Rothschild and Sons v St Paul International Insurance Company - [2004] NSWSC 359

No judgment structure available for this case.

Reported Decision:
(2004) 13 ANZ Insurance Cases 61-602

Supreme Court

CITATION: Rothschild & Sons v St Paul International Insurance Company [2004] NSWSC 359 revised - 30/04/2004

HEARING DATE(S): 22 April 2004

JUDGMENT DATE:
23 April 2004

JUDGMENT OF: McDougall J at 1

DECISION: See paras [67] and [68] of judgment

CATCHWORDS: INDUSTRIAL LAW - INSURANCE - employment practices liability policy - where former employee bringing proceedings against plaintiff under s 106 of the Industrial Relations Act 1996 - where plaintiff claims indemnity under the policy in respect of s 106 proceedings - whether defendant correct in denying indemnity under the policy - whether plaintiff entitled to declaration as to entitlement to indemnity - whether employee's summons in Industrial Relations Commission a "Claim" for a "Wrongful Employment Practice" as defined - whether plaintiff entitled to advancement of defence costs - whether any liability of the plaintiff for compensation for unfairness pursuant to s 106 is "assumed under" the employment contract

LEGISLATION CITED: Industrial Relations Act 1996
Corporations Law
Industrial Arbitration Act 1940

CASES CITED: Rothenberger Australia Pty Limited v Lumley General Insurance Ltd (2003) 12 ANZ Ins Cas § 61-683
Beahan v Bush Boake Allen Australia Ltd (1999) 47 NSWLR 648
Fisher v Madden (2001) 54 NSWLR 179
Chase Manhatten Bank NA v Israel-British Bank (London) Ltd [1981] 1 Ch D 1057

PARTIES :
N M Rothschild & Sons (Australia) Limited (Plaintiff)
St Paul International Insurance Company Ltd (Defendant)

FILE NUMBER(S): SC 50151/03

COUNSEL: C Mantziaris (Plaintiff)
F McLay (Defendant)

SOLICITORS: Corrs Chambers Westgarth (Plaintiff)
Sparke Helmore (Defendant)

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

McDOUGALL J

23 April 2004 (Revised 28 April 2004)

v ST PAUL INTERNATIONAL INSURANCE

COMPANY LIMITED

JUDGMENT

Introduction

HIS HONOUR:

1 The plaintiff ("Rothschild") employed Geoffrey Richard Hodgkinson as Head of Banking from 23 May 1994 until 30 June 1997 and as Managing Director of Banking from 1 July 1997 until 22 February 2001. On 22 February 2001, Rothschild gave Mr Hodgkinson written notice of the termination of his employment.

2 Mr Hodgkinson has brought proceedings No IRC 1524 of 2001 ("the s 106 proceedings") in the Industrial Relations Commission (“the Commission"). It will be necessary to look in more detail at the claims for relief and allegations made by Mr Hodgkinson set out in his summons in those proceedings, which are brought under s 106 of the Industrial Relations Act 1996 ("the Act").

3 Rothschild is defending the s 106 proceedings. It has, so far, incurred legal costs of almost $500,000.

4 Rothschild and the defendant ("St Paul") are parties to a policy of insurance described as "Employment Practices Liability Policy" ("the Policy"). Although that policy was issued by St Paul on 30 April 2001 (and was sent by the broker Aon Financial Services to Rothschild on 11 June 2001), it was current from 27 October 2000 to 27 October 2001. It was thus current when the s 106 proceedings were commenced and when the s 106 summons was served on Rothschild.

5 Rothschild has claimed indemnity under the policy in respect of the s 106 proceedings. St Paul initially admitted partial liability under the policy. However, it has retracted that admission and now denies all liability.

6 In these proceedings, Rothschild seeks declaratory relief as to its entitlement to indemnity under the policy. The essential issue is whether St Paul was correct in denying indemnity.

7 Rothschild has limited its claim for relief in a way that is appropriate having regard to the fact that the s 106 proceedings have not been decided. The parties are agreed on the orders that I should make if I conclude that, in principle, Rothschild is entitled to be indemnified under the policy.

The issues for decision

8 The parties agreed that the issues to be decided by me were as follows:

. is there a "Claim" for "Wrongful Employment Practices"?

. has Rothschild suffered a "Loss"

as each capitalised word is defined in Section 3 of the policy?

(2) Is St Paul entitled to decline liability by reason of the provisions of clause 4.1.6 of the policy, or is its liability limited by the operation of clauses 4.2.1, 4.2.2, or 4.2.3 of the policy?

