Plasteel Windows Australia Pty Limited & Anor v Ce Heath Underwriting Agencies Pty Ltd; Plasteel Windows Australia Pty Limited & Anor v Ce Heath Underwriting Agencies Pty Ltd

[1990] HCATrans 240

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IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney No S47 of 1990

B e t w e e n -

PLASTEEL WINDOWS AUSTRALIA PTY LIMITED and PLASCON INDUSTRIES PTY LIMITED

Applicants

and

C.E. HEATH UNDERWRITING

AGENCIES PTY LIMITED

Respondent

Office of the Registry

Sydney No S48 of 1990

B e t w e e n -

PLASTEEL WINDOWS AUSTRALIA PTY LIMITED AND PLASCON INDUSTRIES PTY LIMITED

Applicants

and

C.E. HEATH UNDERWRITING

AGENCIES PTY LIMITED

Plasteel	1	12/10/90
DEANE J DAWSON J
TOOHEY J

First Respondent

TOIKAN INTERNATIONAL INSURANCE
BROKING PTY LIMITED, SALAMANDER
INVESTMENT CORPORATION PTY
LIMITED (IN LIQUIDATION) and

TOIKAN (VIC) PTY LIMITED

Second Respondents

Applications for special leave

to appeal

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 1-2 OCTOBER 1990, AT 10.28 AM

Copyright in the High Court of Australia

MR B.W. RAYMENT, QC:  May it please Your Honours, I appear

with my learned friend, MR P.E. BLACKET, for the

applicant. (instructed by A.R. Connolly & Co)

MR R.B.S. MACFARLAN, QC: If the Court pleases, I appear

with my friend, MR J.B. SIMPKIN, for the respondent

C.E. Heath in each matter. (instructed by Minter

Ellison)

MR RAYMENT:  Your Honours, those Toikan companies are

effectively defunct and have not been participating

in these proceedings at all since my learned friend

ceased to indemnify them.

DEANE J: Yes. The Registrar has received a letter from the

former solicitors for Toikan (Vic) Pty Limited

advising that they no longer act for that company.

That letter can be on the file.

MR RAYMENT:  I see.

DEANE J:  Yes, Mr Rayment. The matters can be dealt with

together, I assume.

MR RAYMENT:  Yes, certainly. Can I hand up some materials,

if Your Honours please. Your Honours will have

observed that there were two points taken at the

trial by Mr Macfarlan's client, two separate

grounds of avoidance urged upon the trial judge,

both of which found favour with him. The Court of

Appeal then dealt with the matter by dealing with

one of those grounds and so can I address first

Plasteel 2 12/10/90

that which was dealt with in the Court of Appeal

and come back to the other ground that it will be

necessary for my clients to deal with if special

leave were granted.

Your Honours, at the outset of the point

determined by the Court of Appeal there is in fact

a question of fact, that is whether there was a

practice of signing proposals on behalf of the
clients of the broking house. Could I deal with it
at the moment on the basis that that would not be
the subject of a grant of special leave but at the
very last, before I sit down, I do want to ask

Your Honours for leave on that matter as well, but

I cannot support that on any basis involving any

general question of public importance. So may I

just assume that Your Honours would limit me so I

cannot raise that issue for the purposes of dealing

with the section 31 point.

DEANE J:  Mr Rayment, is that question of fact the subject

of concurrent findings?

MR RAYMENT:  Yes, it is, so that the result may well be

precluded before the High Court anyway. So one

would come, on the appeal, to the question under

section 31 of the Insurance Contracts Act which we

have put a print of as the first item in that

bundle. Your Honours, it is an unusual section

enabling the court to disregard an avoidance in a case of fraud where there was a misrepresentation

which was fraudulent or a non-disclosure which was

fraudulent and it may do so:

if ·it would be harsh and unfair not to do so -

and then the court may:

allow the insured to recover the whole, or

such part ..... of the amount that would have

been payable if the contract had not been

avoided.

The case in the Court of Appeal went off on

subsection (2) which provides that:

The power conferred by sub-section (1)

may be exercised only where the court is of

the opinion that, in respect of the loss that

is the subject of the proceedings before the

court, the insurer has not been prejudiced by

the failure or misrepresentation or, if the

insurer has been so prejudiced, the prejudice

is minimal or insignificant.

