OZ Minerals Holdings Pty Ltd v AIG Australia Ltd
[2015] VSC 185
•6 May 2015
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
S CI 2014 6610
| OZ MINERALS HOLDINGS PTY LTD (ACN 101 657 309) & ORS | Plaintiffs |
| v | |
| AIG AUSTRALIA LTD (ACN 004 727 753) | Defendant |
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JUDGE: | HARGRAVE J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 15 April 2015 |
DATE OF JUDGMENT: | 6 May 2015 |
CASE MAY BE CITED AS: | OZ Minerals Holdings Pty Ltd & Ors v AIG Australia Ltd |
MEDIUM NEUTRAL CITATION: | [2015] VSC 185 |
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INSURANCE CONTRACT – Construction of major shareholder exclusion clause – Whether clause requires assessment of claimant’s status at two points in time, the time of the wrongful act and the time of the claim – HELD: Clause requires assessment of the claimant’s status at the time of the wrongful act and the time of the claim – Electricity Corporation v Woodside Energy (2014) 251 CLR 640; Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500; Mobbs v Powell [1965] VR 222.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr N J Young QC with Mr J A Redwood | K & L Gates |
| For the Defendant | Mr E C Muston with Mr M J Hooper | Gilchrist Connell |
TABLE OF CONTENTS
The material terms of the policy...................................................................................................... 4
Applicable law.................................................................................................................................... 7
The Insurer’s construction................................................................................................................ 9
The plaintiffs’ construction............................................................................................................ 11
Which construction should be preferred?................................................................................... 19
Conclusion and orders.................................................................................................................... 23
HIS HONOUR:
The first plaintiff, OZ Minerals Holdings Pty Ltd, was formerly called Zinifex Ltd. I will refer to it as the ‘Company’ unless the context otherwise requires. The second to fifth plaintiffs, were directors or officers of the Company at material times. By a joint media announcement made on 3 March 2008, the Company and Oxiana Ltd announced that they intended to merge their mining businesses by a scheme of arrangement. The scheme of arrangement was approved by the Court on 20 June 2008. The merger was implemented and, as a result:
(1) Oxiana was re-named OZ Minerals Ltd (‘OZ Minerals’);
(2) OZ Minerals acquired all the issued shares in the Company;
(3) the Company’s shareholders were issued shares in OZ Minerals; and
(4) the Company was initially renamed OZ Minerals Holdings Ltd but subsequently changed its name to OZ Mineral Holdings Pty Ltd.
In February 2014, Tobias Mitic commenced a representative proceeding in the Federal Court of Australia against OZ Minerals (the ‘primary proceeding’), alleging breach of continuous disclosure requirements in s 674 of the Corporations Act 2001 (Cth) and a series of misrepresentations in, among other things, the joint media announcement and the scheme booklet for the merger. All of the wrongful conduct is alleged to have occurred before 20 June 2008.
As a result of the primary proceeding, OZ Minerals commenced a contribution proceeding against the plaintiffs on 19 June 2014 (the ‘contribution claims’).[1]
[1]The contribution claims were initially commenced in this Court and subsequently transferred to the Federal Court to be heard and determined together with the primary proceeding.
The plaintiffs claim that the defendant is obliged to indemnify them against any liability arising from the contribution claims. Their claim is based upon a policy of insurance issued on 24 April 2008 (the ‘policy’). The policy was issued by American Home Assurance Company trading as AIG Australia. American Home Assurance Company has since transferred its rights and obligations under the policy to the defendant, AIG Australia Ltd (the ‘Insurer’).
The policy is principally a directors and officers liability policy issued to the Company for the benefit of its directors and officers, with an extension to cover the Company for breaches of laws governing corporate securities – such as s 674 of the Corporations Act 2001. It is common ground between the parties that each of the plaintiffs is an ‘Insured’ under the policy, that the contribution claims were made and notified within the ‘Discovery Period’ stipulated in the policy, and that the contribution proceeding is both a ‘Claim’ and a ‘Securities Claim’ as defined in the policy. In these reasons, as in the policy, the first letter of terms defined in the policy will be capitalised.
The Insurer denies liability under the policy on the ground that the contribution claims are excluded by a ‘Major Shareholder and Board Position Exclusion’ in the policy (the ‘exclusion clause’) in the following terms:
The Insurer shall not be liable to make any payment under this policy in connection with any Claim brought by any past or present shareholder or stockholder who had or has:
(i)direct or indirect ownership of or control over 15% [or] more of the voting shares or rights of the Company or of any Subsidiary; and
(ii)a representative individual or individuals holding a board position(s) with the Company.[2]
[2]Emphasis added.
The parties agree that neither of the two conditions for operation of the exclusion clause was satisfied before 20 June 2008. However, they also agree that OZ Minerals has satisfied the first condition from on or about that date, as it has since that time been the sole shareholder of the Company. Accordingly, it is not in dispute that the first condition was satisfied at the time the contribution claims were brought by OZ Minerals.
