Sergienko v AXL Financial Pty Ltd

[2019] NSWSC 1610

Supreme Court

New South Wales

Medium Neutral Citation:	Sergienko v AXL Financial Pty Ltd [2019] NSWSC 1610
Hearing dates:	5 November 2019
Date of orders:	20 November 2019
Decision date:	20 November 2019
Jurisdiction:	Equity
Before:	Ward CJ in Eq
Decision:	1.   Refuse leave for the joinder of Lawcover Insurance Pty Ltd and dismiss the notice of motion filed 16 August 2019 with costs.
Catchwords:	CIVIL PROCEDURE — Parties — Joinder — Of cross-defendant – application for joinder of Lawcover by cross-claimants – where Lawcover is the insurer of a law firm under a “run-off” professional indemnity insurance policy – where the law firm was instructed by the applicant to draft the relevant trust deed and to act on the conveyance of the relevant property – whether the solicitors allegedly failed to give certain advice to the applicants including to lodge with the Land Titles Office a copy of the relevant trust deed or to lodge a caveat over the relevant property – whether discretion under s 5 of the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) enlivened to permit the joinder of Lawcover – held that the proposed third cross-claim does not adequately establish the existence of a reasonably arguable cause of action against Lawcover – notice of motion dismissed
Legislation Cited:	Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW), ss 4, 5 Corporations Act 2001 (Cth), ss 9, 46 Law Reform (Miscellaneous Provisions) Act 1946 (NSW), s 6 Legal Profession Uniform General Rules 2015 (NSW), r 78(9)(a) Real Property Act 1900 (NSW), s 82(2)
Cases Cited:	Amadio Pty Ltd v Henderson (1998) 81 FCR 149; [1998] FCA 823 Dey v Victorian Railways Commissioners (1949) 78 CLR 62; [1949] HCA 1 DSHE Holdings Ltd (receivers and managers appointed) (in Liq) v Abboud; National Australia Bank Limited v Abboud [2017] NSWSC 579 Energize Fitness Pty Ltd v Vero Insurance Ltd [2012] NSWCA 213 Garzo v Liverpool/Campbelltown Christian School Limited [2011] NSWSC 292 General Steel Industries Inc v Commissioner for Railways (1964) 112 CLR 125; [1964] HCA 69 Hastie Group Ltd (in liq) v Bourne; Hastie Group Ltd (in liq) v Moore [2017] NSWSC 709 Hoxton Park Residents Action Group Inc v Liverpool City Council [2012] NSWSC 1026 Mrdajl v Southern Cross Constructions (NSW) Pty Ltd (In Liq) [2018] NSWSC 161 Ritchie v Advanced Plumbing and Drains Pty Ltd [2019] NSWSC 1028 Rushleigh Services Pty Ltd v Forge Group Ltd (in liq) (receivers and managers appointed) [2018] FCA 26 Wayland v Bird [2017] NSWCA 26
Texts Cited:	M Leeming, The Statutory Foundations of Negligence (1st ed, 2019, The Federation Press)
Category:	Procedural and other rulings
Parties:	Sergie Sergienko (Plaintiff) AXL Financial Pty Ltd (First Defendant) Oliver Roths (Second Defendant) Roths Holdings Australia Pty Ltd (Third Defendant) IWC Industries Pty Ltd (Fourth Defendant/Applicant on motion) DK Excavation and Concreting Pty Ltd (Fifth Defendant/Applicant on motion) Lawcover Insurance Pty Ltd (Respondent to motion)
Representation:	Counsel: I King (Fourth and Fifth Defendants) D Lloyd (Respondent to motion)   Solicitors: Mackellars Lawyers (Fourth and Fifth Defendants) Gilchrist Connell (Respondent to motion)
File Number(s):	2018/203377
Publication restriction:	Nil

Judgment

1. HER HONOUR: Before me for hearing on 5 November 2019 was an amended notice of motion filed on 16 August 2019 by the fourth and fifth defendants in these proceedings, IWC Industries Pty Ltd (IWC) and DK Excavation and Concreting Pty Ltd (DK Excavation), pursuant to which those defendants (who are also cross-claimants in the proceedings) seek an order that Lawcover Insurance Pty Ltd (Lawcover) be added as a cross-defendant to the proceedings and an order, pursuant to s 5 of the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) (the Act), for leave to bring or continue the proceedings against Lawcover. LawCover opposes the application for its joinder. At the hearing of the application, I was provided with the proposed third cross-claim for which leave is now sought.