Your Honours, the loss before the court arose

from professional negligence on the part of the

Plasteel 12/10/90

insured Toikan which had nothing to do with any

practice on its part of signing proposals on behalf

of its clients. The circumstances of the loss are

described sufficiently for present purposes at

page 8 of the application book where there is

summarized the effect of Mr Justice Yeldham's

original findings at trial when my clients sued

Toikan and Mr Macfarlan's clients paid the costs of

Toikan to defend the proceedings. At the foot of

page 7 the present trial judge summarizes

Mr Justice Yeldham's judgment. He:

found that Toikan International, as insurance

brokers for Plasteel, had been negligent.

His Honour said:

"It's retainer was to arrange for effective

insurance cover for the plaintiffs and this it

would have achieved by assignment of the then

existing policies (with the insurer's consent)

or by the effecting of new contracts of

insurance".

Plasteel, in November 1986, being newly formed companies, purchased the business

formerly carried on by the "Plasteel Group of

Companies", being five different legal

entitles.

My clients bought a going concern business, I

think, from its receiver. There were five

companies all calling themselves one way or another

Plasteel in their various names. New entities

taken from the shelf by my clients then called
themselves Plasteel by arrangement with the vendor

and occupied the same premises as lessees. Then,

as the appeal book indicates, Toikan adopted the

procedure of writing to the current insurer of the

old group telling them of a change of name. In the

Toikan group of companies, those five companies

then became the two new shelf company names of my

clients and the trial judge found that they had not

effectively novated or otherwise obtained any

contract of insurance for my clients with Sun

Alliance, the old insurer.

The result of that was that in due course

after a proceeding in the Court of Appeal and

special leave application here and the new trial

before Mr Justice Cole himself, a verdict was

obtained for some $2.3 million by my clients
against Toikan of which C.E. Heath were, if the

avoidance was bad, liable to indemnify Toikan for

my client's benefit as to $1.5 million.

Plasteel 4 12/10/90

DAWSON J: Mr Rayment, forgive my ignorance, but can you

tell me what is the vice in signing proposals on

behalf of a client?

MR RAYMENT: It apparently is this: if a broker signs a

proposal form on behalf of his client it might give

rise to a dispute later between the broker and the

client as to what the broker was told before he

signed the proposal form. In other words, what
professional indemnity insurers said in this case
they were concerned about was the possibility that
if a client made a claim on the broker and the

broker was left with the proposal form signed by

him, the broker might be disadvantaged in some

issues of fact that would arise as between the

broker and the client if the insurance company were

to avoid because of something in the proposal form.

DAWSON J:  The broker in effect adopts what the client has

told him by citing the proposal on - - -

MR RAYMENT:  He is at any rate stating that those were -

what he was telling the insurance company and if a

finding of fact were made that that was what he was

told by his client, then presumably the broker

would not be liable for anything that he has said. But if the client says, I told him something else, and he is believed on that, then there might be as

it were a greater exposure for the broker in a

proceeding begun by its client, or so the

professional indemnity insurers here believed.

DEANE J: There also used to be a perception that

information was more reliable if it came from the insured direct than if it came from a broker who,

in the case of dispute, was sometimes suggested to

have been the insurer's agent rather than the

insured. I think that latter thing has probably

tended to disappear.

MR RAYMENT:  Yes, I think it probably has, Your Honour,

these days with the statute making things so clear.

Now, it is important to look at what the vice or

the alleged vice of the signing of proposal forms

on behalf of clients is and that is why we have put

in these materials sections of the appeal books.

There were two of the underwriters, professional indemnity underwriters called and we have taken

their main statements from the appeal book. First

is Mr Duke, and that is No 2 in that bundle, and it
is paragraph 12 of his statement. Mr Duke, in

effect, managed the business of the second insurer

liable which accounted for some 32.5 per cent of

the risk of the professional indemnity insurers.

He says, in paragraph 12:

Plasteel 5 12/10/90

I refer to answer 11 in the proposal annexure

"A" to the effect that the broker does not

have a practice of signing proposals on behalf

of clients. If instead of being given this

answer, I had been told that the broker then

had such a practice or at any time in the past

twelve months had signed proposal forms, I

would have been concerned as to whether or not

to write the risk as I regard signing

proposals on behalf of clients as a very

dangerous practice which can lead to claims

against brokers when it transpires that some

matter has not been disclosed to the

underwriter concerned and the question arises

as to whether this is the fault of the client

or the broker. I would only write the risk if

I were satisfied that there had been good

reasons namely urgency and unavailability of

the client which had led to the broker signing

the proposal forms and that the broker within

a short period thereafter arranged for the

original to be countersigned by the insured.

