Porter v GIO Australia Ltd - [2003] NSWSC 668

No judgment structure available for this case.

Reported Decision:
(2003) 12 ANZ Insurance Cases 61-573

Supreme Court

CITATION: Porter v GIO Australia Ltd & Anor [2003] NSWSC 668

HEARING DATE(S): 6-7 May 2002,16-17 October 2002, 21 October 2002, 17-20 March 2003, 24 March-22 May 2003, 26 May-5 June 2003, 16 June-27 June 2003

JUDGMENT DATE:
21 August 2003

JURISDICTION:
Equity Divison
Commercial List

JUDGMENT OF: McClellan J

DECISION: Summons dismissed

CATCHWORDS: INSURANCE - DIRECTORS AND OFFICERS INSURANCE - Plaintiff sought indemnity under policy for costs of civil proceedings brought by former employer and criminal proceedings in which nolle prosequi granted - whether insurer entitled to rectification of policy - period of cover - date of entry into policy - construction of insuring clauses and exclusion clauses - whether dishonest, fraudulent or criminal conduct - whether plaintiff involved in contravention of s 205 Corporations Law by provision of financial assistance for purchase of company’s own shares - whether claim notified during policy period - whether official ‘Inquiry’ commenced prior to policy period - whether non-disclosure or fraudulent misrepresentation by plaintiff - whether plaintiff entitled to indemnity under professional indemnity policy - whether insurer estopped from relying on matters not previously relied upon - whether insurer acted in bad faith by obtaining documents through misrepresentation - CORPORATIONS LAW - DIRECTORS INDEMNITY - whether plaintiff entitled to indemnity under company’s Articles of Association or common law - whether plaintiff’s costs arose out of conduct involving lack of good faith - whether nolle prosequi amounts to acquittal or judgment in favour - whether obligation of good faith owed to plaintiff, implied from board resolution - whether former employer breached such obligation by cancelling policy - DEEDS AND INSTRUMENTS - CONSTRUCTION - Deed of Release - whether general release contained in Deed extended to bar claim for criminal defence costs - limitation of general words of release to matters in contemplation of parties at time deed entered - whether unconscionable for former employer to rely on deed - whether inequality of knowledge

LEGISLATION CITED: Australian Securities & Investments Commission Act 1989 (Cth)
Contracts Review Act 1980 (NSW)
Corporate Law Economic Reform Act 1999
Corporate Law Reform Act 1994 (Cth)
Corporations Act 2001
Corporations Law
Insurance Agents and Brokers Act 1984
Insurance Acquisition and Takeovers Act
Insurance Contracts Act 1984
Trade Practices Act 1989 (Cth)

CASES CITED: Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349
Alexander Ward & Co Ltd Samyang Navigation Co Ltd [1975] 1 WLR 673
Aleyn v Belchier (1758) 28 ER 634
Atkins v National Australia Bank (1994) 34 NSWLR 155
Australian Competition & Consumer Commissioner v C G Belatis Holdings Pty Ltd (2003) 197 ALR 153
Australian Growth Resources Corp Pty Limited v Van Reesema (1988) 13 ACLR 261
Bahr v Nicolay (No 2) (1988) 64 CLR 604
Bank of Credit and Commerce International SA (in liquidation) v Ali [2001] 1 All ER 961
Barrett v State of South Australia (1994) 63 SASR 208
Bonelli's Telegraph Company, in re (1871) LR 12 Eq. 246
Bradshaw v McEwans Pty Ltd (unreported, High Court of Australia, 27 April 1951)
Brambles Holdings v Bathurst City Council (2001) 53 NSWLR 153
Burger King Corp v Hungry Jack's Pty Ltd [2001] NSWCA 187
Burton v Palmer [1980] 2 NSWLR 878
Bush v National Australia Bank Limited (1992) 35 NSWLR 390
Charterhouse Investment Trust Ltd v Tempest Diesels Ltd [1986] BCLC 1
Chequepoint Securities Ltd v Claremont Petroleum NL (1986) 11 ACLR 94
Chew v R (1991) 107 ALR 171
Comino v Manettas (1993) 7 ANZ Ins Cas 61-162
Commercial Bank of Australia Ltd v Armadio (1983) 151 CLR 447
Commonwealth Life Assurance Ltd v Smith (1938) 59 CLR 527
Corporate Affairs Commission v Papoulias (1990) 20 NSWLR 503
Danish Mercantile Co Ltd v Beaumont [1951] Ch 680
Darvall v North Sydney Brick & Tile Co Ltd (1989) 16 NSWLR 260
Davis v Gell (1924) 35 CLR 275
Dempster v National Companies & Securities Commission (1993) 10 ACSR 215,
Devine v Sun Alliance Australia Ltd (unreported, Supreme Court of New South Wales, 18 June 1992, Giles J).
Dwyer v Long (1992) 7 ANZ Ins Cas 61 - 120
East End Real Estate Pty Limited t/as City Living v C E Heath Casualty & General Insurance Ltd (1992) 7 ANZ Ins Cas 61-151
Edwards v R (1992) 173 CLR 653
Emanuel Management Pty Ltd (in liq) v Emanuele (2002) 83 SASR 501
Fitzsimmons v R (1997) 23 ACSR 355.
Giorgianni v R (1985) 156 CLR 473
Goodwin v State Government Insurance Office (Queensland) (1991) 6 ANZ Ins Cas 61-064
Grant v John Grant & Sons (1954) 91 CLR 112
HG & R Nominees Pty Ltd v Fara [1997] 2 VR 368
H L Bolton (Engineering) Co Limited v T J Graham & Sons Limited [1957] 1 QB 159
Howard Smith v Ampol Petroleum Ltd [1974] AC 821
Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR 151
Independent Steels Pty Ltd v Ryan [1990] VR 247
Karger v Paul [1984] VR 161
London & South Western Railway Co v Blackmore (1870) 4 HR 610
Luxton v Vines (1952) 85 CLR 352
Magnacrete Limited v Douglas-Hill (1988) 15 ACLR 325
Marchesi v Barnes [1970] VR 434
McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579
Meinhard v Salmon 249 NY 458 1928
Mid-Density Developments Pty Ltd v Rockdale Municipal Council (1993) 44 FCR 290
Milburn v Pivot Ltd (1997) 78 FCR 472
Mills v Mills (1938) 60 CLR 150
Moore; in re Faithfull, ex parte (1885) 14 QBD 627
Myer Retail Investments Pty Ltd, re (1983) 68 FLR 15
Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449
New Zealand Forest Products Limited v New Zealand Insurance Co Limited [1997] 1 WLR 1237
Noye v Robbins [2000] WASC 81
Onslow v Commissioners of Inland Revenue (1890) 25 QBD 465
Overlook v Foxtel (2002) ATPR (Digest) 46-219, (2002) Aust Contracts Rep 90-143
Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (in liq) [2003] HCA 25
Plasteel Windows Australia Pty Limited v C E Heath Underwriting Agencies Pty Limited (1989) 5 ANZ Ins Cas 60-926
Poliwka v Heven Holdings Pty Ltd (No 2) (1992) 8 ACSR 747
Presentaciones Musicales SA v Secunda [1994] Ch 271
Prime Forme Cutting Pty Limited v Baltica General Insurance Co Limited (1991) 6 ANZ Ins Cas 61-028
Questions of Law Reserved on Acquittal (3 of 1995) Michael Charles Baenisct (1996) A Crim R 1
Rankin v North Waterloo Farmers Mutual Insurance Co (1979) 25 OR (2d) 102
Rejfek v McElroy (1965) 112 CLR 517
Royal Botanic Gardens & Domain Trust v South Sydney City Council (2002) 186 ALR 289
Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378
Silbermann Greaves and Rich v CGU Insurance Limited [2002] NSWSC 1195.
Smith v New South Wales Bar Association (1992) 176 CLR 256
State of South Australia v Clark (1996) 66 SASR 199
Sterileair Pty Ltd v Papallo (1998) 29 ASCR 461
Studdert v Grosvenor (1886) 33 Ch D 528
Talbot v NRMA Ltd (2000) 50 NSWLR 300
Tallglen Pty Ltd v Optus Communications Pty Ltd (1998) 16 ACLC 1526
Tomlinson v Liquidators of Scottish Amalgamated Silks Limited (1935) SC(HL) 1
Transport Industries Insurance Co Ltd v Longmuir [1997] 1 VR 125
Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107
United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1
Victorian Teachers Credit Union v KPMG (a firm) (2000) 1 VR 654
Wallersteiner v Moir [1974] 1 WLR 991 [1974] 3 All ER 217
Wambo Mining Corporation Pty td v Wall Street (Holding) Pty Ltd (1998) 28 ACSR 654
Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285
Woolworths Ltd v Kelly (1991) 22 NSWLR 189
ZBB (Australia) Ltd v Allen (1991) 4 ACSR 495

PARTIES :
Robert Arthur Porter (Pltf)
GIO Australia Ltd (1D)
OAMPS Limited (2D)

FILE NUMBER(S): SC 50072/01

COUNSEL: P R Hayes QC/A Paterson/Chettle (Pltf)
J T Gleeson SC/C Moore (1D)
P M Biscoe QC/A M Gruzman (2D)

SOLICITORS: Withnell Hetherington (Pltf)
Ebsworth & Ebsworth (1D)
Bamford Associates (2D

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

McCLELLAN J

THURSDAY 21 AUGUST 2003

50072/01 PORTER v GIO & ANOR

PART I - INTRODUCTION

1 The plaintiff, Robert Porter, was the Managing Director of the second defendant, OAMPS Limited. He was removed from that position on 27 November 1998. OAMPS is a public company operating as an insurance underwriter and broker.

2 Porter’s problems stemmed from events which occurred on 30 June 1998. On that day OAMPS, through its wholly owned subsidiary AIIL Pty Ltd, at the suggestion of Porter agreed to buy and, on that day pay for, the acquisition of 6,527,429 shares in Clifford Corporation. This transaction is conveniently referred to as the “Clifford transaction.”

3 The Clifford shares were purchased from two companies controlled by Mr Barrie Loiterton, Blenheim Pty Ltd and Leisuremark Pty Ltd. Loiterton was the Executive Chairman of Clifford Corporation.

4 On the same day, Blenheim bought 3,075,000 shares in OAMPS from a company associated with Mr Rodney Adler who was the Chief Executive Officer of FAI Insurances Limited. The OAMPS shares controlled by Adler are conveniently referred to as the “FAI parcel.”

5 Within months of the Clifford transaction Clifford Corporation had gone into liquidation. Porter was subsequently accused of a breach of s 205 of the Corporations Law which prohibited a company from financing the purchase of its own shares. He was investigated by the Australian Securities and Investment Commission. OAMPS and AIIL also sued Porter for damages. Porter brought a cross-claim. The proceedings, which I shall refer to as the Civil Proceedings, were settled and a Deed of Release was executed on 17 February 2000.

6 After the Deed had been executed Porter was charged by the Commonwealth Director of Public Prosecutions with breaches of s 205 and other sections of the Corporations Law. He was committed and brought to trial. However, the trial judge in the County Court in Victoria had a heart attack and could not continue. Porter was subsequently to stand trial before another judge and jury but the DPP entered a nolle prosequi.

7 Porter incurred substantial costs for legal representation at his committal hearing and at the criminal trial. In these proceedings he sues OAMPS and GIO Insurance Limited (now Gordian Runoff Limited), which provided Directors and Officers insurance to OAMPS, to recover the costs of that representation. In addition he sues Gordian to recover his legal costs of the Civil Proceedings, which were compromised with OAMPS. He also claims damages by way of consequential loss, alleging that having been denied indemnity he was forced to raise funds by selling assets at an undervalue.

8 The defences raised by Gordian and OAMPS are numerous and complex. However, a fundamental element is the allegation that, by his actions on 30 June, Porter breached the law and improperly placed his own interests before those of OAMPS.