9 There are no issues relating to non disclosure, failure to notify, or the like.

10 I note that, whilst St Paul was considering whether to grant indemnity, it (having been informed that Rothschild had retained Corrs Chambers Westgarth to conduct the defence of the s 106 proceedings) informed Rothschild, through the broker, that Rothschild “should continue to act as a prudent uninsured and with the advice of Corrs". St Paul did not submit that, if Rothschild were otherwise entitled to indemnity in respect of Defence Costs, that entitlement should be denied because of the terms of clause 5.2.8 of the policy (which provided, among other things, that Rothschild should not incur Defence Costs without the written consent of St Paul, such consent not to be unreasonably withheld; and that St Paul would not be liable for any Defence Costs to which it had not consented).

11 The relevant provisions of the policy are as follows:

“SECTION 1. INSURING AGREEMENT

St. Paul will pay on behalf of the Insureds Loss for which the Insureds become legally obligated to pay on account of any Claim first made against them, individually or otherwise, during the Policy Period or, if exercised, the Discovery Period, for a Wrongful Employment Practice taking place during the Policy Period or before the Policy Period but not prior to the retroactive date specified in Item 11 of the Schedule.

…

2.11 Advancement of Defence Costs

St Paul will pay on behalf of the Insured Defence Costs as and when they are incurred.

…

SECTION 3. DEFINITIONS

…

3.1 Claim means:

brought by or on behalf of any past, present or prospective Employee of the Company, any Independent Contractor, any Leased Employee, or any governmental body, for a Wrongful Employment Practice. The term Claim does not include any labour or grievance proceeding pursuant to a collective bargaining agreement.

…

3.3 Defence Costs mean that part of Loss consisting of reasonable costs, charges, fees and expenses (including but not limited to lawyers’ fees, investigators’ fees and experts’ fees) incurred in the defence or investigation of Claims, any premium for appeal, attachment, or similar bonds, and any amount required to be raised as security for costs. Defence Costs do not include regular or overtime wages, salaries or fees of the directors, officers or Employees of the Company.

…

3.11 Loss means any amount which an Insured becomes legally obligated to pay on account of any Claim made during the Policy Period or, if applicable, the Discovery Period. Such Claim must be made against an Insured for Wrongful Employment Practices for which cover applies, including, but not limited to, damages, judgements, [sic] settlements and Defence Costs. Loss does not include:

…

3.18 Proposal means all signed proposals, including attachments and materials submitted therewith, for this Policy or for any policy of which this Policy is a renewal or replacement. All such proposals, attachments, and materials are deemed attached to and incorporated into this Policy.

…

3.22 Wrongful Employment Practice, either in the singular or the plural, means any actual or alleged:

committed or attempted by any of the Insureds in their capacity as such.

4.1 St Paul will not be liable for Loss on account of any Claim:

…

4.1.6 based upon, arising out of, or attributable to liability assumed by the Insured under any contract or agreement, either oral or written, except to the extent that

absence of the contract or agreement; or

Company to indemnify an Insured Person;

…

4.2 St Paul will not be liable for that part of Loss, other than Defence Costs, which constitutes:

…”

12 I have referred to the definition of "Proposal" because Rothschild relied on the terms of its proposal, in particular, on questions 14, 15 and 16 in "Addendum - 1" of the proposal (which related to "Employment Practices Liability Extension" - the proposal was, overall, for directors and officers and company liability insurance) and on its answers thereto. I do not regard that material as casting any light on the proper construction of the relevant terms of the policy. On any view, the policy responded to wrongful dismissal (see clause 3.22.4 set out above). What was disclosed, in answer to the questions, was some six allegations of unfair dismissal. That has no bearing on the question whether Mr Hodgkinson's claim in respect of his dismissal falls within clause 3.22.4.

The s 106 summons

13 The structure of the s 106 summons reflects Mr Hodgkinson's primary case that there were two consecutive contracts of employment and that it was the second, relating to his employment as Managing Director of Banking from 1 July 1994, that was unfair and that was terminated.

14 Mr Hodgkinson's first claim is for a declaration that the contract (which he specified to mean that which he said came into existence on 1 July 1997) was unfair within the meaning of s 105 of the Act.

15 He then seeks orders varying that contract ab initio. The first clause seeks to insert an acknowledgment by Rothschild of representations said to have been made to induce Mr Hodgkinson to leave his previous employment and to take up the position of Head of Banking, and Mr Hodgkinson's reliance on those representations. The second clause would assert an obligation on Rothschild and Mr Hodgkinson to maintain a relationship of trust and confidence so as, among other things, to protect the employment relationship. The third clause would require Rothschild to act with respect and regard to Mr Hodgkinson and so to act as to avoid him professional humiliation, or embarrassment, or loss of reputation; it is agreed damages by way of a monetary sum would afford appropriate relief to Mr Hodgkinson if that obligation were breached. The fourth clause relates to a profit share incentive scheme.