The plaintiffs do not admit that the second condition was satisfied at the time the contribution claims were brought. I am satisfied on the evidence that the Insurer has proved that the second condition was satisfied at that time. For the following reasons, OZ Minerals then had ‘a representative individual or individuals holding a board position(s) with the Company’:
(1) the Company’s board of directors then included:
(a) Terence Burgess, appointed 18 June 2014, Managing Director and Chief Executive Officer of OZ Minerals;
(b) Andrew Coles, appointed 17 June 2009, Chief Financial Officer of OZ Minerals;
(c) Joseph Phillipos, appointed 17 June 2009, General Manager – Financial Controller of OZ Minerals; and
(d) Richard Hedstrom, appointed 31 December 2010, Head of Business Development of OZ Minerals.
(2) Messrs Coles, Phillipos and Hedstrom were also directors of at least 15 other subsidiaries of OZ Minerals.
(3) On or about 6 November 2009, the Company’s constitution was amended to authorise its directors to act in the best interests of OZ Minerals provided that they act in good faith in the best interests of OZ Minerals and that the Company is not insolvent and does not become insolvent as a result of the action in question.
(4) From 1 July 2008, various directors of the Company have been indemnified by OZ Minerals in relation to matters including their performance as directors of the Company.
(5) From 1 July 2008, OZ Minerals and the Company have operated as one consolidated group and prepared and reported accounts as a consolidated entity on the basis that OZ Minerals has — throughout that period — wholly owned and controlled the Company and has had the power to govern its financial and operating policies.
In summary, the above facts demonstrate that:
(1) prior to 20 June 2008, neither of the two conditions for the operation of the exclusion clause was satisfied; and
(2) at the time the contribution claims were brought, both conditions for the operation of the exclusion clause were satisfied.
The central issue for determination concerns the point or points in time at which a claimant is to be assessed against the conditions in the exclusion clause. In summary, the plaintiffs contend that the exclusion clause is only intended to exclude Claims by claimants who satisfy the conditions at the time of the alleged Wrongful Acts giving rise to the contribution claims, in this case before 20 June 2008. They contend that it makes no commercial sense for the exclusion clause to require an assessment of the claimant against the conditions in the exclusion clause at the time a Claim is brought. The Insurer contends that the words of the exclusion clause unambiguously disclose an intention that it should operate at both the time of the alleged Wrongful Acts and the time the contribution claims were brought.
In order to understand the rival contentions, it is necessary to set out the terms of the policy in more detail. In doing so, I will adopt the definitions contained in the policy.
The material terms of the policy
The policy was issued on 24 April 2008 in respect of the Policy Period from 31 March 2008 to 31 March 2009. As I have said, the principal purpose of the policy is to provide directors and officers liability insurance, with an extension to cover the Company for defined Securities Claims. The policy maintains a clear distinction throughout between the two kinds of cover provided. The directors and officers liability cover extends to claims for a broad range of Wrongful Acts. The cover provided to the Company is limited to Wrongful Acts giving rise to Securities Claims.
The policy is a ‘claims made’ policy, providing cover for, among other things, Defence Costs and Loss arising from Claims first made within the Policy Period or an applicable Discovery Period.
At the time the policy was issued, it covered Claims made against Insured Persons in respect of defined Wrongful Acts committed or allegedly committed after 1 September 2002 and notified during the Policy Period. The policy provided, however, that if a merger such as the one in this case occurred during the Policy Period, then the policy would be automatically amended to apply only to Wrongful Acts occurring prior to the effective time of the merger.[3] Following the implementation of the merger, the policy was amended by the addition of two endorsements dated 28 July 2008:
(1) A ‘Run-Off Exclusion’ which provides that the Insurer will not be liable in connection with any claim in respect of a Wrongful Act committed or allegedly committed after 20 June 2008 (the ‘run-off exclusion’).
(2) A ‘Discovery Period Endorsement’ under which, in consideration of a further premium of $600,000, the Insurer agreed to extend the ‘Discovery Period’ from the existing policy period ending on 31 March 2009 to the period from 20 June 2008 to 20 June 2015 (the ‘Discovery Period extension’).
[3]See definition of ‘Transaction’ and the ‘General Provision’ in the policy concerning the occurrence of such a Transaction.
The effect of the run-off exclusion and the Discovery Period extension was to extend the period during which Claims covered by the policy could be made until 20 June 2015, but to limit the cover to Wrongful Acts committed between 1 September 2002 and 20 June 2008 (the ‘cover period’). Accordingly, the policy provided cover for Wrongful Acts committed or allegedly committed in the course of the merger process if they otherwise fell within the terms of the policy and were not specifically excluded.