And then the other underwriter called on the matter is Mr Brown who was from C.E.Heath itself. In paragraph 17 of his statement he puts the matter

slightly differently. He says:

I refer to answer 11 -

that is the proposal form question -

The answer stated that it was not the practice

of the firm to sign proposals on behalf of

clients. I refer also to exclusion 13 of the

Policy Annexure "C" in relation to claims associated with the signing of the proposal

forms by the insured. That exclusion however

was stated not to apply to acts or omissions

prior to inception date of the policy. If the

proposal had stated or I had otherwise been

informed at the time of considering the risk

that it was the practice of the broker to sign

proposals on behalf of clients I would have

wished to know whether it was the practice of

the broker at or immediately after signing

them to send to the client a form type letter

with the copy proposal specifically pointing
out that Insured needs to check the answers

stated carefully and advise Toikan immediately

if they do not agree with all the statements
contained on the proposal form because any
misstatement could stop the Insured from
securing indemnity under the policy in
question. If I was not satisfied that there

was such a practice then I would have imposed

a special condition deleting the second

Plasteel 6 12/10/90

sentence of Clause 13 of the policy and making the exclusion in relation to claims associated with the signing of proposal forms by the

insured applicable regardless of whether or not this happened before or after inception date.

So that Your Honours can understand that, we

have next put on the policy. If Your Honours would

go to clause 13 of it which has page 5 typed on the

top of it. Perhaps back on page 4 it is necessary

to get the opening words:

The Insurers shall not indemnify The Insured against any claim or loss arising from:-

13.      Or associated with the signing of

Proposal Forms by the Insured. But this

exclusion (13) shall not apply to acts or

omissions committed or alleged to have been
committed prior to the inception date of this

policy.

So they exclude the consequences of signing

proposal forms in the extended form but not
retrospectively and apparently for Mr Brown the
purpose of this question was to see whether he

would exclude the retrospective cover whereas

Mr Duke, according to his statement, it went to

whether he would have written the policy at all

because he was worried about his clients being

sued, in effect - the insureds being sued.

DEANE J:  What does that mean, that the new policy applied

to claims arising from the practice prior to the

date of the policy?

MR RAYMENT:  Yes, and of course this claim arose after the

policy commenced and, in any event, this claim had

nothing to do with the signing of any proposal

forms.

Now, Your Honours, the error we submit the

Court of Appeal fell into in construing

section 31(2) was to treat the fact that the

insurer entered into the contract and the fact of

the dishonesty of the insured, no doubt stemming

from the fraudulent nature of the misrepresentation

in the present case - or it does not matter what it

stems from - as being the relevant prejudice. This

is the very thing, we say, that section 31 is

concerned to avoid. In every case within the

section there will have been a fraudulent non-

disclosure or fraudulent misrepresentation and

there will be a contract entered into which

Plasteel 7 12/10/90

otherwise would be capable of avoidance. The

question is whether, in our submission, there is

such a nexus between the loss before the court and

the relevant non-disclosure or misrepresentation,

given that it is fraudulent, as would make

subsection (2) satisfied or not.

DEANE J:  Mr Rayment, assuming against yourself that there

was such a practice, to what extent would this

policy cover events while there was such a

practice, in view of the identity of the insured.

I mean, what is the period when this insured was

carrying on this practice?

MR RAYMENT:  Not relevantly at all, for this reason: Toikan

International, the company we have sued and which I

always forget, Toikan International Insurance

Broking Pty Limited, which had the contract with my

clients needed this insurance from my learned

and could not carry on business by force of the	friend before it could be registered as a broker in place and satisfied the insurance commissioner
that it had done so. So the only person that could
have been sued was the predecessor in business
which had - there was some retroactive cover,
Your Honours, provided by the policy. In fact, no
such claims came home in any event, as a matter of
fact. But so far as the direct insured was
concerned, it had no - at any rate, it would have
been unlawful for it to be in business before it had the contract of insurance issued in the present case.

The matter is discussed at pages 118 to 119 of

the application book by Mr Justice Samuels with

whom the other members of the court agreed. I have

left out till last the procedural question that he

raises which we submit is shortly answered. At

page 118, half-way through, His Honour says this:

If, however, the appellants do have standing

to pursue relief under that section, I fail to

see how the appellants can plausibly assert
that, to borrow (and rearrange somewhat) the

words of Mr Macfarlan QC, "the insurers had

not suffered prejudice in a circumstance where
they had by reason of fraudulent
misrepresentation and non-disclosure of the
broker insured against liability and
dishonesty -

and there was a section for the fraud of servants

in this policy -

an admittedly dishonest broker which engaged

in practices fraught with risk."