Background

2. The dispute the subject of the principal proceedings (which were commenced by statement of claim on 2 July 2018) involves a claim by the plaintiff, Mr Sergienko, against three defendants (AXL Financial Pty Limited (AXLF), Mr Oliver Roths and Roths Holdings Australia Pty Limited (Roths Holdings)) for relief consequent upon a settlement reached between those parties in other proceedings in this Court.

3. In summary, what is alleged is that, as part of the settlement of those other proceedings (recorded in a Deed of Settlement entered into on or about 9 April 2018 (the Deed of Settlement)), AXLF granted to Mr Sergienko an equitable mortgage over a property in Killarney Heights, New South Wales (the Killarney Heights Property) to secure AXLF’s obligations under the Deed of Settlement to pay to Mr Sergienko certain amounts (see [7] of the further amended statement of claim) and to secure AXFL’s obligations as there pleaded. The settlement also allegedly included an agreement by Mr Roths and Roths Holdings to transfer shares held by them in another company (PLC Financial Solutions Ltd) (the PLC Shares) to Mr Sergienko.

4. In the principal proceedings, Mr Sergienko makes allegations as to: the failure of AXLF to deliver a mortgage in registrable form; the failure of Mr Roths and Roths Holdings to transfer the PLC Shares to Mr Sergienko; and the failure of AXLF to pay the amount secured by the mortgage on time (and hence breaches of the mortgage).

5. IWC and DK Excavation were joined as defendants to the proceedings (the fourth and fifth defendants) in June 2019 apparently on their own application or at least with their consent (see T 7.16; 7.50) once they became aware of a caveat that had been lodged by Mr Sergienko over the title to the Killarney Heights Property (which property they contend is held by AXFL on trust in its capacity as trustee of a unit trust, the DK Excavation and Concreting Unit Trust (the DK Unit Trust), of which DK Excavation is the sole beneficiary).

6. By way of a second cross-claim filed on 8 August 2019 (and subsequently amended on 28 August 2019), IWC and DK Excavation seek relief predicated on the allegations in the statement of claim (which they either do not admit or deny) being found to be true. In those circumstances, they seek an order that the land vest in IWC (which was appointed as trustee of the DK Unit Trust on 6 June 2019 in place of AXLF) and that there be an account of the dealings and transactions of AXLF as trustee of the DK Unit Trust and that AXLF be ordered to pay to IWC the amount due on the taking of such accounts together with interest.

7. The allegation made in the second cross-claim against AXLF is that the Killarney Heights Property was held by AXLF in its capacity as trustee of the DK Unit Trust and that AXLF acted in breach of trust if, as is pleaded in the statement of claim, it entered into the Deed of Settlement (by which it is alleged it used the trust property for its own use and in breach of trust as it was proffered as security for a settlement deed which was unrelated to any transaction entered into by the DK Unit Trust or by the fourth and fifth defendants). As adverted to above, AXLF has now been removed as the trustee of the DK Unit Trust.

8. On 6 August 2019, two days before the filing of the second cross-claim, the solicitors for IWC and DK Excavation wrote to Lawcover, providing a draft cross-claim which it was said would be the subject of an application under the Act (see the affidavit of Atticus Busby affirmed 16 August 2019 at pp 16-17 of Annexure A). In that email, it was said that: AXL Legal Solutions Pty Ltd (AXL Legal) (a now deregistered legal practice) was instructed by DK Excavation to draft the trust deed for the DK Unit Trust and to act on the conveyance of the Killarney Heights Property from DK Excavation to AXLF; AXL Legal had failed to give advice that vesting the property in AXLF could expose DK Excavation to a breach of trust, and had failed to give advice to lodge with the Land Titles Office a copy of the DK Unit Trust Deed under s 82(2) of the Real Property Act 1900 (NSW) (Real Property Act) or to lodge a caveat noting DK Excavation’s beneficial interests in the Killarney Heights Property; and that DK Excavation would move to join Lawcover to the proceedings under the Act. Lawcover’s response at that stage was that it would be providing a more formal response as soon as possible.

Joinder application

9. AXL Legal, as noted, is a deregistered legal practice. The present application to join Lawcover to the proceedings relates to the fact that it is the insurer of AXL Legal under a “run-off” professional indemnity insurance policy. Clause 4, the insuring clause under that policy, provides:

4.   We agree to indemnity the insured against civil liability for a claim that:

(a)   arises from the provision of legal services by the law practice in Australia or elsewhere; and

(b)   is first made against the insured during the period of insurance or that is deemed under clause 8 [‘Related Claims’]    to have been first made during the period of insurance.