The exclusion clause includes reference to words and terms which are defined in the policy. In order to construe the exclusion clause in the context of the policy as a whole, it is necessary to refer to some of the defined terms:
(1) ‘Claim’ is defined to include:
(i)any written demand or civil, criminal, administrative, regulatory or arbitration proceeding seeking compensation or other legal remedy … for a specified Wrongful Act …
[including] any Securities Claim … but only with respect to [the extended cover to the Company and its Subsidiaries].
(2) ‘Company’ is defined to include the Company and any ‘Subsidiary’.
(3) ‘Insured’ is defined to include the Company, its Subsidiaries and any ‘Insured Person’.
(4) ‘Insured Person’ is defined to include directors and officers of the Company or its Subsidiaries.
(5) ‘Subsidiary’ [which includes a ‘New Subsidiary’ as defined] is defined in the following terms:
(i)any entity in which the Policyholder, either directly or indirectly through one or more entities:
(a)controls the composition of the board of directors;
(b)controls more than half of the shareholder voting power; or
(c)holds more than half of the issued share capital; or
(ii)any joint venture or entity over which the Policyholder exercises effective management and control;
on or before the inception of the Policy Period.
‘Subsidiary’ cover only applies to Wrongful Acts committed or allegedly committed while an entity was or is a Subsidiary of the Policyholder.
(6) ‘New Subsidiary’ is defined to include any entity which becomes a Subsidiary during the Policy Period.
(7) ‘Wrongful Act’ is defined in broad terms to include: (i) actual or alleged wrongful acts or omissions by Insured Persons acting on behalf of the Company; and (ii) actual or alleged wrongful acts or omissions of the Company or a Subsidiary ‘but solely in respect of a Securities Claim.’
Other relevant definitions are referred to below in considering the contentions put forward by the parties by reference to other terms of the policy.
Applicable law
It is necessary to construe the relevant provisions of the policy in accordance with general principles of contractual interpretation.[4] This requires the Court to consider what reasonable persons in the position of the parties would have understood the words to mean by reference to the text of the agreement, the surrounding circumstances known to the parties and the purpose or object of the transaction.[5] In interpreting the words and resolving any ambiguity, the Court should proceed in a common sense and non-technical way and give the agreement a commercially sensible construction.[6] The Court should have regard to all of the words used in the agreement ‘so as to render them all harmonious with one another’[7] and to ensure the ‘congruent operation of the various components as a whole.’[8]
[4]McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579, 589 [22]; Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522, 528-9 [15].
[5]Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451, 461-2 [22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, 179 [40].
[6]Electricity Corporation v Woodside Energy (2014) 251 CLR 640, 656-7 [35], adopting the observations of Arden LJ in Re Golden Key Ltd [2009] EWCA Civ 636 [28].
[7]ABC v Australasian Performing Right Association Ltd (1973) 129 CLR 99, 109.
[8]Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522, 529 [16].
As this case involves the interpretation of an exclusion clause, the principles stated in Darlington Futures Ltd v Delco Australia Pty Ltd apply.[9] In that case, the High Court stated that:
the interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in the case of ambiguity.[10]
[9](1986) 161 CLR 500.
[10]Ibid 510. See also, Selected Seeds Pty Ltd v QBEMM Pty Ltd (2010) 242 CLR 336, 344 [29], a case involving the construction of an exclusion clause in an insurance policy.
The Court does not strain to find ambiguity in exclusion clauses.[11] It is only appropriate to apply the contra proferentem principle when ambiguity remains after applying accepted principles of contractual interpretation.[12]
[11]Ibid 507-11.
[12]Ibid 507. See also, CE Heath Underwriting & Insurance (Australia) Pty Ltd v Edwards Dunlop & Co Ltd (1993) 176 CLR 535, 548; GL Nederland (Asia) Pty Ltd v Expertise Events Pty Ltd [1999] NSWCA 62 [27]; Bank of Queensland Ltd v Chartis Australia Insurance Ltd [2013] QCA 183 [71].
In giving contracts a businesslike interpretation, the Court approaches the task on the assumption that the parties intended to produce a commercial result and, accordingly, a commercial contract is to be construed so as to avoid ‘making commercial nonsense or working commercial inconvenience.’[13] Accordingly, if an exclusion clause is reasonably open to two competing constructions, the preferred construction is the one that avoids capricious, unreasonable, inconvenient or unjust consequences.[14]
[13]Electricity Corporation v Woodside Energy (2014) 251 CLR 640, 656-7 [35], adopting the observations of Arden LJ in Re Golden Key Ltd [2009] EWCA Civ 636 [28].
[14]Australian Broadcasting Commission v Australasian Performing Rights Association Ltd (1973) 129 CLR 99, 109; Bank of Queensland Ltd v Chartis Australia Insurance Ltd [2013] QCA 183 [70].
As the Insurer emphasises, however, the task of interpreting a contractual term, including an exclusion clause, begins with the words. If they are unambiguous and do not give rise to commercial nonsense or commercial inconvenience, the Court must give effect to them, notwithstanding that it may be guessed or suspected that the parties intended something different.[15] As to whether a proffered construction of a term produces commercial nonsense or inconvenience, the Court must, in accordance with the objective approach to interpretation of contracts, assess those matters by reference to what persons in the position of the parties would have reasonably understood at the time the contract was made.