9 The parties have raised various complex legal problems. However, before they can be considered it is necessary to determine the relevant facts. Some facts can be ascertained from the available documents. Many other matters must be determined from the recollection of various persons. It is necessary to carefully assess the credit of a number of witnesses.

Standard of Proof

10 The allegations made against Porter are serious with potentially grave consequences for him both financially and for his reputation and future prospects.

11 The defendants seek to prove a complex sequence of events. Their case depends upon the inferences which can be drawn from various known facts. In these circumstances the approach which must be taken was defined by the High Court in Bradshaw v McEwans Pty Ltd (unreported, High Court of Australia, 27 April 1951). See Luxton v Vines (1952) 85 CLR 352 at 358.

12 Although the appropriate standard of proof is the balance of probabilities, having regard to the serious matters raised, it is necessary for the court to be actually persuaded to the relevant conclusion by the evidence. See Rejfek v McElroy (1965) 112 CLR 517, 521; Smith v New South Wales Bar Association (1992) 176 CLR 256, 272. In Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449 the High Court said:

“The strength of the evidence necessary to establish a fact or facts on the balance of probabilities may vary according to the nature of what it is sought to prove. Thus, authoritative statements have often been made to the effect that cogent proof is necessary ‘where so serious a matter as fraud is to be found.’ Statements to that effect should not, however, be understood as directed to the standard of proof. Rather, they should be understood as merely reflecting a conventional perception that members of our society do not ordinarily engage in fraudulent or criminal conduct and a judicial approach that a court should not lightly make a finding that, on the balance of probabilities, a party to civil litigation has been guilty of such conduct.“ See also Briginshaw v Briginshaw (1938) 60 CLR 336 at 362.

13 It is important to approach the task by evaluating the evidence as a whole. The object is to seek a true picture if it can be derived from the detail. See Transport Industries Insurance Co Ltd v Longmuir [1997] 1 VR 125 at 141.

14 I have approached all factual questions with these principles in mind.

The Clifford Transaction

15 The Clifford transaction involved OAMPS, through its insurance underwriting subsidiary Australian International Insurance Ltd ("AIIL"), purchasing 6,527,249 of the issued shares in Clifford Corporation from Blenheim and Leisuremark. The total purchase price was $3,160,420.54 (including stamp duty and brokerage) which represented a price of 48.25 cents per share, a premium to the market price, which was then about 43.5 cents per share. The broker for both parties was HSBC Securities Australia Limited. One of the HSBC people who handled the transaction was Ian Porter who is the plaintiff's brother.

16 At 3:45pm on 30 June 1998, on the instructions of Blenheim and Leisuremark and at the request of Ian Porter, the net sale proceeds of $3,138,374.59 were deposited into the bank trust account of Perth stockbrokers D.J. Carmichael P/L ("Carmichaels"). At the same time another sum of $232,500 was deposited into that bank account. These two amounts, totalling $3,370,874.59, were identified to Carmichaels as payments intended for the purchase by Blenheim of 3,075,000 OAMPS shares. Settlement occurred that day. The parcel of Clifford shares represented about 4.6% of the issued Clifford shares which, together with a further 400,000 shares which Porter caused OAMPS to purchase on the market between 22 and 29 June, totalled about 4.9% of Clifford's issued shares.

17 At 3:52pm on the same day - 7 minutes after the deposit of funds to Carmichaels' account - Blenheim through Carmichaels contracted to purchase 3,075,000 (about 17%) of the issued shares in OAMPS from a nominee of FAI Insurances Ltd ("FAI") for $3,397,721.58 ($3,367,278.75 plus brokerage and stamp duty) at a price of $1.10 per share. The market price at the time was about 75 cents. Carmichaels acted for FAI and Blenheim on this purchase and received FAI's sell order at 3:55pm Sydney time. The Carmichaels people handling the transaction were Connolly and Sturgess-Smith. On 14 July a shortfall of $26,846.66 required for the purchase of the FAI parcel was sought and received by Carmichaels from Blenheim. The purchase settled that day.

18 By 18 September the market price of Clifford shares had declined to around 28 cents. On 9 December 1998 an administrator was appointed to Clifford. On 23 March 1999 Clifford was placed in liquidation. AIIL's entire investment was lost.

19 At the time of the Clifford Transaction, Porter was the managing director of OAMPS which was the holding company of a group whose main activities are insurance broking and underwriting. He was a director from 31 January 1995, having been nominated by Rodney Adler of FAI. He was the managing director from 22 November 1996 pursuant to a service agreement dated 27 November 1996. On 27 November 1998 the board of OAMPS resolved that he cease to be managing director and terminated his employment. On 1 April 1999 an extraordinary general meeting of OAMPS also resolved to remove him as a director.

The ASIC Investigation

20 From September 1998 ASIC conducted an inquiry into the Clifford Transaction. ASIC interviewed Porter on 6 October 1998 and 20 January 1999. In late 1998 and early 1999 ASIC also interviewed and took statements from many others. In January 1999 ASIC briefed the DPP to advise on whether Porter should be charged. On 20 March 2000 the DPP advised ASIC that he should be charged. He was charged on 28 March 2000.

The Civil Proceedings

21 On 8 December 1998 OAMPS and AIIL commenced Civil Proceedings against Porter in the Supreme Court of NSW, Equity Division. They claimed inter alia:-

(a) injunctions to restrain Porter from holding himself out as managing director, director or secretary, and

22 In about April 1999 Porter cross-claimed against OAMPS. He claimed inter alia his costs of the ASIC inquiry. In August 1999 he also cross-claimed against five of OAMPS' current or former directors or officers - Siggins, Sharkey, Harris, Windebank and Glasgow.

The Deed of Release

23 On 17 February 2000 the parties to the Civil Proceedings entered into a deed entitled Deed to Settle and Release. A copy of the Deed is annexed to these reasons. Under the terms of the Deed OAMPS and AIIL gave up their claim of over $3 million plus interest and costs against Porter, Porter was paid $400,000 and he was granted the right to exercise 500,000 options for OAMPS' shares. Of the sum of $400,000, $300,000 had to be applied under the terms of the Deed to the exercise of the 500,000 options. He immediately sold the shares which yielded him $510,000. Thus his total monetary benefit pursuant to the Deed was $610,000.

The Criminal Proceedings

24 On 28 March 2000 Porter was charged with three breaches of the Corporations Law in relation to the Clifford Transaction ("the Criminal Proceedings"). The charges were:-

"Charge 1 On or about 30 June 1998 at Melbourne ROBERT ARTHUR PORTER did directly or indirectly give financial assistance, namely by procuring the purchase by OAMPS Ltd of shares in Clifford Corporation Ltd, for the purpose of, or in connection with the acquisition by a person, whether before or at the same time as the giving of financial assistance, of shares or units of shares in the company, namely the acquisition of shares in OAMPS Ltd by Leisuremark Pty Ltd and Blenheim Holdings Ltd, AND THAT the said ROBERT ARTHUR PORTER was an officer of the company OAMPS Ltd who was in default contrary to section 205(5) of the Corporations Law.

Charge 2 On or about 30 June 1998 at Melbourne ROBERT ARTHUR PORTER did, whilst an officer of OAMPS Ltd, make improper use of his position as such an officer, to gain, directly or indirectly, an advantage for himself or for any other person or to cause detriment to the corporation, namely by procuring the purchase by OAMPS Ltd of shares in Clifford Corporation Ltd, for the purpose of, or in connection with the acquisition by a person, whether before or at the same time as the giving of financial assistance, of shares or units of shares in the company, namely the acquisition of shares in OAMPS Ltd by Leisuremark Pty Ltd and Blenheim Holdings Ltd, contrary to section 232(6) of the Corporations Law
Charge 3 On or about 2 July 1998 at Melbourne ROBERT ARTHUR PORTER did, whilst being an officer of OAMPS Ltd, furnish information to the Australian Stock Exchange ('ASX') which he knew to be false and misleading in a material particular, namely a letter to the ASX dated 2 July 1998."

25 The committal hearing took place in July and August 2000. On 26 November 2000 Porter was committed for trial. The indictment issued in August 2001 contained the following three counts:

"Count 1 The DIRECTOR OF PUBLIC PROSECUTIONS, who prosecutes in this behalf for Her Majesty the Queen, INFORMS THE COURT AND CHARGES that on or about the 30th day of June 1998 at Melbourne in the State of Victoria ROBERT ARTHUR PORTER did contravene sections 1311(1) and 205(5) of the Corporations Law as taken to be included in the Corporations Act 2001 by section 1401 of that Act, in that he, being an officer of OAMPS Ltd, was involved in the contravention by OAMPS Ltd of sub-section 205(1)(a) of the Corporations Law, in that OAMPS Ltd directly or indirectly gave financial assistance to another company, namely Blenheim Holdings Ltd ('Blenheim'), for the purpose of, or in connection with the acquisition, by Blenheim, whether before or at the same time as the giving of financial assistance, or shares in OAMPS Ltd.

Count 2 And the DIRECTOR OF PUBLIC PROSECUTIONS further INFORMS THE COURT AND CHARGES that on or about the 30th day of June 1998 at Melbourne in the State of Victoria ROBERT ARTHUR PORTER did contravene sections 1317FA and 232(6) of the Corporations Law as taken to be included in the Corporations Act 2001 by section 1401 of that Act, in that he, being an officer of a corporation, namely OAMPS Ltd knowingly, intentionally or recklessly made improper use of his position dishonestly and intending to gain directly or indirectly an advantage for himself or another, by being involved in the giving of financial assistance by OAMPS Ltd directly or indirectly to another corporation, namely Blenheim Holdings Ltd ('Blenheim') for the purpose of, or in connection with the acquisition, by Blenheim, whether before or at the same time as the giving of financial assistance, of shares in OAMPS Ltd.
Count 3 And the DIRECTOR OF PUBLIC PROSECUTIONS further INFORMS THE COURT AND CHARGES that on or about the 2nd day of July 1998 at Melbourne in the State of Victoria ROBERT ARTHUR PORTER did, contrary to sub-section 1309(1) of the Corporations Act 2001, being an officer of OAMPS Ltd, furnish or authorise the furnishing of information to the Australian Stock Exchange ('ASX') which he knew to be false and misleading in a material particular, namely a letter to the ASX dated 2 July 1998."

26 The provisions of the Corporations Law referred to in these counts – ss.205, 232(6), 1309(1), 1311(1), 1317FA - relevantly provided as follows:-

(a) whether directly or indirectly, give any financial assistance for the purpose of, or in connection with:

(i) the acquisition by any person, whether before, or at the same time as, the giving of financial assistance, of:

(A) shares ... in the company; or

(B) shares ... ; or

(ii) the proposed acquisition by any person of:

(A) shares ... in the company; or

(B) shares ...;

(b) ...

(c) ...

(2) A reference in this section to the giving of financial assistance includes a reference to the giving of financial assistance by means of the making of a loan, the giving of a guarantee, the provision of security, the release of an obligation or the forgiving of a debt or otherwise.

(3) For the purposes of this section, a company shall be taken to have given financial assistance for the purpose of an acquisition or proposed acquisition referred to in paragraph (1)(a) (in this subsection called the 'relevant purpose') if:

(a) the company gave the financial assistance for purposes that included the relevant purpose; and

(b) the relevant purpose was a substantial purpose of the giving of the financial assistance.

(4) For the purposes of this section, a company shall be taken to have given financial assistance in connection with an acquisition or proposed acquisition referred to in paragraph (1)(a) if, when the financial assistance was given to a person, the company was aware that the financial assistance would financially assist:

(a) the acquisition by a person of shares ... in the company; or

(5) A company that contravenes this section is not guilty of an offence by virtue of this section or section 1311, but each officer of the company who is involved in the contravention contravenes this subsection ."

"232(6) An officer or employee of a corporation must not, in relevant circumstances, make improper use of his or her position as such an officer or employee, to gain, directly or indirectly, an advantage for himself or herself or for any other person or to cause detriment to the corporation."