10. The policy also includes the following clause (cl 9(a)(vii)):

We will not indemnify the Insured under this Policy when (….) the claim arises from (…) a contract or transaction where the insured has or had a direct or indirect financial interest other than an entitlement to receive fees for the provision of legal services[.]

11. Lawcover has not yet confirmed its position as to whether the run-off policy responds (and submits that it is not yet in a position to make such a determination (see below)).

12. Lawcover’s position in relation to the proposal that it be joined was initially set out in a letter dated 13 August 2019 from its solicitors (Gilchrist Connell) to the solicitor acting for the applicants. Relevantly, Lawcover’s solicitors there criticised the adequacy of the draft affidavit in support of the proposed application and pointed to perceived deficiencies in the pleading of the proposed cross-claim. They expressed the opinion that there was no utility in joining Lawcover. In particular, the letter advised that Lawcover was not in a position to confirm cover under the policy on the basis that it did not know (and was not able definitively to assess) whether it would be able to rely upon an exclusion in any policy that may respond to the claim outlined in the draft cross-claim due to a lack of information; and therefore that it could not currently be said that there is any “controversy between [the] insured and [the] insurer”.

13. Following the filing of the amended notice of motion on 16 August 2019, the solicitors for Lawcover wrote to AXLF’s solicitors (on 22 August 2019), enclosing a letter addressed to the sole director of both AXL Legal and AXFL (Mr Alexander Harmstorf) seeking to secure Mr Harmstorf’s co-operation “to understand the claim proposed to be made against Lawcover” (a letter to which there has been no response from Mr Harmstorf notwithstanding that later communications have confirmed that it had been passed on to Mr Harmstorf on 4 September 2019).

14. Lawcover’s position as at 12 September 2019, as communicated to the applicants’ solicitor, was that: records in respect of AXL Legal had been sought but that there had been no response to that request from the solicitor for AXLF; that the material available to Lawcover was limited to the material provided by the applicants’ solicitor; and that Lawcover was unable to determine whether a policy responds to the draft third cross-claim. The letter, of 12 September 2019, apart from reiterating the deficiencies that had earlier been identified in the proposed form of the third cross-claim, sought particulars of the third cross-claim. Some particulars were provided on 18 October 2019. (The adequacy of those particulars is said to be in issue but Lawcover accepts that this is probably not relevant to the determination of whether DK Excavation should be granted the relief sought in the amended notice of motion.)

Applicants’ submissions

15. The case sought to be pleaded against AXL Legal (and its insurer, through the run-off policy, Lawcover), as articulated in written submissions on this application, is (consistently with the notification given to Lawcover on 6 August 2019) that DK Excavation did not receive advice that vesting the property in AXLF could expose it to a breach of trust, nor did it receive advice either to lodge with the Land Titles Office a copy of the unit trust deed under s 82(2) of the Real Property Act or to lodge a caveat noting its beneficial interest in the property as a beneficiary of the DK Unit Trust.

16. It is submitted that, having not received advice in relation to the risks of vesting the trust property in AXLF, nor to have DK Excavation’s interests in the property noted on the Register, that interest was not noted, and the property was vested in AXLF. It is said that, if Mr Sergienko’s case is accepted, AXLF then entered into an equitable mortgage in relation to the Killarney Heights Property; and that there is (or will be) a “real contest” between Mr Sergienko and the fourth and fifth defendants as to which interest should have higher priority.

17. Counsel for the applicants made clear on the present application that there is no complaint that AXL Legal acted improperly or negligently when the firm acted in the conveyance of the property to AXLF, nor in the drafting of the trust deed appointing AXLF as trustee.

18. The fourth and fifth defendants say, without conceding that there are “any real difficulties” with the proposed pleading, that the pleading difficulties identified by Lawcover (see below) are not such as to reach General Steel threshold (General Steel Industries Inc v Commissioner for Railways (1964) 112 CLR 125; [1964] HCA 69), noting that an action will not be dismissed “once it appears that there is a real question to be determined whether of fact or law and that the rights of the parties depend upon it” (citing Dey v Victorian Railways Commissioners (1949) 78 CLR 62 at 91; [1949] HCA 1 per Dixon J (as his Honour then was)).