[15]Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99, 109.
The Insurer’s construction
The Insurer’s construction involves the following key steps.
First, the policy is a ‘claims made’ policy. The Insurer’s obligation to indemnify is only triggered by the making of a Claim within the Policy Period as extended by the Discovery Period extension. Such a policy is to be distinguished from an ‘occurrence based’ policy, under which an insurer is obliged to provide indemnity for defined events occurring within a particular period, whenever the claim for insurance cover in respect of that event is made. Accordingly, a Wrongful Act is not a sufficient trigger for indemnity under the policy. There must be both a Wrongful Act within the cover period and a Claim made in respect of the relevant acts within the Policy Period or the Discovery Period.
Second, building on the need for the two events, the Insurer contends that the conditions for the operation of the exclusion clause unambiguously apply to the time of both events — the Wrongful Act and the Claim. The Insurer contends that the claims made structure of the policy explains the use of the past and present tenses in the exclusion clause. Accordingly, the present tense words — ‘present shareholder … who has’ — were obviously intended to apply to the time the relevant Claim is brought. As to the past tense words — ‘past shareholder … who had’ — the Insurer accepts that, construed in a businesslike manner, these words cannot have been intended to have their literal meaning, under which they would apply to any time before the policy was made. It agrees with the plaintiffs that these words were intended to apply to the time of the alleged Wrongful Act giving rise to the Claim. Such a construction accords with business common sense, because the holder of more than 15 per cent of the Company’s shares with a board representative may have had the capacity to exert some influence over the Wrongful Act giving rise to the Claim.
Third, the Insurer contends that there is no commercial nonsense or inconvenience attaching to its construction of the present tense words which could justify the Court departing from the unambiguous meaning of the words. The Insurer contends that it was objectively reasonable for it to seek to protect itself against the following risks:
(1) The risk that a claimant shareholder with a representative on the Company’s board may, at the time a Claim is brought, have the capacity to influence the Company’s defence of the Claim. In such circumstances, the Company may have no commercial interest in defending the Claim, especially in instances where the claimant owns all of the Company’s shares, as here, and the insurance proceeds could be used to benefit the corporate group to which the Company belongs. In such circumstances, the Company could benefit from the establishment of a claim against it and the consequent payment by the Insurer of Loss arising from an indemnified Claim.
(2) The risk that a claimant shareholder with a board representative will have access to information about the Company’s internal workings, or other confidential information such as the terms and amount of cover under the policy, which could provide the claimant with a forensic advantage that an arms-length claimant would not enjoy. The Insurer’s concern about the risk of misuse of the Company’s confidential information is apparent from one of the General Provisions in the policy, which obliges any Insured to make reasonable efforts not to disclose the existence of the policy or its terms, with limited exceptions.
(3) The risk that in a contribution claim (such as the present) the Company and a claimant shareholder may co-operate to maximise the culpability of the Company and its insured directors and officers and minimise that of the claimant, so as to maximise the amount of the Loss to be indemnified by the Insurer.
The plaintiffs’ construction
The plaintiffs’ construction involves the following key steps.
First, the objective purpose of the policy is to provide cover to the Insured for Defence Costs and Loss arising from Wrongful Acts. The fact that cover under the policy is limited to claims first made within the Policy Period or the Discovery Period is merely an additional condition of cover. The ‘claims made’ nature of the policy does not alter its essential purpose and the exclusion clause should accordingly be construed with that purpose in mind.
Second, the exclusion clause is ambiguous as to the time at which it was intended to operate. In respect of the past tense words, the parties agree that the literal meaning makes no commercial sense and must be rejected to give those words a businesslike interpretation. The parties agree that the past tense words are not directed to the shareholding position at any time in the past (the literal meaning), but only to the time of the relevant Wrongful Act which is the subject of the Claim. As to the present tense words, their literal meaning is directed at the commencement of the Policy Period (31 March 2008) or the date the policy was issued (24 April 2008). That literal meaning makes no commercial sense either, as it is unrelated to the time of a relevant Wrongful Act or the making of a Claim. Accordingly, the parties’ intention as to the time at which those words were intended to apply raises another question of contractual interpretation, to be assessed in a businesslike manner in accordance with the above principles.