Plasteel 8 12/10/90

Section 31(2) conditions the exercise of the power upon the Court's affirmative opinion that the insured has not been prejudiced by the failure or misrepresentation. That is to say, -

and that is not right. It premises "conditions the

exercise of the power upon the Court's affirmative
opinion that" with respect to the loss before the

court "the insured has not been prejudiced by the

failure or misrepresentation.	"That is to say",
His Honour says:

it is no one's task to establish prejudice,

but the insured's task (because I cannot doubt

that that is where this onus lies) to prove

its absence.

The insured did not appear at the trial.

Assuming the appellants to be entitled to

claim relief they did not offer to support

that issue. They called Mr Enshaw, a

distinguished and experienced insurance

broker, but did not invite him to provide any

testimony upon this point. Other evidence in
the case - that of Messrs Brown and Duke which
the judge accepted - established that had

disclosure of the signing of proposals been

made or the misrepresentation not been made,

the first respondent might not have accepted

the proposal at all; or, if it had done so,

would have insisted upon an exclusion which

significantly extended exclusion 13. There is

no evidence capable of showing whether the

risk which the first respondent, with proper
knowledge, would have rejected, in fact

matured. But in the face of this evidence it

is impossible, in my view, to arrive at the
opinion that the first respondent was not
prejudiced. It may be (I do not decide it)
that non-disclosure of so important a fact (or

the equivalent misrepresentation) deprived the

first respondent of a proper opportunity to

consider whether it would accept the insurance

or not, which, in these circumstances,

militated against any conclusion it had

sustained no prejudice.

Then His Honour goes on to overrule the trial

judge's construction of section 31(2) which was to

the effect that every time you get false

information you are prejudiced. So that there was

always going to be prejudice within the meaning of
the section. But in our respectful submission

there is an error in those two pages in the Court

of Appeal's judgment, namely the error of

overlooking the presence of the words "in respect

Plasteel 12/10/90

of a loss before the court". We just direct

attention to that matter and ask the court to
determine whether or not, in respect of that loss,

there has been relevant prejudice, not in respect

of the policy.

At any rate, I now step back from that and say

that we would respectfully submit that that is a

question of general public importance and that it

is substantially arguable.

Your Honours, the procedural point which

Mr Justice Samuels had dealt with starts to be

considered on page 117. His Honour says this:

In my opinions 31 will not assist the appellants and I can state my reasons quite

shortly. First, I am dubious whether the

appellants are entitled to seek the exercise

of the discretion in their favour.

This doubt seems to resolve itself on the next

page.

It is true that there is on foot, and under

appeal (the appellants having been granted

leave to appeal in that matter out of time

when the argument in the original appeal

commenced) a proceeding in which Toikan

International sought a declaration that the

first respondent was bound to provide

indemnity under the subject policies. Toikan

International, however, did not appear in

those proceedings to support that or any other

relief. In those proceedings the appellants

were cross-defendants -

and that is right that we were cross-defendants but

we were also defendants. We got leave to be added

as defendants in that case -

answering (as I have earlier indicated) a

claim by the first respondent for costs

incurred in defending the appellants' original
action against Toikan International and on

appeal.

That is also wrong. The cross claim to which we

were added sought relief by way of declaration that

they were entitled to avoid the policies and

against Toikan only sought recovery of the costs

they incurred in defending our action. His Honour

says:

"In any proceedings by the insured", in

s 31(1), must contemplate a claim prosecuted

by the insured "in respect of a contract of

Plasteel 10 12/10/90

insurance" and so forth, and does not include
within the scope of the relief provided a

party joined to the same proceedings in order

to answer a cross-claim which is not in
respect of a contract of insurance etc. That
seems to me to be the position here.
Notwithstanding that the appellants are

vitally affected by the enforceability of the

policy they are not entitled to stand in the

insured's shoes for the purposes of s 31.

Now what His Honour forgets is that we were not

just cross defendants in a cross claim, we were
defendants in the action. In our submission, on

the authority, for example, in the Supreme Court of

New South Wales of Corporate Affairs Commission v

Bradley, (1974) 1 NSWLR 391 at page 396, which is

the fifth part of the materials I have just handed

up, it follows from that fact that my clients were

entitled to agitate any issue of fact or law in the

case.

TOOHEY J: But that tentative finding by the Court of Appeal

was not crucial to the result, was it?

MR RAYMENT:  No, if it was only doubt, it was not. If the

doubt had been resolved, perhaps it arguably was.