"1309(1) An officer of a corporation who makes available or furnishes information, or authorises or permits the making available or furnishing of information, to:

(a) ...

(c) a securities exchange in Australia or elsewhere or an officer of such a securities exchange;

(d) is false or misleading in a material particular; or

(e) has omitted from it a matter or thing the omission of which renders the information misleading in a material respect;

is guilty of an offence."

(a) does an act or thing that the person is forbidden to do by or under a provision of this Law;

(b) does not do an act or thing that the person if required or directed to do by or under a provision of this Law; or

(c) otherwise contravenes a provision of this Law;

is guilty of an offence by virtue of this subsection, unless that or another provision of this Law provides that the person:

(d) is guilty of an offence; or

(e) is not guilty of an offence."

"1317FA A person is guilty of an offence if the person contravenes a civil penalty provision:

(a) knowingly, intentionally or recklessly; and

(i) dishonestly and intending to gain, whether directly or indirectly, an advantage for that or any other person; or

(ii) intending to deceive or defraud someone."

27 Porter was committed for trial in July 2000. The trial commenced in June 2002. The hearing was vacated when the trial judge became ill. A further trial recommenced in July 2002. On 19 July 2002 the Commonwealth Director of Public Prosecutions filed a Notice of Discontinuance.

28 On 26 July 2002 Porter made, for the first time, a claim on OAMPS for payment of his costs and expenses of the Criminal Proceedings.

The Present Proceedings

29 Porter commenced these proceedings against the first defendant Gordian in May 2001 claiming indemnity for his costs and expenses of defending the Civil Proceedings and the Criminal Proceedings (plus consequential losses) under a Directors & Officers Liability Insurance policy. Gordian later cross-claimed against Porter and OAMPS seeking rectification of the date of inception of the D & O Policy.

30 In October 2002 Porter amended his summons to claim against OAMPS indemnity in respect of his costs and expenses of defending the Criminal Proceedings (but not the Civil Proceedings) and consequential losses. The pleaded causes of action relied upon Article 35 of OAMPS' Articles and an alleged common law right of indemnity.

31 At an advanced stage of the hearing Porter obtained leave to amend his claim against OAMPS by adding (on a contingent basis) a claim for damages in the amount of that indemnity and consequential losses arising from the fact that OAMPS cancelled the D & O policy with effect from 1 November 1999. The pleaded causes of action for this claim are breach of an implied contractual obligation of good faith and the torts of intentional injury, unlawful interference with his rights and using unlawful means to injure him. Porter claims that the Deed of Release does not bar his claim against OAMPS, or alternatively, that it has been or should be set aside or avoided and that the defendants are estopped from relying on it.

The Trial Process and Submissions

32 The trial occupied 63 days. A number of days were given over to oral submissions. Each party also provided comprehensive written submissions of high quality with a detailed account of the relevant facts. Many of the facts are not in dispute. Some are. Because of the quality of the written submissions it has been possible to draw upon them when making factual findings and recording the arguments of the parties in relation to matters of fact and law.

33 A great many issues required determination. Although, having regard to my decision in relation to some fundamental matters, other matters need not have been resolved, but, having regard to the length of the trial and the comprehensive nature of all submissions I have proceeded to determine most issues. All necessary facts have been found. By expressing my view on those matters these reasons will, I trust be of utility to others who may come to read them. Throughout these reasons I have emphasised in bold parts of submissions, transcript or documents which, in the context of the discussion, may be of greater significance.

PART II – THE ISSUES IN THESE PROCEEDINGS

34 The issues in these proceedings are complex. Drawing upon the parties’ submissions I have attempted to provide a summary to assist the reader of these reasons.

Issues in Porter's Claim against Gordian

35 Porter pleads that Gordian is liable to indemnify him under a D & O policy effected by OAMPS for:-

(a) $136,012.13 being his costs and expenses of defending the Civil Proceedings.
(b) $872,327.26 being his costs and expenses of defending the Criminal Proceedings.

36 He also seeks consequential losses allegedly arising from the forced sale of assets at a loss.

37 Porter pleads that the insurance policy commenced on or about 15 September 1998 for a period of 3 years. Gordian pleads that the policy commenced on 29 September 1998. Because of events which happened in the second half of September the commencement date is of significance to the application of some of the exclusions in the policy.

Gordian’s Defence

38 Gordian pleads:-

(a) that Porter’s claim is barred by the Deed of Release.
(b) that it is not liable having regard to the proper construction of the terms of the policy and also because of Porter's non-disclosure, active concealment, fraud and unlawful conduct.

39 The quantum of Porter’s claim is also disputed.

Failure to Satisfy Proviso in Insuring Clause A

40 The insurance policy provides for indemnity under two provisions known as Insuring Clause A and Insuring Clause B.

41 Gordian says that Porter has failed to satisfy the proviso in Insuring Clause A and therefore that it is not liable in respect for the criminal defence costs. Insuring clauses A and B provide as follows:-

"INSURING CLAUSE A

DIRECTORS AND OFFICERS LIABILITY

GIO will pay on behalf of the Insured, all Loss arising from any Claim first made against an Insured during the Period of Insurance and notified to GIO during the Period of Insurance by reason of any Wrongful Act PROVIDED THAT the Organisation is not required or permitted to indemnify the Insured for such Loss.

INSURING CLAUSE B

COMPANY REIMBURSEMENT

GIO will pay on behalf of the Organisation, all Loss arising from any Claim first made against an Insured during the Period of Insurance and notified to GIO during the Period of Insurance by reason of any Wrongful Act PROVIDED THAT the Organisation is required or permitted to indemnify the Insured for such Loss."

42 Gordian says that:-

(a) if, as Porter pleads against OAMPS, he is "entitled" to be indemnified by OAMPS in respect of the criminal defence costs, then the proviso in Insuring Clause A is not satisfied.
(b) alternatively, Gordian says that if OAMPS is "permitted ” to indemnify Porter in respect of the criminal defence costs and the civil defence costs (notwithstanding the Deed of Release) then the proviso is also not satisfied. Because Porter has not been found guilty in the Criminal Proceedings, or to have a liability in the Civil Proceedings, s.199A of the Corporations Act 2001 does not prohibit OAMPS from indemnifying Porter in respect of the criminal or civil defence costs.

Exclusion 10(iv) of the Policy

43 Gordian denies liability on the basis of exclusion 10(iv) of the policy which provides as follows:-

"This policy does not insure Loss arising out of any Claim:

...

44 Gordian says that:-

(a) an Inquiry (being an inquiry by ASIC) was in progress, or alternatively pending, prior to 4.00pm on 29 September 1998 or alternatively 4.00pm on 15 September 1998. The policy defines "Inquiry " to mean any " official investigation, examination, inquiry or other proceedings ordered or commissioned by any official body or institution empowered to investigate the powers of the Organisation " ;
(b) the criminal charges arose from the Inquiry; and
(c) further or alternatively, the Civil Proceedings were prompted by the Inquiry and the civil defence costs thus arose from the Inquiry.

45 On 25 March 2003, senior counsel for the plaintiff obtained the Court's leave to withdraw his admission made on 24 October 2002 that the criminal charges, which led to the criminal costs, arose from the inquiry that ASIC was conducting in September 1999. At the same time, I granted leave to the plaintiff to amend his Reply, to plead that his criminal costs were not a loss arising "directly" from any inquiry or litigation within exclusion 10(iv), and that, on its proper construction, the exclusion only applies to "direct" costs incurred in participating in the Inquiry.

46 Gordian then filed a Rejoinder to plead that if the Reply was correct, then the policy did not respond under Insuring Clause A, because the plaintiff's claim for criminal costs was made after OAMPS terminated the policy on 1 November 1999. The plaintiff then obtained leave (over objection) to amend his summons, to plead against OAMPS that if the Rejoinder was successful, and he could not recover from Gordian, then he claimed against OAMPS for cancelling the policy.

Exclusion 10(v) of the Policy

47 Gordian also denies liability on the basis of exclusion clause 10(v) of the policy which provides as follows:-

"This policy does not insure Loss arising out of any Claim:

...
10(v) arising from circumstances of which any Insured had become aware prior to the Period of Insurance AND which that Insured knew (or ought reasonably to have known) to be circumstances which may give rise to a Claim."

48 Gordian pleads that Porter’s entitlement to indemnity for the civil defence costs and the criminal defence costs is excluded by exclusion clause 10(v), because prior to 4.00pm on 29 September 1998, or alternatively prior to 4.00pm on 15 September 1998 Porter knew of various matters which he knew or ought reasonably have known to be circumstances which might give rise to a claim under the policy.

Exclusion 12 of the Policy

49 Gordian denies liability on the basis of exclusion clause 12 of the policy which provides as follows:-

"This policy does not insure Loss arising out of any Claim:

...

50 The policy defines "Organisation" as follows:-

"Organisation means: the organisation shown under Item 1.0 of the Schedule and any entity which was a Subsidiary of that organisation at the commencement of the Period of Insurance."

51 Item 1.0 of the schedule to the policy states as follows:-

"1.0 ORGANISATION: OAMPS Limited."

52 The policy defines "Subsidiary" as follows:-

"Subsidiary means any organisation where the Organisation (or any Subsidiary of the Organisation) directly or indirectly:

(i) controls the composition of the board of directors;

(ii) controls more than half of the voting rights; or

53 Gordian says that Porter's entitlement to indemnity for the costs of defending the claim by OAMPS in the Civil Proceedings is excluded by exclusion 12, because at all material times OAMPS owned or controlled 100% of the issued capital in AIIL. The plaintiffs in the Civil Proceedings were both OAMPS and AIIL.

Exclusion 13 of the Policy

54 Gordian denies liability on the basis of exclusion 13 of the policy which provides as follows:-

"This policy does not insure Loss arising out of any Claim:

...
13. brought by or on behalf of the Organisation except a Claim which is either:

(i) initiated by one or more shareholders not being the Insured and acting without the solicitation, assistance or participation of the Insured; or ..."

55 Gordian says that any entitlement of Porter to indemnity for the costs of defending the Civil Proceedings is excluded by exclusion 13, because OAMPS and AIIL fall within the definition of "the Organisation" in item 1.0 of the schedule.

Non-Disclosure

56 Gordian pleads non-disclosure and active concealment by Porter in relation to the Clifford Transaction.

57 Gordian also pleads fraud by Porter, in knowingly or recklessly not making such disclosure whereby it is entitled to avoid the policy.

Exclusion 7 of the Policy

58 Gordian also denies liability on the basis of exclusion 7 of the policy which provides as follows:-

"This policy does not insure Loss arising out of any Claim:

...

7. based upon, attributable to, or in consequence of:

(i) any dishonest , fraudulent , criminal or malicious act or omission; or

(ii) any deliberate breach of any statute , regulation or contract;

where such act, omission or breach has in fact occurred."
(emphasis added)

59 Gordian pleads that Porter's entitlement to an indemnity is excluded by exclusion 7 because relevant acts by Porter were dishonest, fraudulent, criminal or a deliberate breach of the Corporation Law.

No “Loss” Arising From Any Claim –Effect of the Deed and the Civil Claim.

60 Gordian also says that Porter has not suffered any "Loss" within the meaning of the policy because pursuant to the Deed of Release of 17 February 2000 he settled the civil claim and by clause 3.1 AIIL agreed to pay him $400,000 inclusive of costs.

The Allegations that Porter was Involved in Illegal Conduct

61 Gordian pleads that Porter (acting as the guiding mind of OAMPS and AIIL and deliberately acting in his own interest) acted unlawfully in the following respects:

(a) aided, abetted, counselled, procured or was knowingly involved in contraventions by OAMPS and AIIL of s.205(5) of the Corporations Law, in that they provided financial assistance for the purchase of OAMPS' own shares.
(b) failed to act honestly in exercise of his powers and discharge of his duties as a director of OAMPS and AIIL, in breach of s.232(2 ) .
(c) made use of his position as a director of OAMPS and AIIL to obtain an advantage for himself, in breach of s.232(6 ) .
(d) failed to exercise the degree of care and diligence as a director that a reasonable director in his position would exercise, in breach of s.232(4).
(e) was present at a directors' investment committee meeting of OAMPS and AIIL and voted in favour of the Clifford Transaction, in which he had a material interest, in breach of s.232A.
(f) was aware of the effect of those sections and that his conduct would contravene them, and therefore engaged in deliberate contraventions.
(g) settled or instructed OAMPS' company secretary, Glasgow, to write a letter to ASX on 2.7.03 which contained statements that were knowingly false and misleading, in contravention of s.1309, and did so deliberately.