19. They maintain that they have established an arguable case against the insured and that leave should be granted to join Lawcover.

Lawcover’s submissions

20. Lawcover’s opposition to the orders sought in the amended notice of motion is put on the following bases: first, that DK Excavation has not satisfied s 4(1) of the Act; second, that DK Excavation has not established via the proposed cross-claim that it has an arguable case against Lawcover’s insured; and, third, that leave to join Lawcover should because there is not yet an insurance dispute and there is no good reason to order the joinder.

21. As to the relevant issues in the present case, Lawcover submits as follows.

22. First, that the proposed third cross-claim does not plead the matters which must be established before leave is granted under s 5(1) (i.e., the statutory basis for joinder under s 4(1)), namely: the existence of the relevant insurer; that the insurer has issued an insurance policy with the relevant defendant; that the policy covers the risk; and that the policy was in place at the time of the risk (referring in this context to the observations made by Walton J in Mrdajl v Southern Cross Constructions (NSW) Pty Ltd (In Liq) [2018] NSWSC 161 (at [10]-[13])). Lawcover accepts that this might be able to be addressed in a further iteration of the proposed third cross-claim but submits that as it stands DK Excavation has not established that s 4(1) is satisfied.

23. Second, as to whether there is an arguable case as to the liability of AXL Legal, while Lawcover accepts that there is a low bar which DK Excavation must clear in order to establish that there is an arguable basis as to AXL Legal’s liability (and while it accepts that any pleading deficiency might be able to be rectified on a further amended pleading), it contends that on the present iteration of the proposed third cross-claim, that has not been established.

24. In this regard, Lawcover raises the following matters.

25. As a preliminary point, it says that it is unclear whether DK Excavation (or IWC, if it is a proposed cross-claimant – and there was some inconsistency in the applicant’s position in this regard) has standing to bring the complaints in the proposed third cross-claim (and, further, it says that if there is such standing, the basis for that is not pleaded). In this regard, although the application for joinder is filed by both IWC and DK Excavation, only DK Excavation appears to be named as the cross‑claimant to the proposed third cross-claim and it is the beneficiary of the unit trust (not the trustee – IWC). Thus, Lawcover raises the issue as to why DK Excavation (the beneficiary) rather than IWC (the trustee) is seeking to agitate the action.

26. More broadly, Lawcover says that insofar as the proposed claim is a claim in negligence to which the Civil Liability Act 2002 (NSW) (Civil Liability Act) appears, the proposed draft cross-claim makes no attempt to engage with the relevant matters set out in ss 5B and 5D of the Civil Liability Act (referring to Hoxton Park Residents Action Group Inc v Liverpool City Council [2012] NSWSC 1026 at [58]; and Garzo v Liverpool/Campbelltown Christian School Limited [2011] NSWSC 292 (Garzo) at [59]-[61] and [63]-[64]; and to the recognition as to the importance of a proper identification of the risk of harm in a pleading by Leeming JA, writing extra judicially, in The Statutory Foundations of Negligence (1st ed, 2019, The Federation Press) at p 34). Complaint is made that the proposed third cross-claim does not identify the risk of harm nor the reasonable precautions it is said that AXL Legal ought to have taken to address that risk of harm; and does not plead matters which could satisfy factual causation for the purpose of s 5D(1) of the Civil Liability Act.

27. As a related matter, Lawcover submits that the nature of the case sought to be put against AXL Legal is unclear from the pleading. In this regard, it is said that the import of the allegation at [14(a)] and [14(b)] as to the duty to advise about the conveyance of the property to AXFL is unclear (especially noting the submission made for the applicants that there are no complaints that AXL Legal acted improperly or negligently when it acted in the conveyance of the property to AXLF, nor in the drafting of the trust deed appointing AXLF as trustee). Lawcover points also to the reference in [14(c)] to the obligation to advise DK Excavation in an “independent and objective manner”. It is submitted that there is a discord between the allegations in [15] and [16] and the allegations as to the scope of duty in [14]; and that there is also a discord between the allegations in [17] and the allegations in [14], [15] and [16]. Complaint is made that it is not clear if the transaction referred to at [18(a)] is the entry into the deed of settlement or some other transaction; and that the reference to representations in [18(b)] is also unclear. It is noted that there is no pleading identifying what those representations were or their relationship to any alleged act or omission by AXL Legal.

28. It is further submitted that there are insufficient material facts pleaded in order for Lawcover to understand the claims sought to be made in relation to AXL Legal (as identified in the earlier correspondence between the solicitors).