Third, a reasonably open interpretation of the exclusion clause is that it refers to both former and continuing major shareholders who had the requisite shareholding and board representation at the time of the Wrongful Act. The plaintiffs contend that, sensibly construed in light of the agreed position that the past tense words refer to the time of the alleged Wrongful Act, the present tense words do no more than make it clear that the conditions for the operation of the exclusion clause apply also to a major shareholder at the time of the Wrongful Act who continues to be a major shareholder. In their written submissions, the plaintiffs’ counsel contended that this grammatical construction is reasonably open because:
First, it is consistent with the words ‘past or present shareholder…who had or has’. Sensibly construed, those words respectively refer to (1) an entity which was a major shareholder of the [Company] at the time of Wrongful Act but no longer is (i.e., a past shareholder who had the relevant ownership interest and board representation) or (2) an entity which was at the time of the Wrongful Act, and still is, a major shareholder of the [Company] (i.e., a present shareholder who still has the relevant ownership interest and board representation). So construed, the [exemption] covers former and continuing major shareholders who had the requisite shareholding and board representation at the time of the Wrongful Act.
On this reading of those words, their purpose is merely to clarify, for the avoidance of doubt, that a claimant cannot escape operation of the exclusion by bringing a claim after (perhaps some time after) they ceased to be a major shareholder if they had the requisite status at the time of the Wrongful Act the subject of the claim. These words put that circumstance beyond doubt.
I note in passing that these submissions focus on reading ‘has’ as ‘still has’, but do not address the express use of the word ‘present’ in the present tense words. So, according to the argument, the present tense words should read: ‘any … present shareholder … who … [still] has’.
The plaintiffs contend that this grammatical construction is consistent with other terms in the policy. They begin with the definitions imported into the exclusion clause, both directly and through other defined terms used in those definitions. In this respect, counsel for the plaintiffs provided the Court with a re-write of the exclusion clause. The re-write includes paraphrased versions of the defined terms used in the exclusion clause. It is convenient to set out that re-write below, with the paraphrased versions of defined terms appearing in bold type:
The insurer shall not be liable to make any payment under this policy in connection with any written demand or civil proceeding seeking compensation or other legal remedy for a specified Wrongful Act, being an alleged breach of duty, misleading statement or omission done:
(a) by a natural person who was, is or, during the Policy Period becomes a director of the Company; or
(b) by the Company itself in respect of a Securities Claim (including a contravention of s 674 of the Corporations Act) —
where such demand or proceeding is brought by any past or present shareholder or stockholder who had or has:
(i) direct or indirect ownership of or control over 15 % [or] more of the voting shares or rights of the Company, or any entity which was a subsidiary of the Company on or before the inception of the policy year commencing 31 March 2008 or in which the Company obtains sufficient shares or control that it becomes a New Subsidiary during that year, but in the latter case cover only applies in respect of Wrongful Acts allegedly committed while that entity was or is a Subsidiary of the Company; and
(ii) a representative individual or individuals holding a board position(s) with the Company[16]
[16]Emphasis added.
The plaintiffs rely upon the italicised words in the above re-write. They contend that those words are speaking historically and, in common with the exclusion clause, use the present tense ‘is’ to refer to the status of an Insured at the time of the alleged Wrongful Act. In other words, consistent with the plaintiffs’ interpretation of the present tense words — ‘Claim brought by any … present shareholder … who …[still] has’ — the italicised reference to ‘is’ should be read as a reference to a person or entity that ‘still is’.
Next, the plaintiffs contend that the commercial purpose of the policy, combined with the introductory words to the section of the policy concerning exclusions, demonstrate that ‘the hinge upon which the exclusions apply’ is the Wrongful Act which is the subject of the relevant Claim. The introductory words to the exclusions are in the following terms:
The Insurer shall not be liable to make any payment under this policy in connection with any Claim arising out of, based upon or attributable to …[17]
The plaintiffs contend that the emphasised words have no relevance to the time at which a Claim is made, only to the circumstances giving rise to the Wrongful Act.
[17]Emphasis added.
Fourth, interpreting the exclusion clause as referring to the time of the relevant Wrongful Act is consistent with authority concerning the time at which the application of exclusion clauses in insurance policies is to be assessed. In this regard, reliance was placed upon Mobbs v Powell, a decision of Gillard J concerning an exclusion clause in a motor vehicle insurance policy.[18] In that case, the exclusion clause provided that the policy did not cover the insured for liability caused while the motor vehicle was being driven by any person with the consent of the insured if the driver was not duly authorised under all relevant laws, by-laws and regulations to be driving such vehicle for the purpose for which it was being used. The insured vehicle was a commercial vehicle. The person driving with the consent of the insured held a special licence to drive that particular kind of vehicle. However, at the time of the accident, the vehicle was carrying a load exceeding the legislated maximum height that could be carried without a special permit first being obtained. The insured argued that it was sufficient, in order to avoid the operation of the exclusion clause, that the driver was licensed to drive the relevant kind of vehicle at the time of the accident. Gillard J described this argument as attaching a wide purpose to the authorisation requirement in the exclusion clause. The insurer contended that a wide authority to drive the vehicle was insufficient, because there was no authority for the driver to drive it for the purpose for which it was being used at the time of the accident, namely to convey an over-height load without a permit. Gillard J referred to this as the narrow purpose.
[18][1965] VR 222.