16 Clauses 5 and 6 would deal with termination of Mr Hodgkinson's employment. I shall set them out in full:

5.1 (a) In the event that at any time and from time to time Rothschild has concern about any aspect of Hodgkinson’s performance under his contract of employment it shall acquaint Hodgkinson with the full detail surrounding such concern and in the event Rothschild sees such concern as being grave and/or going to Hodgkinson’s ability to maintain his position Rothschild shall conduct an independent review of Hodgkinson’s employment and provide Hodgkinson with full details in writing of, and a reasonable opportunity to consider and reply to, any issues or problems which may arise from such review. Rothschild shall give consideration to Hodgkinson’s reply and fairly act in operating its business to ensure that Hodgkinson receives the full benefit of the representations made to him in 1. above; and

(b) after completion of the above “review process”, allow Hodgkinson a reasonable period of time, having regard to the nature of any issues or problems which may arise form [sic] a review process to address those issues or problems and the opportunity to remedy his performance provided always that Rothschild shall give Hodgkinson a period of at least six (6) months from completion of the review process to achieve such remedy.

5.2 Rothschild and Hodgkinson shall co-operate with and assist each other at all times during any and all of the above processes.

Termination of Employment

(a) At any time Rothschild determines to terminate Hodgkinson’s employment Rothschild will first ensure the fair and due compliance with the processes under 5 above and then Rothschild shall, except in the case of proved serious misconduct of Hodgkinson, either:-

(i) provide Hodgkinson with twenty four (24) months [sic] notice of termination (“period of notice”); or in the alternative

(ii) pay to Hodgkinson upon the cessation of the employment a twenty four (24) month [sic] termination payment calculated to include all emoluments, including without limitation profit shares as per 1. and 4. above and as shall be reasonably forecast as applying for that twenty four (24) month [sic] period going forward (“termination payment”) and where necessary pro rata adjustments shall be made for past year periods. In the event of any dispute concerning such calculations the same shall be determined at the request of either party or the parties by an independent accountant acting as an expert and as appointed by the President for the time being of the Institute of Chartered Accountants whose decision shall be final and binding.

(b) Hodgkinson shall have the option to elect to take as his emoluments for such 24 month [sic] period, as an alternative to the basis of calculation set out in 6(a)(ii) above, an annual amount calculated as being his average entitlement for the immediately preceding period of four (4) years.

(c) The parties acknowledge that the period of notice and calculation of termination payment is just, fair and conscionable having regard to the matters and representations referred to in 1 above.”

17 Further, Mr Hodgkinson seeks an order varying the contract from 1 January 2001 so as to make further provision for what he would say is a "fair" profit share incentive scheme.

18 Mr Hodgkinson seeks a declaration to the effect that if the contract did not operate in accordance with the terms referred to or set out above, then unfairness had arisen; an order that, upon termination, Rothschild should observe the terms relating to termination; and the following orders:

“(6) An order that if the contract operates or has operated otherwise than in accordance with the terms sought in order (2) 2 above [the “trust and confidence” clause], Rothschild shall pay to Hodgkinson a sum equivalent to twenty-four months [sic] remuneration, calculated to include all emoluments, in addition to all other sums payable to Hodgkinson by Rothschild under the contract as varied.

19 Essentially similar relief is sought, in the alternative, if the employment contract were the one that came into existence on 14 April 1994.

20 Relief is then sought in relation to an investment loan. That may be set to one side. Rothschild concedes that it is not entitled to indemnity under the policy in respect of this claim for relief.

21 The summons then sets out a "summary of matters of fact and law". That summary includes the following matters:

Meeting with the Chairman on 15 February 2001

(39) In a meeting between Hodgkinson and the Chairman of Rothschild, Mr Phillip Brass (“the Chairman”) on or about 15 February 2001 the Chairman advised Hodgkinson that in the Chairman’s view someone should be held responsible for the performance of the Banking Division of Rothschild, which was regarded as less than optimal for the preceding year and that although Hodgkinson had not been incompetent he should bear such responsibility. The Chairman said to Hodgkinson words to the effect of ‘I think you should go.’ and further indicated that Hodgkinson should speak to the CEO with respect to the timing of his departure but that Hodgkinson’s departure should not be long delayed.

(40) The Chairman then advised that Rothschild proposed to pay to Hodgkinson on termination the sum which had been invested for Hodgkinson under the LTI Scheme, ie [sic] sum of $1,368,252.00 together with a further payment of $630,000.00. The Chairman expressed the view that this latter sum represented ‘1 ¾ years’ pay’.

(41) Hodgkinson advised the Chairman that his remuneration under the contract included a salary and profit share, and that his expected remuneration under the contract over the next 12 months was conservatively estimated at a sum in the order of $1,100,000.00. Hodgkinson said that Rothschild’s offer was not fair and generous.

(42) Hodgkinson also expressed the view to the Chairman that Rothschild’s conduct toward him had led to his suffering substantial professional embarrassment and humiliation, that any attempt to make Hodgkinson a scapegoat for Rothschild’s recent performance in its banking operations was entirely unwarranted having particular regard to the operation of the Credit Committee, and that Rothschild’s recent attitude to Hodgkinson would render it difficult, if not impossible, for him to obtain other employment at any equivalent level of seniority and remuneration.”