29. Thus it is submitted that, because of the pleading deficiencies, it has not been established that an arguable cause of action is disclosed in the proposed draft third cross-claim against AXL Legal Solutions.

30. Pausing here, as to the complaints made by Lawcover in relation to the content of the proposed cross-claim, it is submitted by the fourth and fifth defendants that many of these complaints deal with either obvious typographical errors in the draft annexed to the affidavit of Atticus Busby of 16 August 2019 or complaints as to the meaning of what is pleaded, such as the assertion that Lawcover does not know what is meant by the use of the term “covered” in [4] of the draft third cross-claim which states that:

AXL Legal Solutions Pty Ltd is covered by the Run Off Professional Indemnity Insurance policy issued to the Law Society of NSW by Lawcover Insurance Pty Ltd.

31. As to the complaint by Lawcover that the proposed cross-claim does not plead in the precise terms of s 5B of the Civil Liability Act, reference is made to Pritchard v DJZ Constructions Pty Ltd; Gilles v DJZ Constructions Pty Ltd [2012] NSWCA 196 where (at [509]) Whealy JA states the issue of whether s 5B concerns are addressed is determined by reference to whether the relevant factual matters have been addressed and that, when determining the issues required to be dealt with under s 5B:

[t]he correct question, which was addressed by the primary judge, was whether it was established on the balance of probabilities that a reasonable senior counsel in the position of Mr McGovern SC as at April 2003, acting competently, would have warned DJZ of the risk of loss with the consequent wastage of costs, by reason of the February 2001 Deed. Consequently, both the “risk of harm” and the “reasonable precautions to avoid risk of harm” were addressed, and found against Mr McGovern. …

32. Third, as to whether the applicants have established an arguable case that the policy issued by Lawcover responds to the claim, Lawcover submits that the proposed third cross-claim makes no allegations of a kind sufficient to permit a finding that any policy issued by Lawcover responds to the claim. In particular, Lawcover says that it is not known whether the exclusion in the policy at cl 9(a)(viii) may apply (though at this stage it does not rely on this clause on this application as a basis to conclude that the policy does not respond).

33. To the extent that Lawcover may assert the application of an exclusion, the applicants say that Lawcover bears the onus of proof (referring to Ritchie v Advanced Plumbing and Drains Pty Ltd [2019] NSWSC 1028 at [6] per Campbell J).

34. As to the meaning of a “financial interest” in the exclusion clause, reference is made to Amadio Pty Ltd v Henderson (1998) 81 FCR 149; [1998] FCA 823 where the Full Court of the Federal Court of Australia held that a “financial interest” in an exclusion clause of a professional indemnity policy meant an interest “that … can give rise to an expectation, which is not too remote, of a ‘gain or loss of money’”. It is noted that the purpose of the exclusion clause in that case was to relieve the insurer from liability when a conflict of interest arises; and it is said that such an interpretation is consistent with r 78(9)(a) of the Legal Profession Uniform General Rules 2015 (NSW) which states that professional indemnity insurance (for law practices except barristers) “must not provide the insurer with a right to avoid, cancel or reduce cover because of … any innocent or non-fraudulent non-disclosure or misrepresentation by the law practice”.

35. It is submitted that the evidence presently before the court of the alleged interest of AXL Legal in AXLF does not discharge Lawcover’s burden of proving the alleged interest of AXL Legal in AXLF (on the basis that, while it appears that AXL Legal has or had a shareholding in AXLF, there is nothing to indicate the strength or voting power of that shareholding at any relevant time, nor the entitlement of AXL Legal to any dividends). It is submitted that a mere reference to an “ultimate holding company” on an ASIC form does not prove the degree of control necessary to prove control in the sense required by s 46 of the Corporations Act 2001 (Cth) (which underpins the s 9 definition of a “holding company”); and that, without more, the evidence is not sufficient to prove that AXL Legal stood to gain or lose money as a result of the advice it gave DK Excavation.

36. As to the final of the matters required to be established on the joinder application, Lawcover accepts that the applicants have established that there is a real possibility that AXL Legal (now deregistered) will not be able to meet a judgment against it.

37. Turning to the question whether, if the discretion is enlivened, it should be exercised in favour of granting leave to join Lawcover, it is contended by Lawcover that leave should not be granted for the following reasons: first, that granting leave would expose Lawcover to an unnecessary, unwarranted or inappropriate claim, and as such, it is not reasonable for Lawcover to be joined; and, second, that there is no utility in granting leave to join Lawcover, as there is no insurance dispute as yet.