Gillard J preferred the narrow purpose, because the exclusion clause was intended to apply to the use to which the vehicle was being put at the time of the accident giving rise to liability. His Honour rejected the argument that there was ambiguity in the exclusion clause and continued:
The liability on the insurer is to indemnify the insured against certain events which must have a temporal relationship to the policy. There must be an event which gives rise to a liability. It is in respect of this liability that the exclusion attaches. Accordingly, the exclusion also must have a temporal ingredient. In this case … the Court will be bound to find that the vehicle was being used to transport a load for which it was not duly authorised by a formal permit … or other relevant authority to carry. So the person in using the vehicle in this way was not duly authorised under all relevant laws to be driving the vehicle for the purpose it was then being used. Accordingly, I have reached the conclusion that the driver … was not duly authorised to be driving the vehicle for the prescribed purpose.[19]
[19]Ibid 225 (emphasis added).
The plaintiffs contend that their interpretation, which involves giving the exclusion clause a temporal connection to the Wrongful Acts giving rise to the contribution claims, is consistent with Gillard J’s reasoning in Mobbs v Powell.
Fifth, the plaintiffs rely on the run-off exclusion, which established a ‘temporal end-point’ for the Wrongful Acts giving rise to claims under the policy. They contend that the run-off exclusion is consistent with the focus of the policy being to provide cover for Wrongful Acts during the cover period only — when OZ Minerals did not have control or influence over the Company.
Sixth, the plaintiffs reject the Insurer’s contentions concerning the reasonableness of its suggested commercial rationale for applying the exclusion clause to the time at which the relevant Claim is made. The commercial rationale put forward by the Insurer may fairly be summarised as an intention to diminish the risks of: (1) co-operation between the claimant shareholder and the Insured against whom the Claim is made; and (2) misuse of the Company’s confidential information to the claimant’s forensic advantage. The plaintiffs contend that the Insurer’s suggested risks are far-removed from the commercial purpose of the policy as a whole and are, in some respects, specious. In summary, the plaintiffs contend that the suggested risks:
(1) do not reflect the express terms of the exclusion clause, but are instead directed to only one of the many circumstances in which it may operate if the Insurer’s construction is accepted;
(2) emphasise the secondary purpose of the policy (to provide cover to the Company for Securities Claims) and not its primary purpose (to provide cover to the Company’s directors and officers for Wrongful Acts);
(3) require words to be read into the exclusion clause;
(4) will lead to unfair and capricious outcomes in many circumstances; and
(5) are in any event addressed by other exclusions in the policy.
As to the first contention, the plaintiffs contend that the Insurer’s example of a claim such as the present, where the claimant shareholder with board representation is the Company’s only shareholder, fails to address any rational commercial explanation for the situation where the claimant shareholder owns as little as 15 per cent of the Company’s shares. At that level, the Company could not apply the proceeds of an insurance claim for the benefit of the claimant shareholder or related companies. Accordingly, the onus is on the Insurer to put forward a rational commercial explanation for the operation of the exclusion clause across all levels of ownership and board representation constituted by its language. The Insurer has failed to provide a logical commercial rationale, particularly at shareholding levels of between 15 and 50 per cent, where it cannot be assumed that the claimant shareholder will have the capacity to influence the Company’s conduct in relation to a Claim.
As to the second contention, the plaintiffs emphasise that the policy is, when read as a whole, primarily intended to provide cover to the Company’s directors and officers. On the other hand, the cover provided by the policy to the Company against Securities Claims is merely an optional addition. In these circumstances, the co-operation risk must be assessed in light of the Claims primarily covered by the policy. Viewed in that context, it is most improbable that a director or officer would co-operate to allow serious allegations to be made against him or her, or to be defended in a manner calculated to maximise his or her personal culpability. Indeed, in the context of contribution claims such as the present, it is specious to attribute an intention to the parties to prevent such unlikely conduct. The Insurer’s example of the co-operation rationale does not address claims against directors and officers, but only claims against the Company by its sole shareholder under the optional additional cover provided to it under the policy.
As to the third contention, the plaintiffs contend that the co-operation rationale requires the exclusion clause to be read as if it contained the words ‘and maintained’ — so that it applies to ‘any Claim brought and maintained by any past or present shareholder …’.
As to the fourth contention, the plaintiffs contend that there are many circumstances within the broad range of shareholding and board representation positions which are contemplated by the exclusion clause that, if the Insurer’s construction is accepted, would could give rise to unfair and capricious outcomes. For example, the effect of the Insurer’s construction is that insurance taken out by the Company in favour of its directors and officers, designed to protect them from a wide range of possible claims, is capable of being rendered worthless by the happenstance that, years down the track and long after they have resigned, allegations are made against them by a claimant holding as little as 15 per cent of the Company’s shares and having a single representative on its board at the time the claim is brought.
As to the fifth contention, the plaintiffs point to other exclusions which give the Insurer the right to deny liability, or impose negative obligations on the Insured, in respect of the suggested risks.