62 With respect to the damages claimed by Porter both causation and quantum are in issue.

Porter’s Reply - Insurance Contracts Act 1984 s.13 – “utmost good faith”

63 In his Reply Porter pleads that if the period of insurance commenced at 4:00pm on 29 September 1998, reliance by Gordian upon exclusion 10(iv) and (v) involves a failure by Gordian to act with utmost good faith in accordance with s.13 of the Insurance Contracts Act 1984.

Porter’s Reply - Insurance Contracts Act 1984 s.31

64 In his Reply Porter also pleads that if there was a fraudulent failure to comply with the duty of disclosure, Gordian’s avoidance is harsh or unfair and Porter asks the Court to disregard it under s.31 to the extent it considers just and equitable.

Porter’s Reply - Waiver and Estoppel

65 Porter also pleads waiver and estoppel against OAMPS for various reasons.

Issues in Porter's Claim Against OAMPS

66 Porter claims against OAMPS an indemnity for his costs and expenses of defending the Criminal Proceedings and consequential losses including alleged losses on forced sales of assets prior to 26 July 2002 to fund those costs and expenses. It was only on 26 July 2002 that Porter first made a claim on OAMPS for an indemnity for his costs and expenses of defending the Criminal Proceedings. He does not claim against OAMPS for his costs of defending the Civil Proceedings.

67 Porter's pleaded causes of action against OAMPS are based firstly on Article 35(1) (a) of OAMPS' Articles. Article 35(1) provides as follows:-

"35.1 Indemnities

To the extent permitted by law:

(a) the Company indemnifies every person who is or has been an Officer of the Company or of a subsidiary of the Company against any liability for costs and expenses reasonably incurred by that person in defending any Proceedings in which judgment is given in that person’s favour, or in which the person is acquitted, or in connection with an application in relation to any Proceedings in which the Court grants relief to the person under the Corporations Law; and

68 The issues in relation to Article 35.1(a) include:

"

69 Porter bases a further cause of action on Article 35(1)(b), in respect of which the issues include the following:-

(a) whether Article 35.1(a) covers the field in relation to indemnity against costs and expenses incurred in defending legal proceedings.
(b) whether Porter's costs and expenses of defending the Criminal Proceedings were liabilities "incurred as an officer of OAMPS " .
(c) whether Porter's liability for such costs and expenses "arises out of conduct involving a lack of good faith".
(d) the effect of the repeal of Article 35.1 on 26 October 2000.

70 Porter also claims a director's common law right of indemnity. On this claim the issues include:

71 Porter’s fourth claim, which is contingent upon his claim against Gordian failing, is based upon OAMPS' cancellation of the GIO policy on 1 November 1999. Porter pleads that this was a breach of an implied contractual obligation of good faith in a contract said to be constituted by a 1997 board resolution, known as the Bardie Russell resolution. There are issues as to whether the resolution constituted a contract; if so whether there was breach of any implied obligation of good faith; and, if so, whether it caused Porter any damage.

72 The same contingent claim for cancellation of the policy is pleaded tortiously as intentional injury, unlawful interference with Porter's rights under the policy or using unlawful means to injure him. There are issues as to whether there is a tort of intentional injury, whether OAMPS' conduct in cancelling the policy was tortious as alleged and if so whether Porter suffered damage.

73 Porter pleads that the Deed of Release does not bar his claim on its proper construction. Alternatively he pleads:-

74 The conduct of OAMPS pressed by Porter in aid of these propositions is that at the date of the Deed of Release OAMPS knew, and knew that Porter did not know, that:-

OAMPS Defence

75 OAMPS pleads in its Defence in answer to all causes of action that any costs and expenses that Porter incurred were incurred by him as a result of him being charged with the criminal charges; and that his acts and omissions the subject of the criminal charges were undertaken by him:-

76 Causation and quantum are in issue. As to the cause of the alleged consequential losses arising from the alleged forced sale of assets at a loss, no claim on OAMPS for indemnification against the costs and expenses of the Criminal Proceedings was made until 26 July 2002 after the DPP had filed a Notice of Discontinuance on 18 July 2002.

Issues on Gordian’s Cross-Claims

77 Gordian cross-claims against Porter and OAMPS seeking:-

78 OAMPS submits to the order of the Court in relation to (a) and is neutral as to (b).

Issues on OAMPS' Cross-Claims Against Porter and Gordian

79 OAMPS cross-claims against Porter for declarations that in bringing these proceedings Porter has breached clauses 8.2, 9.2, 4.3 and 16.2 of the Deed of Release and claims as damages its legal costs and disbursements of defending the proceedings on an indemnity basis. Porter pleads in his defence:-

80 OAMPS cross-claims against Gordian that if it is liable to Porter, Gordian is liable to indemnify OAMPS under the policy.

81 With this brief summary of the issues I turn to consider the facts.

PART III – EARLY DEALINGS

Was OAMPS Interested in Investing in Clifford?

82 Porter was appointed Managing Director of OAMPS on 1 May 1996. At that time Adler, through Corcarr Nominees Pty Ltd (a nominee of FAI), controlled a significant proportion (in fact 17%) of the shares in OAMPS (“the FAI parcel”).

83 OAMPS had been adversely affected by an unsuccessful attempt to expand into the United States. Porter, who had by then considerable experience in the insurance industry both in Australia and England, was known to Adler. He was invited at Adler’s instigation, to join OAMPS to remedy its problems. Porter was successful in this endeavour and was, rightly, credited with having achieved a considerable success.

84 Porter impressed me as an energetic and resourceful person. Having “rescued” OAMPS from these problems I have no doubt that he was looking for ways to expand OAMPS’ business. That business was concentrated significantly on the insurance of motor vehicles.

85 Porter met Loiterton in 1995. Their sons attended the same school. Loiterton was the executive chairman of Clifford Corporation, a public company, involved primarily in the manufacture of buses and fire engines. Another director of Clifford was Mr Ian Hall. Loiterton and Hall were significant shareholders in Clifford and utilised private companies, which they owned together, for this, and other investment purposes. Those companies included Blenheim, Leisuremark and Notretoil Pty Ltd.

86 By about March 1998 Hunter Hall Investment Management Ltd ("Hunter Hall"), an investment company, owned about 17.4% of the issued shares in OAMPS. By May 1998 it had increased its holding to 18.4%, making it the largest single shareholder. Its chairman since 1996 was Mr Peter Hall (no relation to Ian Hall of Clifford). His position involves advising on the investments of various Hunter Hall trusts. Mr Jack Lowenstein has been retained by Hunter Hall since 1997 to provide corporate and investment advice. By 23 April 1998 OAMPS had invested $3 million in a Hunter Hall trust.

87 Porter gave evidence that in 1997 he formulated a plan for OAMPS to enter the bus insurance market and had identified Clifford as a company which may provide that kind of business. If he had such a plan it must have been informal in nature for there was no written evidence of it.

88 Porter gave evidence that in December 1997 OAMPS was appointed as Clifford’s insurance broker. He said that in the 12 to 18 months preceding 30 June 1998 he also had a number of conversations with Loiterton about the possibility of some cross shareholding arrangements. He said in his statement made on 30 January 2003:

“In about the 12 to 18 months preceding 30 June 1998, I had a number of discussions with Mr Loiterton, who at the time was the executive chairman of Clifford. In one of the early conversations I said to him words to the following effect:

Porter: ‘I am very interested in what Clifford is doing in the transport area. OAMPS would also be interested in buying an interest in Clifford. We would only initially be interested in buying up to 4.9% as we would not want to trigger the substantial shareholder requirements at this stage. I have already mentioned our interest in buying in to Laurie and Laurie is very positive about China’

89 He went on to add in his statement that there had never been any discussion to the effect that any company with which Loiterton was associated other than Clifford might buy OAMPS’ shares. This suggestion is relevant to the events which take place on 30 June 1998.

90 Porter gave evidence that in about March 1998, he had a conversation with Loiterton to the following effect:

“Loiterton: ‘I can put together a substantial parcel of shares in Clifford for OAMPS if you are still interested in buying a stake. Some of these shares belong to me and others do not. I can influence some others to sell as we would welcome OAMPS on Clifford’s share register.

Porter: ‘I am interested, but it will need to be considered by OAMPS’ board. Let me know what the price expectation is for a 4.9% parcel.’ “

91 I am satisfied that Porter has exaggerated the nature and extent of these early conversations with Loiterton. Loiterton gave evidence that although there had been some talk of possible investments, including possibly a very cursory discussion in February or March, he said that “up until the 19 (June) everything was casual, social or perfunctory.” The matter was never raised at an OAMPS Board meeting until 30 June. I do not accept that there was a conversation in March 1998 in the detail suggested by Porter.

92 Evidence was given that Loiterton wrote to Porter in March 1998 suggesting the development of a closer relationship and possible merger between OAMPS and Clifford. As I understand the situation it was suggested that Clifford might buy into OAMPS. All evidence of the correspondence is now said to have been destroyed by both parties because they came to the view that such a relationship was inappropriate. Whatever the suggestion may have been it came to nothing.

93 Porter also gave evidence that he had discussed the possibility of investing in Clifford with Mr Gordon Siggins, who was the Managing Director of one of the companies in the OAMPS Group. However, Siggins, who Porter submits was a credible witness, denied any conversations to this effect until Porter spoke with him on 29 June 1998. I accept Siggins’ account of this matter.

94 Porter gave evidence that he discussed the possibility of OAMPS investing in Clifford in the months preceding 30 June 1998 with Mr Mark Windebank, the Chairman of OAMPS, on numerous occasions and had similar discussions with other senior executives. I do not accept this evidence. As I have indicated, the possibility of investment in Clifford had never reached the stage where it was included in any agenda, board papers or minutes of the investment committee of OAMPS prior to 30 June 1998.

95 Porter gave evidence of one specific occasion prior to June 1998 when he had a conversation about Clifford with Windebank. He said they had a meeting in Singapore, in May 1998, with a Singapore insurance executive, Mr Leow Sak Fah. A statement by Leow which was tendered in evidence referred to the discussion. The parties agreed that the short evidence of Leow, who resides in Singapore, would be received without cross-examination and that no Browne v Dunn point would be taken. Windebank denied having any such discussion and said he had not heard of any intention to invest in Clifford before 30 June 1998. I accept Windebank as a witness of truth. If the conversation did occur it must have been of such limited significance that Windebank no longer remembers it.

96 Peter Hall gave evidence that Porter had spoken to him about the possibility of investing in Clifford on three occasions between March and June 1998. On each occasion Hall advised Porter not to invest. Although Porter raised the matter, Hall believed he had only a passing interest in the possibility of such an investment.

97 Porter testified that in May 1998 he spoke to Mr Duncan Glasgow the Company Secretary of OAMPS, about the possible acquisition of 4.9% of Clifford’s shares and asked Glasgow to investigate and find out as much as he could about Clifford. Glasgow's evidence was to the contrary. He testified that the first he knew of Porter's interest in investing in Clifford was when he saw letters, dated 22 June 1998, to Porter from Leisuremark and Blenheim.

98 Glasgow did say that in May 1998 Porter told him that he had spoken to Loiterton who had said there was an opportunity to do something about Clifford’s superannuation fund, and asked Glasgow to follow up on it. Subsequently Glasgow prepared a memorandum dated 22 May dealing with that issue. Glasgow’s diary entries for this period confirm that he was undertaking tasks relating to Clifford but relevant only to Clifford’s superannuation fund. Windebank believes that Glasgow may have told him that Porter had raised the possibility that Porter had spoken of an investment some months before. However, his evidence is not entirely clear on this matter. I accept Glasgow’s evidence.