22 The summary also sets out the reasons why, Mr Hodgkinson says, his contract for employment was unfair:

Hodgkinson’s contract of employment with Rothschild is unfair

(50) The contract is an unfair contract within the meaning of s. 105 of the Act.

(51) The contract did not contain, nor operate according to, the representations set out in (5) above. Insofar as Rothschild represented to Hodgkinson under the contract that the contract would contain, or operate according to, the terms set out in (5) above, Rothschild misled Hodgkinson, rendering the contract unfair.

(52) Insofar as the contract did not operate according to the terms set out in (5) above, it was unfair.

(53) Insofar as the contract permits Rothschild to terminate the employment of Hodgkinson without the provision of 24 months’ notice or the payment of a sum equivalent to 24 months’ notice having regard to the total remuneration payable to Hodgkinson (calculated to include all emoluments) over that period, the contract is unfair.

(54) Insofar as the contract fails to contain a provision in the terms set out in orders A(2) and (3) above, the contract is unfair.

(55) Insofar as the contract fails to provide that Rothschild shall not cause Hodgkinson professional embarrassment and humiliation, the contract is unfair.

(56) Insofar as the contract permitted Rothschild within the terms of the contract to cause Hodgkinson professional embarrassment and humiliation, the contract is unfair.

(57) Insofar as the contract fails to provide that Rothschild shall not erode or damage the relationship of trust and confidence between the parties to the contract, the contract is unfair.

(58) Insofar as the contract permitted Rothschild, acting within the terms of the contract, to erode or damage the relationship of trust and confidence between the parties to the contract, the contract is unfair.

(59) Insofar as the contract fails to provide for an independent review of Hodgkinson’s position in circumstances where Rothschild has any concern about any aspect of Hodgkinson’s performance under the contract, the contract is unfair.

(60) Insofar as the contract permits Rothschild to act to terminate Hodgkinson’s position under the contract without an independent review of the [sic] Hodgkinson’s position in circumstances where Rothschild has any concern about any aspect of the [sic] Hodgkinson’s performance under the contract, the contract is unfair.”

23 Those matters, which relate to the contract said to have come into existence on 1 July 1997, are repeated in the alternative in relation to the contract that came into existence on 14 April 1994.

24 In relation to the matters alleged in paragraphs 48, 55 and 56 of the summary, St Paul relied, before me, on advice given to Rothschild by its solicitors. That advice said, in substance, that although the Commission took the view that it could award compensation for non economic loss for matters such as stress, humiliation or loss of reputation, there was no evidence of humiliation or professional embarrassment, or of any damage caused thereby. The solicitors, therefore, concluded that "as currently instructed ... we do not consider [that Mr Hodgkinson] would be successful in this part of his claim.”

Wrongful Employment Practice: construction

25 It was not suggested that the s 106 summons was not a "claim" in the ordinary English meaning of that word. Further, it was not suggested that, if the subject matter of the s 106 summons were held to be, or include, a Wrongful Employment Practice, singular or plural, as defined, the summons would, nonetheless, not be a "Claim" as defined in clause 3.1 of the policy. The issue was whether the claim advanced by the summons was for a Wrongful Employment Practice as defined.

26 Rothschild's submission was that, in considering whether there was a claim (using that word in its ordinary English meaning, and intending to encapsulate therein the various forms of claim specified in clauses 3.1.1 - 3.1.4 of the policy) for a Wrongful Employment Practice, it was necessary to look not only at the relief claimed, but also at the facts that were relied upon - in effect, pleaded - to support the relief claimed. Thus, Rothschild submitted that if the facts relied upon to support the relief claimed in the s 106 summons fell within one or other paragraphs of the definition of Wrongful Employment Practice, there was a Claim, within the definition of clause 3.1 of the policy.

27 St Paul submitted that the policy did not respond because the claim brought by Mr Hodgkinson was a claim for compensation for an unfair contract. St Paul submitted that even if some of the allegations in the summons fell within the wording of individual paragraphs of the definition of Wrongful Employment Practice, that did not make a summons a claim for Wrongful Employment Practice. Those matters, St Paul submitted, were relied upon to show the contract was unfair; there was no claim for recovery of individual heads of damages but, instead, a claim for compensation for unfairness overall.

28 It is in my view essential to bear in mind that what is required is to ascertain, at first, the proper construction of the insuring clause. That requires, among other things, a consideration of the defined terms that appear within it; but to consider those defined terms in isolation, rather than as elements of the insuring clause, is not the correct approach.

29 Consideration of the insuring clause is not assisted by the circumstances that if definitions are substituted for relevant defined terms, it becomes repetitive in the extreme: the reference to "Loss" immediately requires reference to the concepts of "Claim" and "Wrongful Employment Practice"; and the reference to "Claim" necessarily involves reference to "Wrongful Employment Practice".