First, the plaintiffs point to the express exclusion of Consensual Claims ‘brought by or on behalf of any Company or Insured Person’. A ‘Consensual Claim’ is defined as:
any Claim which is solicited or brought with the voluntary (rather than legally required) intervention, assistance or active participation of the Insured against whom it is brought.
They contend also that the Consensual Claim exclusion addresses the Insurer’s concern about the misuse of the Company’s confidential information, at least in the context of a decision to make the Claim.
Moreover, the plaintiffs contend that the Consensual Claim exclusion is to be contrasted with the exclusion clause, because it expressly focuses upon the circumstances surrounding the making of the claim, and not the Wrongful Act.
Second, the plaintiffs rely on the Conduct exclusion, which excludes liability to indemnify for any improper use by directors or officers of their position. They contend that this includes Conduct designed to bring about a Consensual Claim against them, the Company or another director or officer.
Third, the plaintiffs rely on exclusions in respect of Claims made by any Outside Entity.
The first Outside Entity exclusion applies in circumstances where a Company representative ‘is or was appointed as a director or officer of an Outside Entity’ at the request of the Company, and where that Outside Entity later brings a Claim. The first exclusion does not, however, apply to Claims which have ‘not been solicited or brought with the voluntary (rather than legally required) intervention, assistance or active participation of any Insured Person [which, for this purpose, includes any representative of the Company who has been appointed to the board of the Outside Entity].’
The second Outside Entity exclusion operates to exclude cover for:
any Claim brought by any past or present shareholder or stockholder who had or has direct or indirect ownership of or control over any of the voting shares or rights of any Outside Entity.
The plaintiffs contend that, read literally, this further exclusion would have the commercially absurd result that any Claim brought by a person who holds or ever held any shares in the Outside Entity is excluded, regardless of any connection between the alleged Wrongful Acts and the conduct by the relevant Insured Person as a director of the Outside Entity. As that is commercial nonsense, it is necessary to engage in a process of interpretation and limit the existence of the shareholding by the claimant to the period during which the Insured Person was acting as an officer of the Outside Entity. To do otherwise, would render the cover provided by the policy and the Outside Entity extension worthless by the random circumstance that the claimant happens to be a shareholder in an Outside Entity at any time. Accordingly, like the exclusion clause, the Outside Entity exclusion is to be read as being concerned with the events that existed at the time of the alleged Wrongful Acts which are the subject of the Claim — a time at which the relevant shareholding in the Outside Entity may have influenced the Wrongful Act which is the subject of the Claim.
Which construction should be preferred?
In my opinion, the Insurer’s construction should be preferred. It is grammatical, accords with the structure of the policy (which requires two events, not one, to establish liability for Loss) and the suggested commercial rationale is objectively reasonable. The plaintiffs’ construction is contrary to authority because it requires a strained approach to find ambiguity in the exclusion clause. It is also ungrammatical and inconsistent with the policy’s structure.
I will address each of the plaintiffs’ contentions in turn.
As to the first contention, I accept that the primary purpose of the policy is to provide cover to the Insured for Wrongful Acts. However, I reject the contention that the ‘claims made’ structure of the policy reflects merely an additional condition for cover. It is an essential condition precedent to cover, and its existence is consistent with the use of the past and present tenses in the exclusion clause.
As to the second contention, I accept that the past tense words in the exclusion clause should not be read literally and should be interpreted in the agreed manner, as applying only at the time of the alleged Wrongful Act underlying the Claim. I do not, however, accept the plaintiffs’ suggested literal meaning of the present tense words. In the context of the structure of the policy as a whole, the present tense words are clearly directed to the time when a Claim is brought.
As to the third contention, the plaintiffs’ suggested grammatical construction — involving reading ‘has’ as ‘still has’ — is not grammatical. It does not address the express use of the word ‘present’ in the present tense words. The proposed inclusion of the word ‘still’ would create incoherence with the word ‘present’.
I also reject the plaintiffs’ reliance on the re-write of the exclusion clause which, incorporating paraphrased definitions, the plaintiffs contend demonstrates that the present tense (‘is’), when utilised in the exclusion, refers to historical matters. First, I do not accept that the first use of the present tense ‘is’ — a person who was, is or, during the Policy Period becomes — speaks historically. In that instance, the word is used in its literal sense, so that the definition as a whole refers to a director of the Company who was a director before the inception of the policy, who is a director at the date of the policy (24 April 2008) or at the commencement of the Policy Period (31 March 2008), or who becomes a director during the Policy Period.
The second use of the present tense word ‘is’ — ‘while that entity was or is a Subsidiary of the Company’ — presents some difficulty. The clumsiness in that drafting is not, however, a sufficient basis to read all of the present tense words in the exclusion clause as being intended to include only past events. The inclusion of both the past and present tense — was and is — appears to be mere surplusage in the context of the preceding words and the structure of the incorporated definition of Subsidiary. That definition differs materially from the exclusion clause, where the alternative tenses ‘had or has’ are clearly tied to the words ‘past or present’, thereby signalling a requirement that the conditions in the clause be considered at two separate points in time.
