Scholle Industries Pty Ltd v AEP Industries (NZ) Ltd - [2009] SASC 145

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
SCHOLLE INDUSTRIES PTY LTD v AEP INDUSTRIES (NZ) LTD & ANOR
[2009] SASC 145
Judgment of The Honourable Justice White
21 May 2009
PROCEDURE - SUPREME COURT PROCEDURE - SOUTH AUSTRALIA - PROCEDURE UNDER RULES OF COURT - PLEADINGS
PROCEDURE - DISCOVERY AND INTERROGATORIES - DISCOVERY AND INSPECTION OF DOCUMENTS
Application by defendants for permission to amend defences - defendants wish to plead that plaintiff's claim for damages in respect of its liability to a non-party for which the plaintiff received indemnity from its liability insurers was limited to the amount which the plaintiff had paid to those insurers to secure the release of the insurers' subrogated rights - defendants apprehend that plaintiff made an agreement with its insurers for the release of their subrogated rights - application by first defendant for discovery by plaintiff of the apprehended agreement - whether defence raised by defendants in proposed amended defences is reasonably arguable - whether apprehended agreement directly relevant to an issue on the pleadings.
Held: matters raised in proposed amended defences not reasonably arguable - permission to amend defences refused - apprehended agreement not directly relevant to any issue on the pleadings - application for discovery of apprehended agreement dismissed.
Evidence Act 1929 (SA) s 67C; Supreme Court Rules 1987 r 58A, referred to.
Duke Group Ltd (in liq) v Arthur Young (No 4) (1991) 55 SASR 24; Pavlovic v Commonwealth Bank of Australia (1992) 56 SASR 587; Re T H Knitwear (Wholesale) Ltd [1988] Ch 275; Orakpo v Manson Investments Ltd [1978] AC 95; Re Palmdale Insurance Ltd [1986] VR 439; Boscawen v Bajwa [1996] 1 WLR 328; Re Trivan Pty Ltd (1996) 134 FLR 368; Castellain v Preston (1883) 11 QBD 380; State Government Insurance Office (Queensland) v Brisbane Stevedoring Pty Ltd (1969) 123 CLR 228; Napier and Ettrick v Hunter [1993] AC 713, applied.
Protec Pacific Pty Ltd v WMC (Olympic Dam Corporation) Pty Ltd [2006] VSC 208; Insurance Commission of Western Australia v Kightly (2005) 30 WAR 380, discussed.
Hadley v Baxendale (1854) 9 Exch 341; Deloitte Touche Tohmatsu v JP Morgan Portfolio Services Ltd (2007) 240 ALR 540; Scholle Industries Pty Ltd v AEP Industries (NZ) Ltd & Anor (2007) 99 SASR 178, considered.

SCHOLLE INDUSTRIES PTY LTD v AEP INDUSTRIES (NZ) LTD & ANOR
[2009] SASC 145
Civil
WHITE J:

The first defendant (AEP) has applied, amongst other things, for leave to amend its defence, and for an order that the plaintiff (Scholle) discover an agreement which AEP apprehends Scholle has made with its insurers. The second defendant (DS Smith) made an application to amend its defence in similar terms to those proposed by AEP. Apart from some limited submissions of its own, DS Smith adopted the submissions made by AEP. Scholle opposed each application.
This judgment contains my reasons on those applications.
Background to the Applications
In very general terms, in these proceedings Scholle sues AEP and DS Smith to recover losses which it claims to have suffered as a result of the supply by AEP of defective taps designed by DS Smith. Scholle used the taps in wine cask inserts. It alleges, amongst other things, that the defects in the taps had the effect that large quantities of wine were spoilt, and that it became liable to two wine producers, the Hardy Wine Company and Yalumba, for the losses which they suffered in consequence.
It was common ground that Scholle had been insured in respect of some of its losses and, in particular, in respect of at least some, if not all, of the liability which it incurred to the Hardy Wine Company. It also seemed to be common ground that Scholle’s insurers had indemnified it in respect of some, if not all, of its losses arising out of claims made by the Hardy Wine Company (the Hardy Claim).
The present applications arise out of the defendants’ belief that Scholle and its insurers have, since the indemnification, entered into an agreement providing for the “purchase” by Scholle of the insurers’ subrogated rights (the apprehended agreement). The defendants do not know the nature of the agreement but apprehend that it may take the form of an agreement between the insurers and Scholle by which the insurers, in consideration of a payment to them by Scholle, have agreed not to enforce the lien over any judgment monies to which their right of subrogation gave rise.