99 Mr Walker, another director of OAMPS gave evidence. When cross-examined he gave evidence that there were informal discussions between members of the board and members of the investment committee well before 30 June, about the acquisition by OAMPS of Clifford shares. When asked to identify the discussions in re-examination he indicated they were:

100 None of these specific occasions were put to Windebank, Glasgow or any other OAMPS witness in their earlier cross-examination, nor were they specifically corroborated by Porter.

101 I have indicated below that I do not accept Walker’s evidence unless corroborated. Although I accept that Porter had developed an idea that Clifford may be a company that OAMPS should invest in I do not accept that the possibility was discussed with the Board until 30 June. It was submitted by Porter that his motivation for the Clifford transaction was the potential commercial advantage from the synergies which the close alignment of the businesses might create. I do not believe this was the case. Porter only moved to have OAMPS make the share acquisition when other events began to unfold.

PART IV – INITIAL MANOEUVRES & PORTER’S JOB

Lamont Plans a Takeover

102 As I have related Porter went overseas with Windebank in May 1998. They returned in early June. During his time in London, Porter heard a rumour that there had been a coup at OAMPS and he had been removed. The rumour was not true, but there is no doubt that by this time corporate manoeuvres were being initiated and the security of Porter’s future position with OAMPS was soon to become uncertain.

103 Upon his return Porter spoke to Adler who told him that he was considering selling the FAI parcel to Mr Kingsley Lamont or interests which he controlled. Lamont was the Managing Director of Steadfast Insurance Brokers Management Group Ltd. Lamont was not a friend of Porter’s.

104 As it happened, Lamont and Adler had been in discussion for some time about the prospective sale of the FAI parcel. They exchanged correspondence in May, and although FAI would be required to provide vendor finance, it appears that by sometime in May an agreement in principle was reached that a transaction would be concluded by 30 June 1998.

105 It will become apparent that if Lamont gained control of OAMPS he intended to sack Porter and install a new managing director. Porter was soon to learn of Lamont’s intentions.

Discussions between Lowenstein and Lamont

106 It is also clear that Lowenstein of Hunter Hall and Lamont had been in discussion. For a time Porter believed that their discussions may have been about the possible sale of Hunter Hall’s OAMPS shares to Lamont. As it happened the topic was the proposed purchase by Lamont of FAI’s parcel and not the shares owned by Hunter Hall. Lowenstein made a note of his conversation with Lamont which occurred on 10 June 1998. Relevant parts of his summary of the conversation reads as follows:

“Lamont indicated that he has reached an agreement in principle with Rodney Adler to buy FAI’s shares. The deal appears to involve paying ‘well above market’ – and a side agreement for OAMPS to make a subsequent 10% placement back to FAI at a price between today’s market and the sell out price. Lamont says Adler is keen to complete the transaction before the end of the financial year.

Should the deal proceed Lamont proposes to take full management control, removing the current board including the present MD, Porter, and appointing a new MD, himself as a part time executive director and an ‘independent’ non-executive chairman. He indicated he would be happy for a HH nominee to join the board. He does not anticipate any changes to investment policy.

Lamont wanted to know what our in-principle response to his actions would be. I outline his proposals in slightly greater detail below. In addition I have asked him to prepare a detailed paper for us including:

§ Outline business plan with projections and taking into account transition costs.

§ CVs for the three proposed new directors

He has promised to prepare these by early in the week beginning June 15th.”

Clifford Looks for Investors

107 As it happened, by June 1998 the Clifford group was actively looking for new investors. Part of its corporate structure included an entity known as the Signature Group which Loiterton had been endeavouring to sell to assist the financial integrity of the group. The sale was expected to raise $16 million which it was suggested would underpin future dividend payments. There is some disagreement as to when Porter learned of the proposed Signature transaction and, as it happens, the “deal” never materialised. With hindsight it is readily apparent that without the sale of Signature, Clifford was in serious financial trouble.

Porter’s Early Phone Calls

108 There is evidence that Loiterton rang Porter on 10 June 1998 but the two did not speak. Porter’s diary records a meeting with Loiterton at 5 pm on 11 June 1998 and although this is possible the content of any discussion remains unknown.

109 I am satisfied that Porter spoke to Adler on or immediately prior to 12 June 1998. It was in this conversation that Adler confirmed he was considering selling the FAI parcel to Lamont.

110 Subsequently, Porter and Lamont spoke on 12 June 1998. Porter gives this account of the conversation which I accept:

“At or about 6.00 pm on 12 June 1998 Mr Lamont telephoned me and to the best of my recollection we had a conversation to the following effect:

Lamont: ‘I have just purchased FAI’s shares in OAMPS from Adler. Steadfast is going to takeover OAMPS. I have the full support of Hunter Hall for me to take control of OAMPS.’

Porter: ‘Congratulations. How much did you [meaning Steadfast] pay?’

Lamont: ‘$1.10 per share. I am letting you know that I am joining the board and assuming responsibility for the company. You will be out. I have the support of Hunter Hall on this. Adler is no friend of yours.

Porter: ‘The fact that you have bought the shares does not automatically entitle you to a Board seat. I certainly don’t recall discussing it with my colleagues.

Seriously Kingsley, to kick me out of the company will be quite expensive because I am contracted. What about your conflicts of interest with Austin, Cowden and Steadfast. You lot are serious competitors of ours. We should be taking over Steadfast and I am hugely supportive of that strategy as it would be a perfect back door listing for Steadfast. Lets get together and talk about it’

What’s all this aggravation about? What’s your problem?’

Lamont: ‘Now that you have cleaned up the American mess I want to move the business forward.’

Porter: ‘Kingsley we should also discuss with you and your associates your share buying activities in OAMPS Limited. Having regard to the agreement you say you have reached with FAI, I am concerned that you and your mates are breaching the insider trading laws. Adler is so concerned he is re-thinking the whole deal you say you have concluded. As you have the support of Steadfast, I think we should have a meeting to discuss this.’

Lamont: ‘I’m not worried about that, but I will meet with you.’ “

Conversation with Lowenstein – Porter Raises the Possibility of a Share Buy- back

111 After speaking with Lamont, Porter rang Peter Hall, but, as he was not available, he spoke to Lowenstein who made a note of their discussion which was addressed to Peter Hall and reads as follows:

“CONVERSATIONS WITH ROB PORTER

Porter called me on Friday in high dudgeon! He appears to be a highly voluble and slightly volatile character! For some reason he seemed to believe that we were seeking to sell our stake and that we might be talking to Lamont for this purpose.

I explained that the call from Lamont had been initiated by him and that not only had I given no indication that we were a seller, but that I personally took no part in any trading decisions. I also pointed out that we had received no bid from Lamont for our shares. I then explained your basic investment policy of buying shares at a discount to your estimated intrinsic value and holding them for as long as you felt they remained at a discount. I also pointed out that you had a record of being constructively supportive of management of your investee companies and had never sought changes lightly or capriciously.

Once all this was sorted out the following points emerged:

§ Porter claims that he has been told by Rodney Adler that Lamont has offered to buy FAI’s stock at $1.10-$1.20 a share

§ ‘Rodney has said that he is quite interested’, but there is as yet no firm agreement

§ Porter believes that Brian Austin (who you may recall is Lamont’s OAMPS MD designate) is guilty of insider trading for having bought OAMPS stock on market since Lamont started talks with FAI. Whether this is insider trading is moot – but it does match up with Lamont’s claims for parties associated with him already having a holding.

§ Notwithstanding the above, Porter speaks highly of Austin. By coincidence (?!?) Porter says he had been trying to hire Austin, acquire part of his brokerage and use him to create a structure similar to Austbroking to expand the broking capacity of OAMPS while still leaving individual brokers incentivised. Austin has not been returning calls.

§ OAMPS is currently preparing to sue one of the Steadfast directors, who is a former executive of OAMPS for improper use of confidential material. A statement of claim for $2m is about to be lodged.

§ Porter is concerned that Claringbold may be behind Lamont, both in terms of funding and tactical advice.

Porter has now arranged to meet Lamont on Tuesday. His aim is to reduce the aggression and see if the two of them could work together. Porter says he is impressed with the Steadfast concept (although I think he has an inflated concept of its intrinsic worth – mainly because he was under the impression that it would earn $4m in fees – which on my reading of the Steadfast prospectus is out by a factor of at least 10x). In any case he has promised to report back to me after the meeting.

On Friday, Porter was proposing to withdraw his invitation for HH to make a nomination to the OAMPS board. Today he was more placatory. Clearly he did not get on all that well with John Parker. My advice to you is to bring forward any appointment you plan. Do you have any other candidates in mind?

On Friday, he was interested in my views on the company buying part of FAI’s stake. I explained to him the concept of selective share buy backs. However price would clearly be an issue.”

112 It is plain from this conversation that Porter was concerned that Lamont might get control of OAMPS and was investigating the possibility of stopping this or at least avoiding a hostile acquisition by Lamont. Porter in his evidence sought to explain his suggested share buy-back of FAI’s stake in OAMPS as a normal event. However, I am satisfied that on this occasion he saw it as a possible defensive measure against Lamont.

113 Porter also asked Glasgow to investigate the possibility of a share buy-back by OAMPS. Glasgow reported by memorandum dated 15 June 1998:

“Have confirmation that it can be done per s.308E of the Corporate Law and Corrs. (Bill Keock) Corrs have also advised as follows:

(i) Corporation Law and ASX Listing Rules require an EGM (75% of those there and voting) to approve it. Notice of Meeting for the EGM will have to have an explanatory memorandum with it.

(ii) Because of proposal price v current ASX price an independent experts valuation will be needed – Auditors firm could provide this and still be independent.

(iii) Need to have the process run by an executive or director who is unrelated to the party being taken out. That would probably eliminate both you and Richard because of both your connections to FAI. Difficulty would be having the Board approve this deal at all because both would have to exclude themselves from the meeting when it was discussed.

(iv) Would need to lobby top 20/40 Shareholders.

(v) Information memo would need to have our very good reason why it should be approved bearing in mind the 80 90% premium being proposed.

P.S. Bill Keock says that just last week he has had 2 Rights issues fall over because underwriters are getting skittish. So if we wanted to raise capital for acquisition would need to do it a la Edex Baillieu Method.”

114 It was now apparent to Porter that a share buy-back was not likely to be feasible within the time frame which Adler required for the disposal of the FAI parcel of OAMPS shares.

Advice of Peter Hall

115 Porter gave evidence that on 12 June he did manage to speak with Peter Hall and received advice from him about Loiterton. Porter says the conversation was in the following terms:

“Porter: ‘I am very enthusiastic about the opportunities our Clifford client opens up for us particularly in NSW State Government Transport and their Superannuation Funds Management.’

Hall: ‘We once invested in Clifford and sold out because I did not like Mr Loiterton and we became disenchanted with the serviced office business. We are unconvinced that he can achieve his wide objectives.’

Porter: ‘Mr Loiterton seems pretty competent to me and in any case he has confirmed that the Signature Group office rental business has been sold to the Americans. I am told by Mr Loiterton that more than $10 million in free cash will be produced for Clifford to enable them to pay out the Heller Financial Services debt and that will make a huge difference to the balance sheet.’ “

116 I accept that Hall gave this advice to Porter.

117 Hall also gave evidence that in the period March to June, on about three occasions, he discussed Clifford with Porter. He told Porter that he had an investment in Clifford in early 1996 but got out quickly because he “did not like the people involved.” He also told Porter that the financial position of Clifford was not strong and that Porter should not invest in the company. Each time Porter raised a possible investment in Clifford with him Hall gave the advice “Rob, I urge you not to invest in Clifford. It’s bad news.”