The plaintiffs’ reliance upon the introductory words to the section of the policy concerning exclusions is, in my opinion, misplaced. The exclusion clause contains its own introductory words: ‘The Insurer shall not be liable to make any payment under this Policy in connection with any Claim brought …’. Applying the introductory words to the exclusion clause would lead to unnecessary repetition. Further, the two sets of prefatory words cannot be reconciled — one set refers to the subject matter of a Claim, the other refers to the characteristics of a claimant. Finally, as a matter of the policy’s structure, there is another exclusion clause which is self-contained and does not draw upon the introductory words for its meaning, namely, the exclusion for bodily injury and property damage.
As to the fourth contention, the decision in Mobbs v Powell[20] is inconclusive. That case concerned an ‘occurrence based’ policy where there was a single temporal element. The application of the exclusion clause in that case to the time of the insured event giving rise to liability does not establish any general principle that exclusion clauses in insurance policies must be construed as applying only at the time of the event causing the loss which engages the policy. Each case will depend on the words of the relevant exclusion clause, construed in the context of the policy as a whole. In this case, there are clearly two relevant events, each of which must occur in order for the Insurer to be liable to indemnify — both a Wrongful Act and a Claim. The decision in Mobbs v Powell is consistent with applying the exclusion clause at the time of both events if the language permits (as it does here).
[20][1965] VR 222.
As to the fifth contention, I do not accept that the run-off exclusion assists the plaintiffs’ contention. It does no more than supply the temporal end-point for the Wrongful Acts which may give rise to cover if the relevant Claim is made during the extended Discovery Period. It says nothing about the point or points in time at which the exclusion clause operates.
As to the sixth contention, I do not accept the plaintiffs’ contention that the commercial rationale put forward by the Insurer for its construction should be rejected as commercial nonsense because there are other clauses dealing with the suggested risks. The Consensual Claims exclusion, the general provision as to Confidentiality, the first Outside Entity exclusion and the Conduct exclusion all demonstrate, to varying degrees, an express intention to protect the Insurer from the risks of co-operation and misuse of the Company’s confidential information in connection with any Claim. These are not objectively fanciful risks. These express provisions support, rather than detract from, the Insurer’s suggested commercial rationale. The fact that the minimum percentage shareholding may be thought to be low in most circumstances, and that it might be thought to be unlikely to give the claimant shareholder any material influence over the Company if there is only one representative director, is not to the point. A rational commercial risk having been identified, it was for the parties to agree on the level of that risk to be accepted by the Insurer.
I accept that the second Outside Entity exclusion appears to lack any sensible commercial purpose, as it contains no specified level of shareholding or board representation requirements. In the case of the exclusion clause, however, those requirements are present and provide protection for objectively reasonable commercial risks.
In support of their contention that there is no rational commercial purpose for applying the exclusion clause at the time of the Claim, the plaintiffs put forward the example of a Claim against a past director, who they contend would have no reason to assist the claimant, simply because it is a shareholder with a board representative. I accept that the risk of co-operation with the claimant is negligible in such a case. There remains, however, a risk of misuse of the Company’s confidential information by the claimant or its board representative. For example, the claimant would likely know the terms of any insurance policy and the amount of cover provided under that policy, and may use that information to its forensic advantage in negotiations. Further, a claimant shareholder with board representation may have an intimate knowledge of the Company’s internal workings which may assist it in prosecuting its claim.
Finally, I do not accept that the Insurer’s co-operation rationale involves reading the words ‘and maintained’ into the exclusion clause. The exclusion clause is directed at the risk of co-operation once a claim is brought. Logically, by excluding claims brought by a major shareholder from the very outset, the Insurer is protected from the risk of co-operation. It is unnecessary to read the words into the clause.
The exclusion clause has the capacity to apply in myriad circumstances. I accept that it may apply in circumstances where none of the risks agreed by the parties or identified by the Insurer materialise, either at the time of the Wrongful Act or at the time of the Claim. That does not, however, make it uncommercial to provide for such risks.
Conclusion and orders
The proceeding will be dismissed.
SCHEDULE OF PARTIES
| S CI 2014 6610 | |
| BETWEEN: | |
| OZ MINERALS HOLDINGS PTY LTD (ACN 101 657 309) | Firstnamed Plaintiff |
| ANTHONY LARKIN | Secondnamed Plaintiff |
| DEAN PRITCHARD | Thirdnamed Plaintiff |
| RICHARD KNIGHT | Fourthnamed Plaintiff |
| ANTHONY BARNES | Fifthnamed Plaintiff |
| - and - | |
| AIG AUSTRALIA LIMITED (ACN 004 727 753) | Defendant |
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