Scholle does not acknowledge that an agreement of the kind apprehended by the defendants does exist. It does, however, positively deny that there has been any assignment of a claim by the insurers to it.
Initially, AEP wished its application for discovery of the apprehended agreement to be determined before its application to amend its Amended Defence. However, later it put the amendment application at the forefront of its applications. DS Smith supported the submissions of AEP in this respect.
Although the amendment proposed by DS Smith is not identical with that proposed by AEP, it is sufficient to refer only to that proposed by AEP. AEP wishes to add a paragraph 25 to its Amended Defence so as to plead:
25    As to the allegations of the Hardy Losses generally, AEP says that:
25.1   The plaintiff was indemnified by its insurers in relation to the claim made against it by Hardy (“the Hardy Claim”).
25.2   The plaintiff’s insurers reimbursed the plaintiff for $4.5 million of the Hardy Claim, and paid $6.48 million to Hardy with the said reimbursement and payment totalling $10.928 million thereby resolving the plaintiff’s purported liability to Hardy.
25.3   The Hardy Claim was subrogated to the insurers upon the indemnification referred to in 25.2 herein.
25.4   On or about 16 December 2008, the plaintiff agreed with its insurers that for consideration from the plaintiff to the insurers, the rights of the insurers to exercise a lien over any award of damages with respect to the Hardy Claim (“the Insurers’ Lien”) would be released or terminated.
25.5   Accordingly, if the plaintiff establishes a liability on the part of AEP to it in relation to the Hardy Claim (which is denied), AEP says that, as a matter of law or public policy, any such liability is limited to the amount Scholle paid to its insurers for the release or termination of the Insurers’ Lien.
In effect, AEP wishes to plead that if it is found liable to Scholle in respect of the Hardy Claim, the amount of its liability is limited to the amount Scholle paid to its insurers to obtain the release or termination of the lien which the insurers would otherwise have over the judgment proceeds, arising from the insurers’ right of subrogation.
In considering this plea, it should be borne in mind that the insurers’ lien would not come into existence unless and until Scholle does recover damages from one or other, or both, of the defendants.
The admissible evidence indicating that there is an agreement between the insurers and Scholle of the kind apprehended by AEP and DS Smith is scant. I rejected the tender of the principal evidence upon which AEP relied, being a statement attributed to the insurers’ representative at a mediation conducted in December 2008. I considered that the admission of that evidence was precluded by s 67C of the Evidence Act 1929 (SA).
However, the absence at this stage of admissible evidence which suggests the existence of the apprehended agreement is of less importance in relation to the application to amend than it is on an application for further discovery. AEP should be granted permission to amend the defence to include the proposed paragraph 25 if the matter proposed to be raised by that paragraph is reasonably arguable.[1] In addressing that consideration, I may take account of the fact that AEP and DS Smith may obtain by discovery the evidence necessary to provide a basis for the defence. It was not suggested that other discretionary considerations such as lateness of the application, prejudice to the proper conduct of the trial, or prejudice to Scholle which could not be cured by an order for costs, existed in this case. Scholle did raise one concern about the form of the pleading, but that can be put to one side for the time being.
[1] Duke Group Ltd (in liq) v Arthur Young (No 4) (1991) 55 SASR 24; Pavlovic v Commonwealth Bank of Australia (1992) 56 SASR 587.
The Amendment Application
It is common for a plaintiff to sue an alleged tortfeasor to recover both insured and uninsured losses. In such cases, it is not unknown for the plaintiff and its insurer to enter into some form of cost sharing arrangement, or some other arrangement involving a division of the judgment proceeds which involves the insurer accepting less than its full subrogated entitlements. It has not hitherto been thought that arrangements of this kind may have to be disclosed to the defendant, or may operate to reduce the damages which an unsuccessful defendant may have to pay.
Neither AEP nor DS Smith were able to point to any authority in an analogous circumstance indicating that an agreement of the kind which they apprehend has been made by Scholle and its insurers in this case may have an effect on the assessment of damages for which a wrongdoer is liable. AEP submitted, nevertheless, that the general principles relating to the existence, or exercise, of rights of subrogation indicated that it was at least reasonably arguable that Scholle’s claim should be confined in the way for which it contends.
I do not consider that the remedy of subrogation has much at all to do with the proposed defence. AEP’s submissions make it necessary to address some of the general principles relating to subrogation, particularly those arising in an insurance context.
Subrogation is recognised as a remedy, founded upon equitable principles, which is available in a variety of circumstances providing for the transfer of rights by operation of law from one person to another.[2] In the insurance context, its purpose is to preclude insureds from being unjustly enriched by a double indemnification.[3] Subrogation is a remedy and not a cause of action.[4] In the case of indemnity insurance, the remedy is available to the insurer. In that context, the doctrine of subrogation does not purport to provide any remedy to a tortfeasor or other third parties who can be compelled to make good the loss insured against.