118 Hall was an impressive witness and has no personal interest in the proceedings. I accept his evidence without reservation.

119 I am satisfied that a prudent person in Porter’s position should have listened carefully to Hall’s advice. At the very least the Board of OAMPS was entitled to be told of Hall’s opinion when considering an investment in Clifford, as happened on 30 June 1998. However, I have no doubt that Porter never told anyone at OAMPS of Hall’s views. At his committal Porter said he did not think Hall’s view was important. Although not relevant to these proceedings Hall’s view was proved to be correct when, within a matter of months, Clifford was in liquidation.

Discussions between Porter and Loiterton

120 Porter and Loiterton spoke on about 12 June 1998. At this time Porter told Loiterton that the FAI parcel was on the market. Loiterton gave evidence that by 19 June he knew that Porter would like him to purchase the FAI parcel.

121 Loiterton also confirmed that by this time he was interested in formulating a proposal to put to Porter for OAMPS to invest in Clifford shares and for Blenheim to buy the FAI parcel. He said “there was discussion relating to those matters.”

122 One of the difficulties in this case was created by the fact that the documents of the various corporations had, by the time of trial, been utilised by different persons for various purposes. In particular the documents of Clifford, now in the possession of the liquidator, but also obtained by ASIC pursuant to its statutory powers and used for the Commission’s purposes, do not appear to be in an entirely orderly arrangement.

123 In answer to a subpoena ASIC produced a document sourced from Clifford which the computer information indicates was created on 12 June 1998. The evidence does not indicate who was responsible for the document. It records an “overall proposal” which provided for OAMPS to purchase Clifford shares and Blenheim to acquire either the FAI parcel or the Hunter Hall parcel of OAMPS shares. The document also stated that “the timing of each transaction is not dependent on the other.”

124 Irrespective of the provenance of the document Loiterton confirmed that prior to 19 June 1998 he had a discussion with Porter concerning a proposal along the lines of the 12 June document. That discussion must have occurred on 12 June or close to that day.

125 It was submitted by counsel for OAMPS that the 12 June document is the draft of a letter. The last paragraph is consistent with this proposition. Notwithstanding Porter’s assertion to the contrary it strongly suggests that a cross shareholding utilising Blenheim was in contemplation, making it likely that it formed part of the discussion between the parties at this time.

Porter and Lamont meet on 16 June 1998

126 On Tuesday 16 June 1998 a meeting was held in Melbourne attended by Glasgow and Porter from OAMPS and Lamont, Mr Colin Cowden and Mr Brian Austin from Steadfast. It was not a friendly meeting. Porter recounts the following essential elements of the conversation:

“At about 2.00 pm on Tuesday 16 June 1998 I attended a meeting with Mr Glasgow, Mr Lamont, Mr Colin Cowden and Mr Brian Austin in Melbourne at Mr Austin’s office. I had asked Mr Glasgow to come along and take notes of the meeting as he was the OAMPS company secretary. … The tone of the meeting from the other side to me was very antagonistic. I did my best to be placatory toward them. During the meeting we had a conversation to the following effect:

Porter: ‘Kingsley told me last week that he had purchased shares in OAMPS from FAI. I know that both Colin and Brian have purchased stock recently. I am concerned about the appropriateness of this, as it may be insider trading. You guys know that Steadfast is paying $1.10 per share. That means that you have inside knowledge that is market sensitive. If you are buying shares on the market at a lower price and there is no disclosure it is insider trading and unlawful.’

‘I actually doubt that you have bought the FAI shares because last week Adler said that I could have an option over them.’

Austin: ‘I don’t know anything about insider trading and such nonsense. I only bought the shares through my superannuation company.’

Porter: ‘That’s not true. Also, do you know that Kingsley threatened me last week? You had better restrain Kingsley from making threats against me and making nonsense phone calls to me. It is beyond me as to why you do not recognise the value of our corporate broking successes.

When we announce this to the market it will move the share price. Look at these corporate references. This is business OAMPS couldn’t even dream about, let alone do a year ago until I put in the corporate division together [referring to OAMPS Corporate Risk Ltd].’

Lamont: ‘You will fail in growing the corporate account that’s why I want to be a director of OAMPS.’

Cowden: ‘We are not interested in your Corporate Division.’

Porter: ‘We have made significant progress with large corporate clients which will underpin our broking companies earnings very quickly. Look at these testimonials to our success. I am not going to support you becoming a director, under these circumstances. Kingsley, why don’t you come to our office tomorrow and we can discuss things and see if we can cooperate, as it is certainly in Steadfast’s and OAMPS’ interests if we can.’ “

127 The statement by Porter that he had an option from Adler was not true. Porter justified his statement to Glasgow after the meeting when I accept that he said:

“Porter: ‘The discussion about me having an option was to draw Kingsley out so that his associates, Austin and Cowden could see that what he had told them about having concluded a deal with Adler was nonsense. Did you see the look on Cowden’s face when he discovered Kingsley had not purchased Rodney’s shares? Can you believe Austin has the audacity to say he only bought a few OAMPS shares in his superannuation fund? You should prepare a detailed file note of the discussions because these guys are up to no good and have certainly been insider trading. With what we told them today they will probably be in the market buying OAMPS with their ears pinned back tomorrow. You don’t have to be concerned about my comment about having an option. Rodney had merely mentioned ages ago that he would always let me know what he was doing with his shares.’”

128 I generally accept Porter’s account of this conversation with Lamont and the others although whether he identified a price of $1.10 for the OAMPS shares is uncertain. Porter made a file note of the meeting in which he identifies a price of $1.00. This was the price which he also spoke about in his initial discussion with an investigating officer of ASIC. $1.00 was also the price initially agreed between Lamont and Adler.

129 However, against this Lowenstein’s note of his earlier conversation with Porter records Lamont as having offered “$1.10 to $1.20 a share.” All that can be said is that the position remains unclear. However there could be no doubt that Adler would seek the highest possible price for the shares from a purchaser with whom he could reach agreement on other relevant terms. A significant factor in any negotiation would be whether Adler would be required to provide vendor finance.

130 There is no doubt that during the conversation Lamont repeated his threat to gain control of OAMPS and remove Porter as the Managing Director.

Porter Telephones Adler

131 On the same day Porter decided to phone Adler. Porter says the following conversation took place:

“Porter: ‘It appears to me there is something very wrong with what Lamont and his mates Austin and Cowden are up to. I have accused them of insider trading in OAMPS shares. Steadfast buying into OAMPS would be very significant to OAMPS share price because they could divert a large chunk of Steadfast business to Australian International Insurance Ltd, our own Insurance Company. They have been buying shares on the strength of that, and you’re selling. You must tell me what is happening because if I get to the bottom of it I’ll have to disclose it to the market. We are trading well below NTA [net tangible assets] at present and if Steadfast comes on the OAMPS share register our share price will certainly rise.

Adler: ‘I have not made any agreement with Lamont or anyone else. The last thing I want is to get caught up in an insider-trading problem. Why don’t you make me an offer?’

Porter: Are you crazy. I don’t have that kind of money. And any way I don’t want to be insider trading. What’s your purpose in selling?’ “

132 Adler was not called to give evidence but there is no reason to doubt that this conversation occurred.

981 When the meeting took place McLure introduced himself as being from the GIO and as the “responsible manager for this claim”. He did not disclose that he was on secondment from Minter Ellison.

982 Hartnell gave evidence, which I accept, that he said to the meeting:

“Our participation in this meeting is on the terms of our correspondence and subject to you agreeing to genuinely and fairly consider the claim by Mr Porter. We are providing this extensive material on the basis you are the insurer and there is a common interest legal professional privilege. Matters of evidence in regard to Mr Adler and his solicitor, Michael Hughes of Minter Ellison are contained in the files are particularly sensitive as to the position of Minter Ellison. These are very important matters that will be raised in the trial.

I cannot presently think of any document in this category, but any documents in respect of which ‘common interest’ privilege cannot be claimed are not intended to be given and, on that basis, you have agreed to return privilege documents without copying them.

Katekar or McLure: We are agreeable to those terms.”

983 Porter later learned that McLure was a lawyer from Minter Ellison. He became concerned about that fact because Minter Ellison was apparently acting for Adler in matters involving Porter.

984 Gordian submitted that there can be no suggestion that McLure breached the confidence entrusted in him or that the documents which were examined were used other than for the purpose of considering Porter’s claim.

985 In summary the evidence of Hartnell was that:

986 Porter’s counsel submitted:

“Mr McLure misled Mr Hartnell by not telling him that he worked for Minter Ellison… The material that was not to be seen, that was given on an undertaking that it would not be used for such a purpose, that was obtained by plain deception and obtained and used in breach of an undertaking given by an officer of the Court , was then sought to be tendered by Mr Gleeson, who was [sic] not accused of any knowledge or complicity in these events, and has been sought to be used in other ways, including in various contested applications.

The hand up brief material was used by the GIO three days later to refuse the application for interim funding and was relied upon for that purpose. The purported ground for refusing the interim funding was false . . . The pretext for the refusal had been obtained from the illicitly obtained and used materials, themselves the subject of embargo from Bryson J because of criminal proceedings pending.

The decision to refuse interim funding was not in good faith and the consent was unreasonably withheld , (a) because they delayed 11 months without notifying refusal, (b) represented in the meantime that funding would be granted, (c) in effect stole material they had no right to see, intending to use it for a purpose altogether different to what they undertook to use it for, (d) the reason they gave for refusing interim funding was wholly wrong .”

987 The evidence of Hartnell makes plain that the documents were not obtained by a misrepresentation and were not improperly used.

988 It was further submitted by Gordian that the claim is not maintainable because each of the documents referred to in that paragraph was discovered by the plaintiff in the proceedings. This is disputed by Porter but in the circumstances it is not necessary for me to resolve the dispute. Questions of privilege and the circumstances of the production of particular documents are in issue.

Orders of Bryson J

989 Gordian further submitted that the claim as pleaded in paragraph 123(a) and (b) of the Third Amended Reply misrepresents the true position. The order made by Bryson J, referred to in paragraph 123(a), excused ASIC from producing documents on the grounds of public interest immunity. It is submitted that this could not, and did not, prevent Gordian from using documents which had been made available to it by the plaintiff on two separate occasions: once when provided by Hartnell, and once when discovered. In relation to documents provided in this manner the submission is correct.

990 It is further submitted that the matter referred to in paragraph 123(b) is a reference to observations of Judge Jones in the criminal trial. Whatever be the effect of this observation, it is irrelevant to the use by Gordian of materials provided and discovered to it by the plaintiff. For the same reason that the documents were either provided or discovered by the plaintiff the submission is correct.

991 As I am satisfied from the evidence of Hartnell that there was no breach by GIO of its good faith obligation when it obtained Hartnell’s material, the allegation in paragraphs 124 and 125 of the third amended reply fail.

Varied Date

992 Porter also pleads a separate cause of action. It is said that, “to the extent that anything happened between 15 September to 29 September 1998 which GIO now seeks to rely on in support of the assertion that it is entitled to avoid the policy for non-disclosure, such reliance is a breach of the duty of good faith having regard to the circumstances in which the “date for inception”” was purportedly varied on 27 October 1998.

993 The pleading has some difficulties. I have already found that the new D & O policy was to commence from 29 September 1998. The hold cover on 8 September did not relate to the D & O cover. No D & O cover had been agreed on 25 August. The date for inception of the D & O Policy was not varied on 27 October 1998.

994 Porter has no cause of action based on anything which occurred on 27 October 1998.

Misuse of Documents

995 Porter pleads a series of allegations alleging further misuse of the documents provided by Porter on 7 March 2001. Although the pleading is unclear, there appears to be an additional claim that Gordian made the decision to refuse interim funding in bad faith.

996 I have already considered and rejected any claim in relation to the misuse of documents. With respect to the decision to refuse interim funding, in my opinion the defences raised by Gordian in the present proceedings are well founded. I do not believe it was a breach of any obligation of good faith to refuse indemnity.