30 If one seeks to recast the insuring clause by inserting the definitions of the contentious defined terms in place of those terms, then (noting the omission of presently irrelevant concepts and for simplicity referring to "the Insured" as "Rothschild") it would read to the following effect:

“St Paul will pay on behalf of Rothschild any amount which Rothschild becomes legally obliged to pay on account of any [written demand or civil, administrative arbitral or criminal proceedings] made against Rothschild for any actual or alleged

committed or attempted by Rothschild in its capacity as an Insured in any case taking place during the Policy Period and for which cover applies, including, but not limited to, damages, judgments, settlements and that part of Loss consisting of Defence Costs.”

31 The drafting technique employed by St Paul including the use of defined terms, and the consequent requirement to read those terms in accordance with their definitions leads to an obvious circularity; the incorporation of the definition of "Loss" means that St Paul is liable to pay amounts on account of the Claims for Wrongful Employment Practices "for which covers applies"; yet it is the insuring clause that is, at least in theory, the source of the obligation to cover (and, therefore, the determinant of whether cover applies).

32 Rothschild relied on the decision of Barrett J in Rothenberger Australia Pty Limited v Lumley General Insurance Ltd (2003) 12 ANZ Ins Cas § 61-583. That case concerned an "Employment Practices Liability Policy" under which Lumley agreed to insure Rothenberger for "legal liability arising out of an Employment Practice in the Insured's Business ... ". The term "Employment Practice(s)" was defined in a way that resembled, although was not as extensive as, the definition of the Wrongful Employment Practice in the present policy. Rothenberger had dismissed its former Managing Director, Mr Poulsen, who took proceedings for damages, relying on alleged implied terms of his employment contract. Those proceedings were compromised, and Rothenberger sought indemnity from Lumley for its costs and for amounts paid pursuant to the compromise.

33 Barrett J said that it was necessary to examine the true nature of Mr Poulsen's claims, and that the question whether they were claims that gave rise to a legal liability arising out of an "Employment Practice" required a consideration of their true nature and not just of the way they were pleaded: 76,938 [28]. His Honour further said of the concept of wrongful dismissal (which was an "Employment Practice" in the case before him, just as it is a "Wrongful Employment Practice" in the case before me), that it was a reference to a termination that was inconsistent with the terms of the contract, so that it amounted to a breach of contract; and that an employee, whose contract of employment was thus wrongfully terminated, is accurately described as a wrongfully dismissed employee, whose remedy was for damages not for recovery of the wages: 76,940 [40].

34 St Paul relied on a number of decisions to support the proposition that the jurisdiction of the Commission under s 106 is to award compensation for the unfairness of a contract within the section; see, for example, Beahan v Bush Boake Allen Australia Ltd (1999) 47 NSWLR 648. St Paul submitted further that there was a clear distinction between relief for wrongful dismissal and relief in relation to unfair contracts: contrasting Chapter 2 Pt 6 of the Act (dealing with wrongful dismissal) and Chapter 2 Pt 9 (dealing with unfair contracts, and including s 106). In this respect, it relied on reasoning such as that found in the decision of Meagher JA in Fisher v Madden (2001) 54 NSWLR 179, 185, where his Honour concluded that compensation awarded under s 106 was not a debt in respect to the termination of the employee's employment (see s 556(2) of the Corporations Law as it then stood), but "an amount awarded ... as compensation for an unfair contract".

35 I do not think that the application of the insuring clause is to be determined by looking only at the relief claimed by Mr Hodgkinson in the s 106 proceedings. If, contrary to what I have said, it were appropriate to look at the definition of the Wrongful Employment Practice in isolation, I would reach that conclusion through the application, by analogy, of the reasoning of Barrett J in Rothenberger. The question, whether there is a written demand etc for a Wrongful Employment Practice, is to be ascertained by looking at the true nature of the demand. That must require consideration of the whole of the demand, and not merely so much thereof as claims remedy.

36 Indeed, as was pointed out in Beahan at 678, (citing Goulding J in Chase Manhattan Bank NA v Israel-British Bank (London) Ltd [1981] 1 Ch D 105, 124), "right and remedy are indissolubly connected and correlated" so that, except in special circumstances, it is "idle to ask whether it vindicates the ... substantive right or gives ... a procedural remedy". The nature of the right that is claimed must depend upon, among other things, the matters that are alleged in support of it. If, as I think is the case, right and remedy are inextricably intertwined, then consideration of a claim in the context of the contractual definition of Wrongful Employment Practice requires that both the remedy and the right that is sought to be vindicated must be looked at; and a consideration of the right involves, as I have just said, a consideration of the circumstances in which it is said to arise.