[2]    Re T H Knitwear (Wholesale) Ltd [1988] Ch 275 at 283.
[3]    Re T H Knitwear (Wholesale) Ltd [1988] Ch 275 at 283; Orakpo v Manson Investments Ltd [1978] AC 95 at 104; Re Palmdale Insurance Ltd [1986] VR 439 at 446.
[4]    Boscawen v Bajwa [1996] 1 WLR 328 at 335; Re Trivan Pty Ltd (1996) 134 FLR 368 at 371-2.
In Castellain v Preston,[5] the Court of Appeal addressed some fundamental principles concerning the operation of the remedy of subrogation in insurance law. Castellain v Preston makes it plain that the remedy operates for the benefit of the insurer, and not for the benefit of the third party who caused the loss giving rise to the indemnity which the insurer paid. Brett LJ said of subrogation in the insurance context that it was a doctrine whose fundamental purpose was to prevent an insured being more than fully indemnified:
[Subrogration] does not arise upon any of the terms of the contract of insurance; it is only another proposition which has been adopted for the purpose of carrying out the fundamental rule which I have mentioned, and it is a doctrine in favour of the underwriters or insurers in order to prevent the assured from recovering more than a full indemnity; it has been adopted solely for that reason.[6] [Emphasis added]
Later, Brett LJ said:
Now it seems to me that in order to carry out the fundamental rule of insurance law, this doctrine of subrogation must be carried to the extent which I am now about to endeavour to express, namely, that as between the underwriter and the assured the underwriter is entitled to the advantage of every right of the assured, whether such right consists in contract, fulfilled or unfulfilled, or in remedy for tort capable of being insisted on or already insisted on, or in any other right, whether by way of condition or otherwise, legal or equitable, which can be, or has been exercised or has accrued, and whether such right could or could not be enforced by the insurer in the name of the assured by the exercise or acquiring of which right or condition the loss against which the assured is insured, can be, or has been diminished.[7] [Emphasis added]
Bowen LJ, in a passage to similar effect, said:
[The principle] is a cororally of the great law of indemnity, and is to the following effect:- That a person who wishes to recover for and is paid by the insurers as for a total loss, cannot take with both hands. If he has a means of diminishing the loss, the result of the use of those means belongs to the underwriters. If he does diminish the loss, he must account for the diminution to the underwriters.[8] [Emphasis added]
[5] (1883) 11 QBD 380.
[6] Ibid at 387.
[7] Ibid at 388.
[8] Ibid at 401-2.
Although it has been said that the circumstances giving rise to the decision in Castellain v Preston were not true circumstances of subrogation,[9] the passages quoted indicate that subrogation operates to provide a remedy to insurers so as to adjust the position as between insurer and insured. The remedy does not speak at all to the position of the insured in relation to a wrongdoer whose conduct caused the insured loss.
[9] Meagher Gummow & Lehane’s Equity : Doctrines and Remedies 4^th Ed, LexisNexis at [9-165].
The underlying principle of subrogation is manifested in a number of legal principles. An insurer is able to exercise, using the name of the insured, the rights which the insured had to recover the loss from a third party; an insured must not release, diminish, compromise or divert the benefit of any right which the insurer may exercise under the right of subrogation;[10] if an insured does release or compromise with a third party, the insured will be liable to the insurer in damages, or possibly, on some occasions, for money had and received;[11] and when an insured does obtain a recovery from a third party, the insurer has an equitable lien over the funds recovered to the extent of the amount paid by way of indemnity.[12]
[10] State Government Insurance Office (Queensland) v Brisbane Stevedoring Pty Ltd (1969) 123 CLR 228 at 241.
[11] Ibid.
[12] Napier and Ettrick v Hunter [1993] AC 713 at 738, 740.
AEP referred to Insurance Commission of Western Australia v Kightly[13] in which many of the above principles were discussed in the reasons of Steytler P. Counsel emphasised in particular the following passage:
[Subrogation] prevents the insured from making a double recovery, once from the insurer and once from the tortfeasor (in a tort case) in circumstances in which the insurer has undertaken to indemnify the insured against actual financial loss. It does that by giving two rights to the insurer. First, it gives to the insurer the right to require the insured to pursue any remedy available against the tortfeasor for the benefit of the insurer. Second, it gives to the insurer the right to recover from the insured any benefit received by the insured in diminution or extinction of the loss against which the insured has been indemnified.[14] [Emphasis added]
Counsel emphasised the italicised words. The submission tended to regard the italicised words as indicating that the doctrine of subrogation operates to prevent an insured from recovering from a tortfeasor when an insurer does not exercise its remedy of subrogation. More generally, AEP’s submissions tended to regard the principle against permitting an insured to recover or retain more than a full indemnity as equivalent to the proposition that an insured may not recover more than the one compensation for the same loss, whether from a third party or an insurer.