997 It was pleaded that Gordian failed to properly assess the plaintiff’s claim. No evidence has been placed before me detailing that process. Although the matter was pleaded the allegation is not supported by any evidence.

998 It was also pleaded that Gordian acted in bad faith and unreasonably withheld its consent to Porter’s application for advance defence costs. However, there is no evidence which supports this allegation and accordingly that claim fails.

999 It is further submitted by Gordian that the allegation fails to have proper regard to the terms of clause 9 of the policy. Clause 9 contains pre-conditions to the advancement of defence costs, which include (clause 9(ii)):

“The written consent of GIO is obtained prior to the Insured incurring such Defence Costs (such consent not to be unreasonably withheld).”

1000 It was submitted by Gordian that Porter has not pleaded a relevant request for consent to the incurring of defence costs, nor pleaded that it was reasonably refused. I do not believe this is correct, although the pleadings are not entirely clear. Porter was told by GIO to “act as a prudent uninsured”. The matter was obviously complex and difficult and it is not surprising that GIO took time to consider its position. Porter has not demonstrated that the delay which occurred was such as to justify a finding that GIO acted in bad faith.

1001 Porter also pleads that Gordian has failed to act in good faith because it cancelled the policy without reference to the plaintiff, “although it was a continuing Policy expressed to expire on 15 September 2001, and notwithstanding that it knew that the plaintiff had made a claim under the said policy in respect of the costs which he was incurring in defending the claim brought by OAMPS”.

1002 As Gordian points out the policy is a claims made policy. Under Insuring Clauses A and B, insurance is provided for:

“All Loss arising from any Claim first made against an Insured during the Period of Insurance and notified to GIO during the Period of Insurance by reason of any Wrongful Act…”

1003 The pleading refers to the claim under the policy “in respect of the costs which [Porter] was incurring in defending the claim brought by OAMPS” (i.e. the civil defence costs). The plaintiff’s claim for the civil defence costs was made whilst the policy was on foot and prior to its cancellation.

1004 It follows that there cannot be a failure to act in good faith to cancel the policy in these circumstances.

1005 This further ground fails.

1006 It was suggested by Gordian that it is difficult to see, in any event, how the cancellation of the policy could amount to a failure to act in good faith. Clause 7 of the policy provides that the Organisation (i.e. OAMPS) may cancel the policy at any time by notifying GIO in writing. OAMPS did this on 18 October 1999, with effect from 1 November 1999. Gordian was obliged, pursuant to clause 7, to cancel the policy at the request of OAMPS.

1007 The possibility that OAMPS may require Gordian to cancel the policy was clearly an aspect of this particular policy. Accordingly, it was submitted that the cancellation of the policy, at the request of OAMPS, and in accordance with the terms of the policy, cannot amount to a failure to act in good faith towards Porter.

1008 Although I may be inclined to accept this submission the matter has not been fully argued. Accordingly, it being unnecessary, it is preferable that I do not decide the matter.

PART XXII – PORTER SUES BASED ON CANCELLATION OF THE POLICY

1009 Porter claims against OAMPS in contract and tort for cancellation of the GIO policy on 1 November 1999. The damages claimed are said to be measured by his costs of defending the Criminal Proceedings and consequential losses.

1010 On 1 November 1999 OAMPS cancelled the GIO policy and replaced it with a policy in identical terms for two years with other insurers.

The Contingent Nature of the Claim

1011 During the hearing, the plaintiff was granted leave to make this claim contingently upon the plaintiff failing against Gordian by reason of Exclusion 10(iv) and the fact that no claim was notified before the policy was cancelled.

1012 As I have found that the claim by Porter under the policy fails because Exclusion clause 10(iv) operates and no relevant claim was notified before the policy was cancelled, this contingent claim must be considered.

The Causes of Action

1013 In summary, Porter pleads in relation to this claim that :-

"

1014 The “Bardie Russell” resolution was in the following terms:-

"It was resolved that the indemnification and access to record rights (contained in a deed) granted to Mr Bardie Russell shall be afforded to all current and future directors"

1015 It is pleaded that the indemnification granted to Bardie Russell in the deed included the following term:

"OAMPS agrees that following the director's retirement from office it will use its best endeavours to maintain a directors and officers insurance with a reputable insurer in at least as nearly as possible the same as that which was in place immediately prior to the director's retirement from office and agrees to ensure that such a policy will provide cover for the director even though he is retired. When effecting the insurance OAMPS will pay the premium when due and use its best endeavours to ensure the policy will not be cancelled through any action or omission that OAMPS may do or omit to do ..."

OAMPS’ Submissions

1016 OAMPS submitted that the contractual claim must fail because the Bardie Russell 1997 resolution did not constitute a contract between Porter and OAMPS. There was no agreement between them and no promise by OAMPS supported by consideration moving from Porter: Woolworths Ltd v Kelly (1991) 22 NSWLR 189 at 192, 201, 220.

1017 The Bardie Russell deed as pleaded only operated in the event of a director's "retirement" from office. As Porter was removed, and did not retire, the claim must fail.

1018 It was also submitted that, assuming there was a contract, there was no breach of any implied obligation of good faith.

1019 In Royal Botanic Gardens & Domain Trust v South Sydney City Council (2002) 186 ALR 289 at [40] per Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ; [155] per Callinan J, the majority declined to decide the issue of the existence of an implied contractual obligation of good faith. Kirby J indicated that he did not think such an obligation sat well with caveat emptor, but also declined to explore the question further: [86]-[88]. However the NSW Court of Appeal has held that a duty of good faith, both in performing obligations and exercising rights, may by implication be imposed upon parties as part of a contract: see Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349 at 369B, Burger King Corp v Hungry Jack's Pty Ltd [2001] NSWCA 187. So too has the Federal Court in Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR 151.

1020 There is no uniformally agreed definition of "good faith" in this contractual context. In the three cases to which reference has been made, the Court cited with approval the suggestion of Sir Anthony Mason that "good faith" embraces three notions:-

(a) an obligation on the parties to co-operate in achieving the contractual objects (loyalty to the promise itself);
(b) compliance with honest standards of conduct; and
(c) compliance with standards of conduct which are reasonable having regard to the interests of the parties.

1021 Barrett J in Overlook v Foxtel (2002) ATPR (Digest) 46-219, (2002) Aust Contracts Rep 90-143 stated:-

"It must be accepted that the party subject to the obligation is not required to subordinate the party's own interests, so long as pursuit of those interests does not entail unreasonable interference with the enjoyment of a benefit conferred by the express contractual terms so that the enjoyment becomes (or could become) ... 'nugatory, worthless or, perhaps, seriously undermined' ... The implied obligation of good faith underwrites the spirit of the contract and supports the integrity of its character. A party is precluded from cynical resort to the black letter. But no party is fixed with the duty to subordinate self-interest entirely which is the lot of the fiduciary ... The duty is not a duty to prefer the interests of the other contracting party. It is, rather, a duty to recognise and have due regard to the legitimate interests of both the parties in the enjoyment of the fruits of the contract as delineated by its terms"

1022 See generally Peden, "The Meaning of Contractual 'Good Faith'" (2002) 22 Aust Bar Rev 235; and Peden, Good Faith in the Performance of Contracts (2003, Butterworths).

1023 Assuming there was a contract and an implied contractual obligation to act in good faith, OAMPS submitted that there was no breach of the obligation. Austin was unaware of the Bardie Russell resolution or deed before the policy was replaced. It was passed before he joined the board. Austin's evidence was that the economic reasons for replacing the policy were to save money and to retrieve commissions which Burdis had received unbeknown to the previous board. Austin assumed that Porter as an ex-director would be protected under the new policy.

Porter’s Submissions

1024 The plaintiff submitted that there was no good commercial reason for the cancellation of the policy. However, a written calculation made by OAMPS prior to the cancellation indicated that a costs savings of over $30,000 was expected. This was calculated on a gross basis i.e. a rebate of premiums, brokerage and stamp duty for the unexpired almost two year portion of the GIO policy. As it happened the rebates actually received from the underwriters were substantially less than expected. The consequence was that the new policy cost approximately $29,000 more than if the cancellation had not occurred. This was because although the primary underwriter GIO rebated on a gross basis, the secondary underwriters Lloyds & Lippo rebated on a net basis meaning that they did not refund the brokerage and stamp duty for the unexpired term of the policy. If Lloyds & Lippo had rebated on a gross basis - as GIO did - the savings that would have been achieved would have exceeded $50,000.

1025 I accept Porter’s submissions that, as Burdis said, a rebate of brokerage upon cancellation of a policy is neither market practice nor a legal requirement. However, I am satisfied the calculation of savings was done with a genuine expectation that brokerage would be rebated, as indeed it was from GIO. I am satisfied that savings of over $30,000 were genuinely calculated and anticipated by OAMPS when considering replacement of the policy.

Templeton’s File Note

1026 The plaintiff relied on a file note of Templeton of GIO relating to his meeting with Austin and Wyner on 17 September 1999. The file note stated:

"As disclosed when we met at their offices the purpose of the meeting:-

OAMPS wished to cancel and re-write existing PI Policy which is a 3 year deal but subject to Annual Review which allows premium terms to be modified subject to certain criteria such as Staff numbers increasing, Asset/Revenue Growth and Claims Experience as recorded in our files.

It would appear 'deal' should remain on current agreed terms following the Annual Review.

1027 OAMPS submitted that the file note evidenced that Austin and Wyner genuinely considered that the recovery of commissions from Swire Blanch was a valid reason to replace the policy with a new policy.

1028 The plaintiff's senior counsel submitted that since the file note recorded the cancellation as being “due to internal disputes … between current and former directors”, the cancellation of the GIO policy was motivated by the dispute with Porter and done with intent to injure him. In cross-examination Austin disputed that the cancellation of the policy was due to the internal disputes mentioned in the file note. OAMPS subsequently called Templeton as a witness. He referred to his file note and stated:

"That meeting occurred at OAMPS' office in Melbourne. Nothing was said at the meeting about Mr Porter or any dispute with Mr Porter, nor did I intend when drafting the file note to refer or allude to Mr Porter or any dispute with Mr Porter. The 'internal disputes' to which I intended to refer in the file note was a matter of the view of the current directors, as I understood it, that the deal should not have been done on the basis that 50% of the commission paid to Swire Blanch was paid to Mr D Burdis (whom I understood to have been a former director)"

1029 In cross-examination Templeton said that there was no mention at all of Porter's name. The statements made to him were to the effect that OAMPS was dissatisfied with Burdis and wanted to retrieve some of the commission.

Spranger’s Evidence

1030 The plaintiff argued that bad faith in cancelling the GIO policy in November 1999 is evidenced by a letter of 27 January 1999 from Sprangers on behalf of OAMPS to Fletcher of GIO stating:

"Mr Porter does not enjoy any indemnities, other than a possible protection under the Directors & Officers insurance.

My interpretation of the policy wordings is quite clearly that under Exclusion No. 13, the Directors and Officers are not protected against loss arising out of any claim brought by or on behalf of the organisation (OAMPS).

1031 The plaintiff further submitted that: "It was eventually established before this Court, contrary to the false denials given by Austin that the Board of OAMPS had instructed Sprangers to write to GIO so as to starve Porter of funds to pay for his legal defence. Sprangers gave evidence that at about the time this letter was sent, either Lamont or Austin, said to him words to the following effect: “We must do everything we can to make sure that Porter does not get any funding for his defence costs from the Directors & Officers Insurance Policy”.

1032 Austin gave the following evidence:-

1033 Sprangers’ evidence was given after all OAMPS’ witnesses had been called and cross-examined. On the express basis that no Browne v Dunn point would be taken, Sprangers was not cross-examined.

1034 Austin said that prior to replacing the policy, he was unaware of the Bardie Russell 1997 resolution or deed. He denied that Lamont expressed hatred of Porter, that he heard him giving instructions to staff and officers of OAMPS in 1998 or 1999 to take steps that would injure Porter, or, that Porter was to be deprived of rights under the insurance policy so as to deprive him of funds to defend the Civil Proceedings.