37 However, I think, the more appropriate path to understanding the application of the insuring clause is to consider its words as a whole. St Paul's agreement was to indemnify Rothschild for an amount that Rothschild was legally required to pay "on account of" any written demand etc against Rothschild brought by a past employee for a Wrongful Employment Practice. In context, the words "on account of" indicate that one should look at the whole of the written demand etc to see if the causal relationship that they introduce exists. That follows also if (as one should do) the definition is substituted for the defined term "Wrongful Employment Practice": that focuses attention on the relationship between the elements of the written demand and the elements of the definition.

38 I add that if the words "Wrongful Employment Practice" were to be construed in accordance with their ordinary English meaning, it must be the case that a claim for relief under s 106 relief, a claim premised on the existence of the unfairness - would be a claim for such a practice. That is because, as a matter of ordinary English usage, it would be regarded as wrongful for an employer to employ someone on the basis of an unfair contract. It would be extraordinary if the policy definition of those words had the effect that their ordinary application was excluded. It would be, on St Paul's approach; but it would not be on Rothschild's.

39 The parties must be taken to have been contracted with the knowledge of the legislative regime embodied in s 106 and its related sections (that section, of course, is the successor to, and in substantially similar terms to, s 88F of the Industrial Arbitration Act 1940, which section had been in force for many years before the commencement of the Act. It would be surprising if the parties intended to provide cover, in respect of Wrongful Employment Practices, that excluded what might be seen as the paradigm of wrongful employment practice (using the words in their ordinary English meaning). On St Paul's approach, they would have achieved that extraordinary outcome; not so on Rothschild's.

40 I therefore conclude that in considering whether the s 106 summons amounts to a claim (in the general sense) for a Wrongful Employment Practice, it is necessary to look at the facts alleged and not just at the relief claimed.

Wrongful Employment Practice: the facts

41 Rothschild relied upon a number of the allegations made by Mr Hodgkinson as showing that a number of the paragraphs of the definition of the Wrongful Employment Practice were engaged. It pointed, in particular, to what was alleged in paragraphs 42, 55 and 56 of the summary of matters of fact and law as engaging clauses 3.22.3, 3.22.7, 3.22.11, 3.22.12 and 3.22.13 of the definition.

42 I think that reliance on clauses 3.22.3, 3.22.7 and 3.22.13 is misplaced. Even if it be accepted that the actions of Rothschild (amounting to unfairness within s 106) made Mr Hodgkinson a scapegoat and caused him significant professional humiliation, embarrassment and loss of reputation, and that Rothschild failed to maintain, and indeed eroded, the relationship of trust and confidence that was said to be required, those matters simply do not seem to me to come within the paragraphs of definition to which I have referred. It is not alleged in the summons (nor is it self evident) that, as a result, Mr Hodgkinson's workplace became abusive or hostile. The description of the allegation amounting to the "defamation" seems to me to be farfetched. Equally, the characterisation of them as "retaliation" seems to me to be farfetched: particularly when one has regard to the matters given by way of example, set out in clause 3.22.13.

43 However, I think, the allegations in paragraphs 42, 55 and 56 of the summary do engage clauses 3.22.11 and 3.22.12 of the definition. As to clause 3.22.11: Mr Hodgkinson's case is that he was made a scapegoat for the failure of others and that the actions against him, culminating in termination of his employment were, in effect, reprisal for the poor performance of others. That does seem to me to amount to an allegation of wrongful, excessive or unfair dismissal: termination of employment being, after all, the ultimate disciplinary sanction in the employer/employee relationship.

44 As to paragraph 3.22.12, I think that on a fair reading of the complaints to which I have referred, Mr Hodgkinson must be taken as alleging that he suffered emotional distress. In this context, I did not understand St Paul to submit that those allegations could not fall within paragraph 3.22.12. Its submission was that the allegation could be put aside because the claim had no prospects of success. In this, St Paul called in aid the opinion of Rothschild's solicitors to which I have referred above.

45 In my view, that is no answer. The policy does not require a weighing of the likelihood of success. (I omit consideration, because no submissions were put, of what might be regarded as merely colourable allegations.) Indeed, the opinion concedes that in principle compensation is available for emotional distress. The opinion is based upon what is said to be a lack of evidence of humiliation and damage. But there is no basis for thinking that the evidence should be set out in full at the time the opinion was given. The summary of matters of fact and law alleges (among other things) the material facts - that Rothschild (so Mr Hodgkinson says) made Mr Hodgkinson a scapegoat and has caused, and is causing, him to suffer significant professional humiliation, embarrassment and loss of reputation. One would not expect the summary to continue by including (for example) evidence from Mr Hodgkinson's friends and colleagues, who could attest to the impact on their estimation of him of Rothschild's alleged behaviour; or evidence from doctors and others of the impact that it may have on Mr Hodgkinson. I therefore do not regard the opinion as being relevant to the question. It follows that I do not regard the assertion of unlikelihood of success as rendering the allegations immaterial for the purpose of considering whether there is alleged conduct (and in the ordinary English meaning of the word, a "claim" in respect of that conduct) within clause 3.22.12 of the policy.