38. As to the first, Lawcover notes that DK Excavation appears to be defending the proceedings (noting the reference at [12] of the proposed third cross-claim to the terms of a defence by DK Excavation to the amended statement of claim). It says that if DK Excavation were successfully to defend the proceedings brought by Mr Sergienko, there would be no basis to assert any liability on the part of Lawcover with respect to any loss claimed by Mr Sergienko. It also notes that DK Excavation has already filed a second cross-claim seeking relief from AXLF. Lawcover says that the only purpose of now joining it to the proceedings would be against the risk that both the defence to Mr Sergienko’s claim by DK Excavation and the cross-claim against AXLF will fail; but that this is in circumstances where there is no time limitation problem that is evident in the proposed claim against Lawcover, nor any “apparent concern” about any need for Lawcover to be a party to those proceedings. It is submitted that, having regard to the allegations which are made in the pleadings, those proceedings may involve significant cost and complexity.

39. As to the second, emphasis is placed on the inability of Lawcover at present to form a view about cover under the policy because of the lack of co-operation by Mr Harmstorf and a lack of information. In the circumstances, it is submitted that there is no insurance controversy to quell and that that is a matter which tells against the grant of leave (referring to DSHE HoldingsLtd (receivers and managers appointed) (in Liq) v Abboud; National Australia Bank Limited v Abboud [2017] NSWSC 579 (DSHE) at [41]).

Determination

40. As noted, the present application is bought under s 5 of the Act, which replaces the former s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW). In Energize Fitness Pty Ltd v Vero Insurance Ltd [2012] NSWCA 213 (Energize Fitness) (at [59]) Campbell JA (with whom Allsop P, as his Honour then was, and Meagher JA agreed) explained the purpose of s 6(4) of the previous legislation as being “to provide a filter against insurers being unjustifiably made parties in litigation that, apart from the grant of leave, they would be free to stay out of” and that the standard as to when it is justifiable to bring an insurer in was “fairly low” (as noted in Wayland v Bird [2017] NSWCA 26 at [20]).

41. Section 4(1) of the Act provides that:

If an insured person has an insured liability to a person (the claimant), the claimant may, subject to this Act, recover the amount of the insured liability from the insurer in proceedings before a court.

42. It is accepted that there are three matters to be established to enliven the discretion to permit the joinder of an insurer directly under s 5 of the Act: that there is an arguable case as to the liability of the insured; that there is an arguable case that the policy responds to the claim against the insured; and that there is a real possibility that, if judgment is obtained, the insured would not be able to meet it. The party seeking leave (here, DK Excavation) bears the evidentiary and persuasive onus of establishing those matters (see Energize Fitness at [53]).

43. If s 4(1) is satisfied, there remains a discretion whether to grant leave pursuant to s 5(1) of the Act; it does not automatically follow that leave should be granted (see Wayland v Bird at [26]). The discretion to grant leave under s 5 of the Act is to be exercised in a similar manner to the grant of leave under the previous legislative provision (see Rushleigh Services Pty Ltd v Forge Group Ltd (in liq) (receivers and managers appointed) [2018] FCA 26 at [42]-[43]). In DSHE, Stevenson J (at [21]) said that:

That discretion must be exercised for the purpose for which it was conferred; namely, to ensure that insurers are not exposed to unnecessary, unwarranted or inappropriate claims: Oswald v Bailey; Tzaidas v Child; Opes Prime Stock Broking Ltd (in Liq) v Stevens [2014] NSWSC 6598 [17]; Wayland v Bird at [20]-[26]. [citations omitted]

44. The question identified by Stevenson J in DSHE was whether “it is reasonable for the insurer to be joined” (at [22]), and whether there is utility in the joinder of the insurer (at [24]).

45. In the present case, leaving aside the preliminary question raised by Lawcover as to whether the proposed third cross-claim discloses that one (or both) of the applicants has standing to bring a claim against the insured, and leaving aside the issues raised as to whether the proposed pleading need plead the facts on which the applicants rely to satisfy s 4(1) of the Act, the difficulty I have is as to the adequacy of the proposed pleading (which is fundamental to the requirement that the applicants establish that there is an arguable case as to the liability of AXL Legal).