[13] [2005] WASCA 154; (2005) 30 WAR 380.
[14] Ibid at [26]; 387-88.
I do not consider that the reasons of Steytler P are to be understood in this way. In the passage which immediately follows the paragraph just quoted, Steytler P referred to the passages quoted above from Castellain v Preston indicating that the doctrine of subrogation operates as between an insured and an insurer to preclude the insured from retaining a double recovery from a tortfeasor. It is evident that Steytler P was not intending any revision of the principles stated in Castellain v Preston, which have now stood for some 125 years.
The true position in the present case is that under the principles of subrogation, Scholle must, absent any agreement to the contrary, account to its insurers for the amount, if any, which it recovers from the defendants in respect of losses for which it has received indemnity. It is in that way that Scholle is not to receive a double indemnity. However, if the insurers enter into a binding arrangement with Scholle by which Scholle will not be liable to account to them for any recovery on amounts recovered from the defendants for indemnified losses, Scholle may be relieved of that obligation. That is a matter solely between Scholle and the insurers. The principles concerning subrogation do not operate in that circumstance to reduce the liability of the defendants to Scholle.
That conclusion makes it unnecessary to address the principles derived from Hadley v Baxendale[15] in relation to AEP’s claim that Scholle would be confined to recovering the amount which it had paid to the insurers to secure the relinquishment of their right of recovery.
[15] (1854) 9 Exch 341; [1843-60] All ER Rep 461.
As noted earlier, subject to other discretionary considerations, the defendants should be given leave to make the amendment which they propose if the defence is reasonably arguable. My conclusion is that the proposed paragraph 25 of AEP’s Amended Defence, and its proposed counterpart in the defence of DS Smith, is not reasonably arguable. It is appropriate that permission to amend be refused in order to avoid a proliferation of unnecessary collateral issues.[16]
[16] Cf Duke Group (in liq) v Arthur Young (No 4) (1991) 55 SASR 24 at 41.
The Discovery Application
Rule 58A of the Supreme Court Rules 1987 governs Scholle’s obligations with respect to discovery. Rule 58A.03 requires Scholle to discover only those documents in its possession, custody or power which are “directly relevant” to an issue arising on the pleadings.
AEP contended that the apprehended agreement was directly relevant in a variety of ways to the damages which Scholle seeks to recover from the defendants.
Although AEP acknowledged that generally the benefits which a plaintiff receives from a source other than the defendant are not to be regarded as mitigating the plaintiff’s loss if they were received as a result of a contract which the plaintiff had made before the loss occurred, it submitted that that principle was not absolute. It depends upon the nature of the contractual obligation under which the payment was made and whether the entity making the payment intended that the recipient should be able to retain the payment notwithstanding the rights of action which it may have against a third party wrongdoer.
In this respect, AEP referred to the judgment of Habersberger J in Protec Pacific Pty Ltd v WMC (Olympic Dam Corporation) Pty Ltd.[17] In that case, which involved an application to strike out a pleading in a defence, Habersberger J reviewed a number of the authorities concerning the circumstances in which a wrongdoer may be entitled to have a payment made by a third party brought into account to reduce the damages for which it may be liable. Habersberger J accepted that, in some circumstances, the law permitted such payments to be brought into account. The question of whether receipts from a non-party are to be brought into account depends upon the character of the payment, which in turn requires consideration of any contractual obligation under which the payment was made, and of the intention of the non-party in making the payment.
[17] [2006] VSC 208.

I respectfully agree with the analysis of the authorities contained in the reasons of Habersberger J. It is not necessary to repeat it. However, I do not consider that the judgment in Protec provides assistance to AEP in the present circumstances. In the first place, AEP does not plead (as did the defendant in Protec) that the receipt by Scholle of monies from its insurers precludes it from seeking to recover damages in respect of the Hardy Claim, nor does it allege that the amount received by Scholle from its insurer should be brought into account in reduction of any damages for which the defendants may be liable. As already noted, it proposed the quite different defence that Scholle’s damages should be limited to the amount which it had paid to the insurers to secure the release of their subrogated rights.