I do not know, Your Honour. They went on to

consider the matter, in any event, under

section 31(2). But, Your Honours, one finds, for

example, at page 396 in the judgment in Bradley's

case, between letters E and F, a short statement

which we respectfully submit is correct:

A person accepted as an intervener

becomes a party to the proceedings with all
the privileges of a party. Thus he can

appeal, tender evidence and participate fully

in all aspects of the argument. His position

is quite different from that of an amicus

curiae. Interveners have been allowed to

appeal.

And so on. It would be normal, we submit, for

parties to be involved as defendants although they might support the plaintiff on some or all issues.

TOOHEY J:  You still have the hurdle, Mr Rayrnent, of

a finding that no prejudice had been - or the

absence of prejudice had not been demonstrated.

MR RAYMENT:  What we submit is it is a question of looking

at what the loss was on page 8. The circumstances

in which Toikan were made liable appears on page 8.

They were negligent in the way in which they arranged the insurance policy and that was the loss that was before the court; indemnity in respect of

Plasteel 11 12/10/90

that liability for negligence. Toikan proceeded

for indemnity in respect of my client's verdict and

as to $1.5 million they succeeded, but for the

avoidance, and the sting - the subject-matter of

the relevant misrepresentation was some practice of

signing proposal forms on behalf of clients. That

has nothing to do with it - and the sting of it was

that in proceedings brought by a client against the

broker which the insurer would be defending in
exercise of its rights of subrogation, in some way
the broker might be disadvantaged by having signed

the proposal form as to the evidence that would be

called in the case. Now, that has, in our

respectful submission, absolutely nothing to do

with acts of negligence of the broker as

professional indemnity insurer.

So that we submit that with respect to the

loss that was before the court, the particular

circumstances of the case, the relevant non-

disclosure dealt with in the Court of Appeal had

nothing to do with the matter.

DAWSON J:  Does that mean in every case in which the non-

disclosure or misrepresentation had nothing to.do

with the actual claim section 31 would apply?

MR RAYMENT: So far as subsection (2) is concerned, yes. It

is an absolute bar, subsection (2) to the making of
an order under subsection (1) which will, of

course, depend upon all of the facts and

circumstances of the case. What we submit is this:

it is apparent that the legislature has directed

its mind to the possibility that an insurer might

search around and find some ground for avoidance of

a policy which has absolutely nothing to do with

the circumstances in which he finds himself liable

to indemnify and put upon the insured and here,

third parties, because of the interest that my

clients have in the matter - - -

DAWSON J: But might it not be more general than that?

Might not the insurer says, well, look, the fact that this misrepresentation was made prevented us

from refusing the policy on the basis that this is

not the sort of broker that we want to insure, that

conducts his business in this way, because it in a

broad sense demonstrates that it is not the way we

would like him to do business and for that reason
we would not insure. It is something like that

that the Court of Appeal says, is it not?

MR RAYMENT:  Yes. One would have -

DEANE J: It is something like that that Mr Duke says in

paragraph 12 also.

Plasteel 12 12/10/90

MR RAYMENT:	Yes, it is something like that that he says and one would really need to do the exercise of
statutory construction in order to resolve this.
Could I just put it this way, Your Honours. If one
looks at what might lie behind the difficulty about
writing this kind of insurance, it is identified,
we submit, both by Duke and Brown and by
consideration of the facts of the matter, in one factor only, namely the possibility that you might
have your evidentiary position prejudiced in the
event qf proceedings by the insured against the broker. It is not put as being something that, for
example, is dishonest. It is put that you might
prejudice the interests of the insurer who might
one day stand in your shoes seeking to defend an
action against the broker.
DAWSON J:	Is it not put - this may not be the right word -

that it is a sloppy practice? It is cutting

corners.

MR RAYMENT:  Yes, a sloppy practice, and sloppy practice for

their own protection, not a sloppy practice for the

protection of their clients. Quite a different

interest. In other words, it does not demonstrate

negligence, for example.

DAWSON J:  What is the principle of law you would be asking

us to enunciate if you were give special leave?

MR RAYMENT:  The principle of law we would be asking

Your Honours to enunciate is this, that there is in section 31(2) an inquiry directed as to the

relationship between the particular fraudulent

misrepresentation or non-disclosure which led to

the avoidance of the policy on the one hand, and
the loss which is before the court on the other

hand, that is to say the particular claim under the

policy itself, if there is, for example, if there

was a non-disclosure of this matter, a practice of

issuing policies of insurance, a practice of

signing proposals on behalf of clients prior to the

issue of policies of insurance, and there were no

inclusions such as is contained in clause 13, and

the loss before the court related in some way to
the following of that practice in the present case,

the case would be clear within subsection (2). And

if the sting of the non-disclosure were that the

broker was shown to be negligent, for example, in

the way he conducted his affairs, so that

professional indemnity claims might be more likely

against him, then similarly if the facts of the

present case arose, one might be able to find a

nexus.