The Claim Fails

1035 As I have indicated, Porter’s claim against Gordian’s fails for reasons other than the cancellation of the policy. However, I am satisfied that the decision to cancel the policy and seek a new one was based upon a bona fide belief that savings could be made on the policy premium and a belief that Burdis was receiving a benefit to which he was not entitled. Although the saving in premium was not in fact achieved, I accept that the Board genuinely believed that it could be.

1036 The file note made by Templeton reflects this view. I accept his explanation of the reference to the internal dispute. It is consistent with his comment that the existing directors wish to “re-write their own PI Policy”, followed by the reference to retrieving commissions paid to Swire Blanch.

1037 With respect to the “Bardie Russell” resolution, in my opinion the plaintiff’s claim fails. It did not provide a contract between Porter and OAMPS. The resolution was made to provide for retired directors, not those who were removed as Porter was. In any event, a replacement policy was effected which was intended to continue the insurance which had previously been in force. Whether Porter could recover under the new policy, as OAMPS suggests, is not a matter which I could determine, but it would seem unlikely.

1038 It is likely that Lamont, and possibly other OAMPS directors, were concerned to ensure that Porter would be denied recovery under the GIO policy. However, irrespective of any characterisation of that behaviour it was not, in my opinion, any part of the motivation for the cancellation of the GIO policy.

PART XXIII - DAMAGES

Damages

1039 The plaintiff claims damages under a number of headings. Significant amounts are claimed for legal expenses in relation to both the civil and criminal trials. Substantial claims are also made for consequential loss said to arise from the forced sale of valuable items of property to raise money to meet legal bills.

1040 The amounts claimed by Porter are not accepted by the defendants. Discussions took place during the trial in an attempt to reach an agreement in relation to quantum but this could not be achieved. As a consequence the parties tendered various documents and helpful submissions were made.

1041 I had intended to resolve the matter of quantum in these reasons in the event that my decision in relation to matters of liability is altered by any appeal. However, I have come to the view that the evidence tendered and the submissions made are not adequate for me to fairly determine these matters. I mean no criticism of the parties or their representatives - the exigencies of the trial made this inevitable.

1042 I have no doubt that if Porter had succeeded before me on matters of liability he would be entitled to a verdict for a money sum. Because of the present state of the evidence, if it had been necessary to determine matters of quantum, I would have invited the parties to address me on whether that matter should have been referred to a Master for consideration. My tentative view is that this would be the appropriate course.

PART XXIV - CONCLUSION

1043 Accordingly, Porter’s claim fails and the summons should be dismissed. OAMPS succeeds in its cross claim and is entitled to a verdict against Porter.

1044 The parties are to bring in short minutes of order in accordance with these reasons.

1045 Costs may be argued.

Last Modified: 08/27/2003

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Citations

Porter v GIO Australia Ltd [2003] NSWSC 668

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CITATION:	Porter v GIO Australia Ltd & Anor [2003] NSWSC 668
HEARING DATE(S):	6-7 May 2002,16-17 October 2002, 21 October 2002, 17-20 March 2003, 24 March-22 May 2003, 26 May-5 June 2003, 16 June-27 June 2003
JUDGMENT DATE:	21 August 2003
JURISDICTION:	Equity Divison Commercial List
JUDGMENT OF:	McClellan J
DECISION:	Summons dismissed
CATCHWORDS:	INSURANCE - DIRECTORS AND OFFICERS INSURANCE - Plaintiff sought indemnity under policy for costs of civil proceedings brought by former employer and criminal proceedings in which nolle prosequi granted - whether insurer entitled to rectification of policy - period of cover - date of entry into policy - construction of insuring clauses and exclusion clauses - whether dishonest, fraudulent or criminal conduct - whether plaintiff involved in contravention of s 205 Corporations Law by provision of financial assistance for purchase of company’s own shares - whether claim notified during policy period - whether official ‘Inquiry’ commenced prior to policy period - whether non-disclosure or fraudulent misrepresentation by plaintiff - whether plaintiff entitled to indemnity under professional indemnity policy - whether insurer estopped from relying on matters not previously relied upon - whether insurer acted in bad faith by obtaining documents through misrepresentation - CORPORATIONS LAW - DIRECTORS INDEMNITY - whether plaintiff entitled to indemnity under company’s Articles of Association or common law - whether plaintiff’s costs arose out of conduct involving lack of good faith - whether nolle prosequi amounts to acquittal or judgment in favour - whether obligation of good faith owed to plaintiff, implied from board resolution - whether former employer breached such obligation by cancelling policy - DEEDS AND INSTRUMENTS - CONSTRUCTION - Deed of Release - whether general release contained in Deed extended to bar claim for criminal defence costs - limitation of general words of release to matters in contemplation of parties at time deed entered - whether unconscionable for former employer to rely on deed - whether inequality of knowledge
LEGISLATION CITED:	Australian Securities & Investments Commission Act 1989 (Cth) Contracts Review Act 1980 (NSW) Corporate Law Economic Reform Act 1999 Corporate Law Reform Act 1994 (Cth) Corporations Act 2001 Corporations Law Insurance Agents and Brokers Act 1984 Insurance Acquisition and Takeovers Act Insurance Contracts Act 1984 Trade Practices Act 1989 (Cth)
CASES CITED:	Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349 Alexander Ward & Co Ltd Samyang Navigation Co Ltd [1975] 1 WLR 673 Aleyn v Belchier (1758) 28 ER 634 Atkins v National Australia Bank (1994) 34 NSWLR 155 Australian Competition & Consumer Commissioner v C G Belatis Holdings Pty Ltd (2003) 197 ALR 153 Australian Growth Resources Corp Pty Limited v Van Reesema (1988) 13 ACLR 261 Bahr v Nicolay (No 2) (1988) 64 CLR 604 Bank of Credit and Commerce International SA (in liquidation) v Ali [2001] 1 All ER 961 Barrett v State of South Australia (1994) 63 SASR 208 Bonelli's Telegraph Company, in re (1871) LR 12 Eq. 246 Bradshaw v McEwans Pty Ltd (unreported, High Court of Australia, 27 April 1951) Brambles Holdings v Bathurst City Council (2001) 53 NSWLR 153 Burger King Corp v Hungry Jack's Pty Ltd [2001] NSWCA 187 Burton v Palmer [1980] 2 NSWLR 878 Bush v National Australia Bank Limited (1992) 35 NSWLR 390 Charterhouse Investment Trust Ltd v Tempest Diesels Ltd [1986] BCLC 1 Chequepoint Securities Ltd v Claremont Petroleum NL (1986) 11 ACLR 94 Chew v R (1991) 107 ALR 171 Comino v Manettas (1993) 7 ANZ Ins Cas 61-162 Commercial Bank of Australia Ltd v Armadio (1983) 151 CLR 447 Commonwealth Life Assurance Ltd v Smith (1938) 59 CLR 527 Corporate Affairs Commission v Papoulias (1990) 20 NSWLR 503 Danish Mercantile Co Ltd v Beaumont [1951] Ch 680 Darvall v North Sydney Brick & Tile Co Ltd (1989) 16 NSWLR 260 Davis v Gell (1924) 35 CLR 275 Dempster v National Companies & Securities Commission (1993) 10 ACSR 215, Devine v Sun Alliance Australia Ltd (unreported, Supreme Court of New South Wales, 18 June 1992, Giles J). Dwyer v Long (1992) 7 ANZ Ins Cas 61 - 120 East End Real Estate Pty Limited t/as City Living v C E Heath Casualty & General Insurance Ltd (1992) 7 ANZ Ins Cas 61-151 Edwards v R (1992) 173 CLR 653 Emanuel Management Pty Ltd (in liq) v Emanuele (2002) 83 SASR 501 Fitzsimmons v R (1997) 23 ACSR 355. Giorgianni v R (1985) 156 CLR 473 Goodwin v State Government Insurance Office (Queensland) (1991) 6 ANZ Ins Cas 61-064 Grant v John Grant & Sons (1954) 91 CLR 112 HG & R Nominees Pty Ltd v Fara [1997] 2 VR 368 H L Bolton (Engineering) Co Limited v T J Graham & Sons Limited [1957] 1 QB 159 Howard Smith v Ampol Petroleum Ltd [1974] AC 821 Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR 151 Independent Steels Pty Ltd v Ryan [1990] VR 247 Karger v Paul [1984] VR 161 London & South Western Railway Co v Blackmore (1870) 4 HR 610 Luxton v Vines (1952) 85 CLR 352 Magnacrete Limited v Douglas-Hill (1988) 15 ACLR 325 Marchesi v Barnes [1970] VR 434 McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579 Meinhard v Salmon 249 NY 458 1928 Mid-Density Developments Pty Ltd v Rockdale Municipal Council (1993) 44 FCR 290 Milburn v Pivot Ltd (1997) 78 FCR 472 Mills v Mills (1938) 60 CLR 150 Moore; in re Faithfull, ex parte (1885) 14 QBD 627 Myer Retail Investments Pty Ltd, re (1983) 68 FLR 15 Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449 New Zealand Forest Products Limited v New Zealand Insurance Co Limited [1997] 1 WLR 1237 Noye v Robbins [2000] WASC 81 Onslow v Commissioners of Inland Revenue (1890) 25 QBD 465 Overlook v Foxtel (2002) ATPR (Digest) 46-219, (2002) Aust Contracts Rep 90-143 Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (in liq) [2003] HCA 25 Plasteel Windows Australia Pty Limited v C E Heath Underwriting Agencies Pty Limited (1989) 5 ANZ Ins Cas 60-926 Poliwka v Heven Holdings Pty Ltd (No 2) (1992) 8 ACSR 747 Presentaciones Musicales SA v Secunda [1994] Ch 271 Prime Forme Cutting Pty Limited v Baltica General Insurance Co Limited (1991) 6 ANZ Ins Cas 61-028 Questions of Law Reserved on Acquittal (3 of 1995) Michael Charles Baenisct (1996) A Crim R 1 Rankin v North Waterloo Farmers Mutual Insurance Co (1979) 25 OR (2d) 102 Rejfek v McElroy (1965) 112 CLR 517 Royal Botanic Gardens & Domain Trust v South Sydney City Council (2002) 186 ALR 289 Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 Silbermann Greaves and Rich v CGU Insurance Limited [2002] NSWSC 1195. Smith v New South Wales Bar Association (1992) 176 CLR 256 State of South Australia v Clark (1996) 66 SASR 199 Sterileair Pty Ltd v Papallo (1998) 29 ASCR 461 Studdert v Grosvenor (1886) 33 Ch D 528 Talbot v NRMA Ltd (2000) 50 NSWLR 300 Tallglen Pty Ltd v Optus Communications Pty Ltd (1998) 16 ACLC 1526 Tomlinson v Liquidators of Scottish Amalgamated Silks Limited (1935) SC(HL) 1 Transport Industries Insurance Co Ltd v Longmuir [1997] 1 VR 125 Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1 Victorian Teachers Credit Union v KPMG (a firm) (2000) 1 VR 654 Wallersteiner v Moir [1974] 1 WLR 991 [1974] 3 All ER 217 Wambo Mining Corporation Pty td v Wall Street (Holding) Pty Ltd (1998) 28 ACSR 654 Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 Woolworths Ltd v Kelly (1991) 22 NSWLR 189 ZBB (Australia) Ltd v Allen (1991) 4 ACSR 495
PARTIES :	Robert Arthur Porter (Pltf) GIO Australia Ltd (1D) OAMPS Limited (2D)
FILE NUMBER(S):	SC 50072/01
COUNSEL:	P R Hayes QC/A Paterson/Chettle (Pltf) J T Gleeson SC/C Moore (1D) P M Biscoe QC/A M Gruzman (2D)
SOLICITORS:	Withnell Hetherington (Pltf) Ebsworth & Ebsworth (1D) Bamford Associates (2D