Secondly, the apprehended agreement does not seem, on what is presently known, to be directly relevant to the assessment of any damages to which Scholle may be found entitled. That is because the insurers’ purpose and intentions with respect to the indemnity provided to Scholle are to be assessed at the time that the indemnity was provided (which was several years before December 2008). It is possible that the insurers’ policy itself, and any documents which were associated with, or which accompanied, the payment of the indemnity may be directly relevant to the character of the payment made by the insurers. However, it is not easy to see that an agreement, entered into many years later, by which the insurers may have relinquished the rights to which their payment gave rise, could evidence an intention on the insurers’ part, at the time that the payment was made, that Scholle should not have the benefit of the payments in addition to the rights of action which it had against the defendants. Neither Scholle nor the insurers could alter, retrospectively, the character of the indemnity provided by the insurers at the time it was made.
Next, AEP asserted that discovery of Scholle’s agreement with the insurers is relevant to paragraph 32(c) of the Second Further Amended Statement of Claim (SFASOC). That subparagraph contains a plea concerning Scholle’s liability to Hardy; the claim made by Hardy on Scholle; Scholle’s settlement with Hardy; the reasonableness, having regard to a number of considerations, of that settlement; and the loss and damage suffered by Scholle in consequence of the Hardy Claim. The pleading is lengthy, extending over some eight pages, and is too long to quote in these reasons. The summary which I have just given is adequate for present purposes.
In my opinion, it cannot be held that the apprehended agreement which Scholle has reached with its insurers after the resolution of the Hardy Claim can be said to be directly relevant to the first four of the identified issues raised in paragraph 32(c) of the SFASOC. In relation to the fifth of the issues (the loss and damage suffered by Scholle), I refer again to my reasons in relation to the suggestion that the defendants may be entitled to have the indemnity paid by the insurers brought into account.
Next, AEP submitted that the apprehended agreement is relevant to Scholle’s claim for pre-judgment interest contained in Part 2, paragraph 3 of the SFASOC. This submission was not developed in argument. It is not clear how an agreement by the insurers to extinguish or release the lien which they would otherwise have over the judgment proceeds can be relevant to the quantification of the interest to be included in the judgment sum. AEP’s amended defence does not explicitly raise an issue concerning Scholle’s claim to interest.
Next, AEP referred to r 58A.04(1) of the 1987 Rules. Rule 58A.04 provides as follows:
(1)Parties are not to include in their lists of documents any documents which are only indirectly relevant to any issue arising on the pleadings unless it is ordered by the Court where it is in the interests of justice to do so.
(2)Where an order under (1) is made after a list of documents has been filed a supplementary list of documents is to be filed within 14 days of the order.
AEP’s argument was that the Court should be satisfied that it is in the interests of justice that Scholle discover the apprehended agreement. To make good this submission, AEP must establish that even though the apprehended agreement is not directly relevant to any issue raised on the pleadings, it is nevertheless in the interests of justice for it to be disclosed. AEP sought to establish a relevant interest of justice by reference to notions of abuse of process. As I understood the argument, AEP contended that the continued pursuit of the claim by Scholle to recover losses which, in the event that it is successful, may result in it being doubly compensated is an abuse of the process of the Court.
In support of this submission, AEP referred to Deloitte Touche Tohmatsu v JP Morgan Portfolio Services Ltd.[18]I referred to that judgment in an earlier judgment in these proceedings.[19] It is not necessary to repeat my summary of the decision.
[18] [2007] FCAFC 52; (2007) 240 ALR 540.
[19] Scholle Industries Pty Ltd v AEP Industries (NZ) Limited & Anor [2007] SASC 322 at [20]; (2007) 99 SASR 178 at 184.
It was not clear to me how the decision in Deloitte Touche Tohmatsu indicated that Scholle’s conduct in prosecuting the present claim could amount to an abuse of process. If Scholle is entitled, as a matter of law, to recover damages from AEP and DS Smith and, having regard to its agreement with its insurers to retain some, or all, of that amount, it is doing no more than enforcing its entitlements. It is difficult to see how the pursuit of the proceedings in those circumstances could be characterised as an abuse of the process of this Court.
In summary, for the reasons given above, I am not satisfied that AEP has established that the apprehended agreement, if it exists, is directly relevant to any issue raised on the pleadings. Accordingly, I dismiss the application for further discovery.
Conclusion
Each of the applications by AEP and DS Smith for leave to amend their respective defences is refused. The application by AEP that Scholle discover any agreement made between its insurers and it in December 2008 regarding the enforcement by the insurers of their subrogated rights is also refused.
I will hear the parties as to costs.