46 The claim that Mr Hodgkinson makes in respect of those matters is that they demonstrate the unfairness of the contract: see, in particular, paragraphs 55 and 56 of the summary. The claim for compensation is a claim in respect of the unfairness, or unfair operation, of the contract. The claim for compensation therefore relates to those matters as well as to the others upon which Mr Hodgkinson relies.

47 I therefore conclude that, to this extent, there is a claim (again in the ordinary English meaning of that word) for a Wrongful Employment Practice.

48 Rothschild also relied on clause 3.22.4, relating to wrongful dismissal or termination of employment. It submitted that, if the contract of employment were to be varied ab initio, as sought by Mr Hodgkinson (including in relation to termination procedures), then the inevitable consequence would be that his employment had been wrongfully terminated.

49 St Paul submitted that there was a clear distinction in the Act between wrongful termination on the one hand and unfair contracts on the other. That is made clear, at least from the date of its commencement (1 December 1998) by s 109A of the Act.

50 The claim made by Mr Hodgkinson is that the contract was unfair insofar as it permitted Rothschild to terminate his employment otherwise than in accordance with the provisions that, it said, should be written into the contract. On analysis, that does not seem to me to be a claim for unfair dismissal; and if it were, it would, on the face of things, be a claim barred by s 109A.

51 It may well be the case that, as Rothschild submits, the inevitable consequence of success for Mr Hodgkinson on this point is that his dismissal was wrongful. But it does not follow that any compensation awarded to him for the relevant unfairness would be compensation for wrongful dismissal. If it were, it would be prohibited by s 109A. Of course, the Commission may decide that the distinction sought to be drawn by Mr Hodgkinson is illusory, and that the relevant claim is, in substance, one for wrongful dismissal. If that be so, then the primary submission for Rothschild would be made good; but there would be no loss because of the operation of s 109A.

52 On either approach, therefore, clause 3.22.4 cannot be engaged. That is, either because the claim is not one for wrongful termination of employment; or because (if it is) it is one for which, by reason of s 109A, no loss will be sustained.

Conclusion on insuring clause

53 I therefore conclude that the claim (in the general sense) made by Mr Hodgkinson against Rothschild includes an element based on an allegation of a Wrongful Employment Practice, namely that referred to in clause 3.22.12. It follows that, in principle, the insuring clause of the policy is engaged.

Claim; Loss

54 St Paul submitted that, notwithstanding that the definition of the "Loss" included reference to "Defence Costs", there was no Loss because there was no Claim. It submitted that there was no Claim because, for the reasons I have referred to, its primary case was there was no relevant allegation of a Wrongful Employment Practice.

55 Because I have concluded that there is a Claim that involves a Wrongful Employment Practice, that submission must fail.

56 Clause 2.11 of the policy applies where Defence Costs are incurred. Defence Costs are defined to include that part of Loss that consists of legal and other fees incurred in the defence or investigation of Claims. It does not matter that the claim against Rothschild may ultimately fail: whilst the claim is made, and assuming it to be a Claim within the definition of that expression in the policy, the obligation to pay Defence Costs is engaged.

57 It follows that Rothschild is entitled to an “advancement” of Defence Costs.

58 St Paul submitted that it would be placed in an invidious position if, at the end of the day, all claims in respect of the alleged Wrongful Employment Practice failed and the only liabilities (if any) that Rothschild was found to have to Mr Hodgkinson were uninsured liabilities. In those circumstances, St Paul submitted that it would have incurred the cost of defending the claim when, as it turned out, there was no Claim, but would have no right to recover Defence Costs paid.

59 That may be so. However, that (if so) would be a function of the drafting of the policy. Where an allegation made against Rothschild includes a Claim within the policy (ie, relates to a Wrongful Employment Practice), the insuring clause is engaged and, with it, the obligation to pay Defence Costs. The agreement of the parties is, apparently, that Rothschild is entitled to be indemnified for Defence Costs as and when they are incurred, even if with hindsight, and at the end of the day, it is shown that there was no occasion for them to have been incurred. Neither Rothschild nor St Paul submitted that, in those circumstances, St Paul would have any right (in the nature of a restitutionary claim) against Rothschild; and I express no opinion as to whether this may be so. My concern is with the wording of the policy. As I have construed it, the right to Defence Costs is one that arises because of the nature of a claim that is made, not because of the nature of the claim that is ultimately proved. It was open to St Paul to protect itself in the circumstances under consideration. It did not do so. I do not think that its apparent failure to do so bears on the issues for determination in these proceedings.

60 To the extent that it matters, this view of the objective intention of the parties, in relation to Defence Costs, receives some support from the scheme of clause 4.2 (under which St Paul is not liable for certain claims but remains liable for Defence Costs).

The exclusions

61 The first exclusion relied upon by St Paul is clause 4.1.6. That refers to a Claim based upon, arising out of, or attributable to, liability assumed by Rothschild under any contract or agreement (the exceptions are irrelevant for present purposes).