46. In Garzo, Garling J emphasised the necessity that a pleading raising a claim in negligence to which the Civil Liability Act applies, must identify and articulate the material facts upon which the plaintiff relies to establish each of the elements required by s 5B(1) of that Act. His Honour said (at [60]-[61]):

As a starting point, a proper pleading of a claim requires the plaintiff to identify, and articulate clearly the “risk of harm” in respect of which, it is alleged, the defendant was obliged to take precautions. This puts a court in a position to determine the defendant’s knowledge of a specified risk of harm, to assess the probability of that risk occurring, and to evaluate the reasonableness of the defendant’s response, or lack of response, to that risk, thereby avoiding the type of error discussed by Gummow J in RTA v Dederer (2007) 234 CLR 330 at [59]-[61].

A proper pleading will also need to plead whether it is part of the plaintiff’s case that the defendant had actual knowledge of the risk of harm, and that the risk was thereby foreseeable (s 5B(1)(a)), or whether the plaintiff only contends that the defendant ought to have known of the risk of harm. Particulars of such a pleading would then ordinarily be provided. A defendant would then be in a position to fully plead to such allegation.

47. At [63]-[64], his Honour emphasised the importance of identifying in the pleading of negligence the risk of harm:

A central concept and one with which the analysis commences is the identification of “a risk of harm” against which the plaintiff, here Mrs Garzo, alleges a defendant would be negligent for failing to take precautions. Harm in this expression includes personal injury. Gummow J, in Dederer at [59]–[61] clearly demonstrates that it is only through the correct identification of the risk of harm that an assessment of the reasonable response can be made.

As a real and practical matter, where a Court is considering any of the essential steps in s 5B(1), it must do so against the identified risk of harm. It is a matter of common experience in common law claims, that in any given set of factual circumstances, there are a number of risks of harm which can be identified. Unless the risk of harm being relied upon is clearly identified then it will not be possible to identify what steps ought reasonably to have been taken by a defendant to address the risk. Nor will it be possible for a Court to determine what the application of reasonable care required.

48. Therein lies the difficulty with the present pleading.

49. Lawcover correctly points out that there is no identification of the risk of harm in the pleading and that the claim is pleaded essentially as a breach of duty of care case (albeit by reference to a contractual retainer). It is important for there to be an articulation of the risk of harm, which must be one which takes into account in some way the risk which is materialised (albeit that this is a forward-looking inquiry).

50. In the present case, the principal complaint is a failure to give proper advice about the risks associated with conveying property to AXLF in its capacity as trustee. As Lawcover notes, the risk which is said to have materialised appears to be a very serious breach of trust by the trustee. In essence, the applicants’ case is that AXLF, as trustee, has used trust property for its own use (to provide security for obligations owing under the Deed of Settlement in proceedings unrelated to the trust). There is no allegation of dishonesty or fraud as such. However, what is alleged is the (seemingly improper) use by a trustee of trust property for its own purposes. That raises not simply a pleading issue but has a broader significance in that, if there were to be an allegation of fraud, then the insurer might be in a position to rely upon an exclusion clause in the policy. Hence, the need for the pleading precisely to articulate the claim alleged against the insured (even apart from the fact that if fraud is alleged, that must be pleaded properly having regard to the seriousness of such an allegation).

51. Lawcover has submitted that one of the problems with the failure of the pleading to articulate the case against the insured is that it is impossible for Lawcover to come to any view about any such exclusion. It is said that if the risk of harm, taking into account in an appropriate way the risk which has now materialised, is the risk of the trustee improperly using trust property, then that should be pleaded (having regard to the authorities referred to above which make plain why the identification of the risk of harm is central to the s 5B(1)(a) analysis in a case of negligence). This would require a pleading going to issues such as whether the risk was foreseeable, whether the risk is not insignificant and that a reasonable person would have taken steps to address or take precautions, and what precautions ought reasonably have been taken. Lawcover has submitted that it is even more important that there be a proper identification of the risk of harm, and the reasonable precautions which it is said AXL Legal ought to have taken, in the present case than it might ordinarily be because of the fact that Mr Harmstorf was a director of both AXLF and AXL Legal at the time that the advice was given. Thus, it is said, any analysis of the risk of harm and of the reasonable precautions would need to take into account that the person giving the advice (about the risks of conveying property to a trustee) is giving advice about a trustee in which he has an involvement (i.e., it is said this informs the consideration of what reasonable precautions a solicitor would take in identifying the risks of the conveyance of a property to a trustee in which the solicitor has an involvement).