But where there is no relationship between the

loss which is before the court, that is

Plasteel 13 12/10/90

Mr Macfarlan's insured's negligence and the matter which was the subject of the non-disclosure or misrepresentation, then we submit subsection (2) has nothing to say about the matter and that the case falls to be considered otherwise under

section 31.

TOOHEY J:  Do you say that subsection (2) has nothing to do

with the matter, or that the onus cast by

subsection (2) is thereby satisfied.

MR RAYMENT:  Yes, I say that.

TOOHEY J: Either or both?

MR RAYMENT:  I say the latter, Your Honour. It is a

precondition to the making of an order under

subsection (1).

TOOHEY J: Then you run into a bit of difficulty, do you

not, because of the finding by the Court of Appeal

that there was no evidence from which could be

inferred that no prejudice had been caused?

MR RAYMENT: Well, there was, in our respectful submission.

The whole of the -

TOOHEY J: That may be, but there is such a finding, is

there not?

MR RAYMENT: There is such a finding, but for the purposes -

if we are right that you look at the nexus between
the particular loss and the relevant fraudulent
misrepresentation, then all the evidence that could
possibly be given about that matter was before the
court, you had the policy, you had the entirety of
the record of the action for professional
negligence against the broker begun by my clients

originally before Mr Justice Yeldham, and you had the proposal form and you had the evidence of the

underwriters which was given for the purposes of

proving its relevance to the particular insurers of

their reaction to the answer - - -

TOOHEY J: That comes fairly close to saying that where

there is no - to use your word - nexus between the

loss and the misrepresentation, then the absence of

prejudice may be inferred by reason of that fact.

MR RAYMENT: Yes; oh yes. It is not a question - there is

no one of whom a question of prejudice could

admissibly be asked, for example, if you have to

establish a relationship of fact between the loss

which is before the court and the answer in the

proposal form or the effect of it. It certainly

does not depend upon any expert evidence. It would

be, we submit, entirely a matter for the Court,

Plasteel 14 12/10/90

knowing what the circumstance of the loss were on

the one hand and knowing the circumstance of non-

disclosure on the other, to compare the two and

inquire whether there is a relevant nexus.

DAWSON J: Apart from subsection (2), is there not a

difficulty in that there is an element of

discretion in deciding what is harsh and unfair, it

is a matter on which minds can differ, and that

would make it something which was unsuitable for

this Court to pronounce upon, that is to say,

anything that one said would fetter the discretion

which was intended.

MR RAYMENT:  No one has exercised the discretion under

subsection (1), as a matter of fact, in this case.

Both the trial judge and the Court of Appeal

stopped with subsection (2). As a matter of fact,

the case, we submit, is quite am appropriate one

for the making of an order under section 31 and

this Court - - -

DAWSON J: Would you be inviting this Court to do that if

you were successful?

MR RAYMENT:  We would invite this Court to do it, or to send

it back. It is something within a fairly narrow

compass. Could I just explain it shortly.

Your Honours, this is the tail end of a very long chain of litigation. It has begun since there was

a fire in premises which were leased by my client

some years ago. The present applicants were not

found in any way to have been to blame for the

negligence of the brokers in the case; they lost

very substantial moneys as a result of a fire lit

by some outsider in premises owned by another.

C.E.Heath, acting on behalf of all of the insurers,

at first indemnified Toikan in the defence of the

proceedings before Mr Justice Yeldham, so my

clients went through that trial.

They then appealed to the Court of Appeal and

before the appeal came on in the Court of Appeal

they found this point about the proposal forms and

avoided it. Then they went to Toikan and offered

to pay the costs of proceeding with the appeal in

case they should one day still be found liable

under their policy, wishing to have the best of

both worlds. So that my clients were again put to

the expense of responding to the appeal. That

appeal was then partly successful, partly

unsuccessful. They came here on a special leave

application. When there was a new trial on limited

issue they again indemnified Toikan in the defence

of those proceedings.

Plasteel 15 12/10/90

Indeed, they are still under appeal in case they should lose this application and this appeal.