62 As a matter of ordinary English usage, I do not think compensation for unfairness in, or the unfair operation of, Mr Hodgkinson's contract of employment could be said to be something based upon, arising out of, or attributable to, liability assumed by Rothschild under that contract of employment. As I have already noted, Barrett J in Rothenberger concluded that a former employee's entitlement for wrongful dismissal was damages, not wages. An obligation to pay wages is, of course, assumed under the contract of employment. An obligation to pay damages for breach of that contract is not. A fortiori, an obligation to pay money under s 106(5) of the Act to compensate Mr Hodgkinson for relevant unfairness would not be a liability assumed under the contract of employment.

63 The same reasoning leads me to the conclusion that clause 4.2.2 (relating to amounts owed under written contracts or agreements) is irrelevant.

64 It is unlikely that clause 4.2.1 (relating to reinstatement or continuation of employment, or complying with orders for injunctive or non monetary relief) will be relevant. To the extent that it is (for example, in relation to that part of Mr Hodgkinson's claim that relates to the investment loan), Rothschild accepts that the policy would not respond.

65 The application of clause 4.2.3 is hypothetical at this stage. However, and obviously enough, if the Commission does order compensation in favour of Mr Hodgkinson and if, on a proper analysis of the Commissioner's reasons and orders, that compensation, or part of it, falls within clause 4.2.3, then to that extent Rothschild would not be entitled to indemnity.

66 I do not propose to deal at greater length with clause 4.2 because the parties have agreed that if I conclude that Rothschild in principle is entitled to indemnity, then declaratory relief should be limited and questions of entitlement (apart from Defence Costs) should be the subject of reservation of the liberty to apply if the parties cannot agree. Because I have found that the policy does respond, I propose to grant relief accordingly. It is therefore unnecessary to give more detailed consideration to clauses 4.2.1, 4.2.2, and 4.2.3.

Conclusion and orders

67 I conclude that the claim made by Mr Hodgkinson against Rothschild does include a claim for a Wrongful Employment Practice as that expression is defined in the policy. On any view, Rothschild has incurred substantial expense in defending that claim. I, therefore, conclude that there is a Claim for Loss (at this stage limited to Defence Costs) for a Wrongful Employment Practice.

68 In those circumstances, and noting as I have said that the parties have agreed on the appropriate orders to be made, I make the following orders:

(1) I make declarations in terms of paragraphs 1 and 2 of the short minutes of the order dated today's date, initialled by me and placed with the papers.

(2) I grant liberty to apply in terms of paragraph 3 of those short minutes of order.

(3) I make an order in terms of paragraph 4 of those short minutes of order.

Last Modified: 05/03/2004

Actions

Download as PDF Download as Word Document

Citations

Rothschild and Sons v St Paul International Insurance Company [2004] NSWSC 359

Cases Citing This Decision

0

Cases Cited

3

Statutory Material Cited

3

Caporale v The Owners Strata Plan 58631 [2010] FMCA 346

Fisher v Madden [2002] NSWCA 28

CITATION:	Rothschild & Sons v St Paul International Insurance Company [2004] NSWSC 359 revised - 30/04/2004
HEARING DATE(S):	22 April 2004
JUDGMENT DATE:	23 April 2004
JUDGMENT OF:	McDougall J at 1
DECISION:	See paras [67] and [68] of judgment
CATCHWORDS:	INDUSTRIAL LAW - INSURANCE - employment practices liability policy - where former employee bringing proceedings against plaintiff under s 106 of the Industrial Relations Act 1996 - where plaintiff claims indemnity under the policy in respect of s 106 proceedings - whether defendant correct in denying indemnity under the policy - whether plaintiff entitled to declaration as to entitlement to indemnity - whether employee's summons in Industrial Relations Commission a "Claim" for a "Wrongful Employment Practice" as defined - whether plaintiff entitled to advancement of defence costs - whether any liability of the plaintiff for compensation for unfairness pursuant to s 106 is "assumed under" the employment contract
LEGISLATION CITED:	Industrial Relations Act 1996 Corporations Law Industrial Arbitration Act 1940
CASES CITED:	Rothenberger Australia Pty Limited v Lumley General Insurance Ltd (2003) 12 ANZ Ins Cas § 61-683 Beahan v Bush Boake Allen Australia Ltd (1999) 47 NSWLR 648 Fisher v Madden (2001) 54 NSWLR 179 Chase Manhatten Bank NA v Israel-British Bank (London) Ltd [1981] 1 Ch D 1057
PARTIES :	N M Rothschild & Sons (Australia) Limited (Plaintiff) St Paul International Insurance Company Ltd (Defendant)
FILE NUMBER(S):	SC 50151/03
COUNSEL:	C Mantziaris (Plaintiff) F McLay (Defendant)
SOLICITORS:	Corrs Chambers Westgarth (Plaintiff) Sparke Helmore (Defendant)