Now, it is solely a third party claim that is in

issue in the case. That is to say Toikan has

absolutely no issue in the matter to defend of its

own, no monetary interest, and it was a statutory

policy issued under the Insurance Agents and

Brokers Act, the purpose of which was to ensure

that person like my clients would have an insurer

standing behind a broker. So that the absence of

any provision such as one finds in the workers

compensation legislation for an uninsured liability

fund is something which the legislature left out.

But, Your Honours, the real parties in other

words before the Court would be my clients, on the

one hand, and C.E. Heath on· the other, who have

caused my clients to incur very considerable

expense in order to finally recover the verdict

which they did recover. The company is out of

business. There was no interest to preserve in

making sure that it would never again be guilty of

any fraudulent misrepresentations. The beneficiary

of the insurance moneys was therefore an innocent

third party, so far as this insurer was concerned.

DEANE J:  Mr Rayment, did Mr Duke or did the Excess

Insurance Group have anything to do with this

actual policy?

MR RAYMENT:  No. They were reinsuring Mercantile Mutual,

was it, which was the second insurer. Your Honours

will see it, there is a list of insurers at the end

of the policy.

DEANE J: Did they have any direct or indirect liability

under the policy?

MR RAYMENT:  No •

DEANE J: They did not.

MR RAYMENT:  They had merely a liability to indemnify.

DEANE J: That is what I meant.

MR RAYMENT:  Yes. And there was an issue about the

relevance of-

DEANE J:	So they did have an interest in the policy?
MR RAYMENT:	They had an interest as reinsurer of Mercantile

Mutual.	But they were not liable under the policy
or - - -

Plasteel 16 12/10/90

DEANE J: No, but I mean one is concerned with the attitude

of reinsurers in determining the attitude of the

insurer, the way the insurance industry works.

MR RAYMENT:  Yes, Your Honour.

DEANE J: Can I just understand this: if the view were

taken that in the light of the evidence, including

Mr Duke's evidence, it is merely a matter of speculation whether this policy would have been

written if there had been proper disclosure, am I

right you still say that the Court should be

satisfied as to the opinion necessary under

section 31(2)? ·

MR RAYMENT:  Yes, certainly, Your Honour.

DEANE J: Even though - - -

MR RAYMENT:  Every case which would come as far as

section 31 would be a case in which the insurer

would not have written the policy - - -

DEANE J: No, that is not so. I mean, most cases of non-

disclosure where it would be harsh and unfair, the

court can look at it and say, the insurer is ·

raising a point now but even it had known that, it

would have written the policy.

MR RAYMENT:  Your Honours, in order to - - -

DEANE J: You have gone, I think - you are approaching the

limits of a leave application.	I do not want to
divert you unnecessarily.

MR RAYMENT:  Your Honours, section 28 of the Insurance

Contracts Act is the power of avoidance to which

section 31 is the answer and you do not get to

section 31 unless you pass the test in

subsection (1) of section 28, that is to say

section 28 does not apply where the insurer would

have entered into the contract for the same premium	and on the same terms and conditions, even if the	insured had not failed to comply with the duty of
disclosure. If that is not so, then a relevant
non-disclosure or misrepresentation runs into the
sand so far as this Act is concerned. In other
words, every case in which it is appropriate to
consider section 31 will be a case where the insurer would not have entered into the contract
but for the relevant non-disclosure. That is why I
do put it that way, Your Honours. It is not a
question of whether the insurer would have entered
into the contract at all. When one looks at
section 31(2) it is a question, we submit
respectfully, of the particular loss and its nexus
with the relevant non-disclosure.

Plasteel 17 12/10/90

Your Honours, could I just indicate if the

Court did give special leave in this case what the

other issues would be on the other ground. Indeed,

again, it would be, I suppose, a matter for the

Court to consider whether it dealt with these

avoidance are, first of all, waiver, and it could

grounds at all or remitted them to the Court of

be - there was some cross-examination on waiver

which I do not want to tell Your Honours about in

detail which might provide the short answer to the

second ground of avoidance.

DAWSON J: Waiver in what sense?

MR RAYMENT:  They knew the facts of the dishonest practice

they complained of - - -

DAWSON J: Waiver in the sense of election?

MR RAYMENT:	Yes, Your Honour.
DEANE J:	What do you say about Justice Samuels' comment at

page 115 line 15, line 14, in relation to that?

MR RAYMENT:  Oh no, there is no waiver about the proposal

form.	I am not suggesting waiver in relation to
the proposal form.	The second ground of avoidance.

I am sorry, Your Honours, I have not made myself

quite clear. There were two grounds of avoidance:

the proposal form, which was the matter the Court
of Appeal dealt with, and an alleged dishonest

practice of this broker, again, which my clients

had nothing to do with and had no knowledge of, of

overcharging them in relation to debit notes that

they would send them for insurance business that

they do on their behalf. What Your Honour has

directed my attention to relates to that which was

the subject of the Court of Appeal's decision, not

the other issue before the _trial judge.

DEANE J: Well, what was said about waiver - this waiver

point in the Court of Appeal?

MR RAYMENT:  Your Honour, the matter was fully argued in the

Court of Appeal but they dealt with it on one

ground only.

DEANE J:  I see. So this was something that was not dealt

with in the Court of Appeal?

MR RAYMENT:  They have not discussed - it was a point that

was not dealt with at all. It is the second ground of avoidance that my learned friend has the benefit of Mr Justice Cole's judgment about, but not a word

from the Court of Appeal.

Plasteel 18 12/10/90

DEANE J:	I see.
MR RAYMENT:	Now, Your Honours, I just really wish to

indicate what would happen about this matter.

There is no contest about the underlying facts.
There is an issue of waiver which is fairly short.

There is then an issue of whether it was

fraudulent. The trial judge, I think, found it was

not fraudulent or did not find it was fraudulent,

which would then give rise to section 28 of the

Insurance Act, and finally there would be the

section 31 issue again.

TOOHEY J: There is a finding by Mr Justice Cole that he

would not exercise the discretion vested in him by

section 31(1) so that even if subsection (2) were

thought to operate, that still is an obstacle in

your way, is it not?

MR RAYMENT: That is so, Your Honour.

DAWSON J: And whilst you are on that, harsh and unfair in

that subsection (1) means harsh and unfair to the
insured. There is no question about that, is

there?

MR RAYMENT:  No question about that, but the insurance may

be for the benefit of third parties, in effect, or

it may be for the benefit of the insured. So while

it says between the insured and the insurer, that

one must look at harshness, one does not sit in

ignorance of the fact that third parties would be

interested in the policy - - -

DAWSON J:  I am not sure about that. I mean, if your client

had a lot of money - not your client - if Toikan
was still in existence with a lot of money it would

not matter. The harshness and unfairness is as much a result of the impecuniosity of Toikan as anything else.

MR RAYMENT:

Oh yes, indeed. It just says harsh and unfair

and Your Honours will notice that any other

relevant matter is referred to as one of the
discretionary questions in subsection (3). It is

important, in our respectful submission, in this

case to be able to see beyond the mere fact that

there is an insurance policy with an insurer and a

notice that what it does is to insure the insured

against the claims of others and, indeed, for the

purposes of a statute which recognizes that public

interest. In other words, that this scheme would

not require the Court to be ignorant of the fact

that third parties are in many ways the true

beneficiaries of this policy. It is something that

they have to have to protect members of the public

who do business with them.

Plasteel 19 12/10/90

DAWSON J:  You agreed that harsh and unfair means harsh and

unfair to the insured. You could advance an

argument, of course, that it means harsh in general

in all the circumstances.

MR RAYMENT:  I think, as a matter of fact, we would. Now,

Your Honours, I have approached this issue without dealing with the factual issue which we would have

sought leave to reagitate if Your Honours were

minded to deal with it. Your Honours, it is not a

special leave point.	The whole case took a day and
a half in the Court of Appeal.	We submit if the

Court is to receive the case, it may not improperly

receive the whole case. There are co-ordinate

findings of fact involved so there are some

difficulties in my client's path about the factual

issue. But I fully accept that in order to give

rise to the section 31 point it would be necessary

to deal with that factual issue one way, and if Your Honours were minded to grant special leave

without leave upon that issue, we would of course

press for it.

DEANE J:  Thank you, Mr Rayment. The Court need not trouble

you, Mr Macfarlan.

MR MACFARLAN: If the Court pleases.

DEANE J: Notwithstanding what has been said in support of this application, the Court is not persuaded that

the application raises any real question of

principle. We would add that we are not, in any

event, persuaded that any appeal would enjoy

significant prospects of ultimate success.

Accordingly, the application is refused.

MR RAYMENT: If the Court pleases.

MR MACFARLAN:  We would seek the costs of the application,

Your Honour.

MR RAYMENT:  We cannot say anything, Your Honour.

DEANE J: The application is refused with costs.

AT 11.25 AM THE MATTER WAS ADJOURNED SINE DIE

Plasteel 20 12/10/90