52. Further, the failure of the pleading to identify the risk of harm and the reasonable precautions against that risk that is said were required gives rise to difficulties in relation to the case on factual causation under s 5D(1)(a). What the plaintiff must do is to identify the likely credible sequence of events which would have occurred but for the breach; and as Lawcover says, that cannot be done in a pleading without a properly identified risk of harm and series of reasonable precautions.

53. For these reasons, I accept the submission for Lawcover that the proposed third cross-claim does not properly plead a case of negligence against the insured (see also Hastie Group Ltd (in liq) v Bourne; Hastie Group Ltd (in liq) v Moore [2017] NSWSC 709 in this regard).

54. As to the discretionary arguments raised, while I accept that there is force to the submission by Lawcover that there is no utility in joinder at this stage (where there are two credible ways in which there may never be a loss aside from, perhaps some nominal loss or, say, loss in the form of unrecoverable solicitor costs), I would not have refused to grant leave on that basis alone. It seems to me that one would need to take into account the fact that there would be no issue estoppel if the insurer were not joined to the proceeding, at this stage, and there has not been a position adopted that the insurer would accept (and indeed would not challenge) whatever factual findings might be made in the proceedings absent its involvement. However, I do accept that, until the claim is properly articulated, it will not be known whether the policy responds to the claim.

55. Even assuming that the facts alleged in the proposed third cross-claim do establish an arguable case against the insured, as a discretionary matter I still would not have been prepared to give leave for the insurer to be joined at this stage because there is considerable force in my opinion to the submissions made as to the pleading issues (and these are matters of substance; not mere or technical pleading points). The insurer is entitled to know precisely what case the insurer would have to meet. Insofar as the factual circumstances may give rise to a range of claims, the pleading would need to be quite clear as to what precisely is being alleged.

56. For the applicants, it was submitted that if that were to be my view then an opportunity to replead should be afforded to them. Certainly, as a general rule one would afford an opportunity to replead if a pleading were being struck out for failure to plead a reasonably arguable cause of action or if leave to file an amended pleading were to be refused for pleading deficiencies.

57. It was submitted for the applicants that, as a matter of the exercise of discretion, once it was determined that there was a real question to be determined as to whether or not AXL Legal provided negligent advice to DK Excavation, then, adopting the General Steel principles, the joinder of Lawcover to the proceedings should be granted subject to the provision of a pleading that addresses the concerns that have been articulated.

58. That seems to me to approach the matter from the wrong perspective. If there has been, as yet, no properly pleaded cause of action (which is the conclusion I have reached) then it is difficult to see how one could be satisfied that there is a reasonably arguable case against the insured so as to enliven the discretion. Clearly enough in the present case, on the facts as they are alleged to be, it is likely that a cause of action against the trustee would lie (for what is alleged to be the improper use of trust property) but the way in which it is alleged that AXL Legal is liable for breach of duty in the giving of advice is what is here in issue and, depending on what claim is ultimately pleaded in that regard, there may well be an issue as to whether the policy responds at all (fraud, I am told, being excluded under the policy).

59. Lawcover resisted the course proposed by the applicants of, in effect, an adjournment of the Joinder application to permit them another attempt to plead a claim satisfactorily. First, it was noted that the pleading problems (and in particular the pleading complaint by reference to the Civil Liability Act) had been raised on 13 August 2019 and again in the September 2019 correspondence between solicitors, yet those issues had not been addressed. Second, that dismissal of the application at this stage would not be an end to the ability of the applicants to pursue a claim against the insurer. It was, therefore, said that the proper course would be simply to dismiss the present application (it being open to the applicants to make a new application if so advised in due course).

60. Against that, Counsel for the applicants pointed to the cost consequences of the fourth and fifth defendants being required to recommence this action.

48. In my opinion, the proposed third cross-claim does not adequately establish the existence of a reasonably arguable cause of action against the insurer and, in circumstances where the applicants have had ample opportunity to address those pleading issues and will not be precluded from making a further application in due course; and particularly where the need for a proper pleading is especially important where it is not clear whether fraud is actually being alleged (and, if so, how the policy would respond if at all to the claim against the insured), even if the discretion had been enlivened I would not have given leave for the joinder of the insurer as a matter of discretion at this stage. I see no reason why the usual order for costs should not follow.

Conclusion

62. For the above reasons, I make the following order:

1. Refuse leave for the joinder of Lawcover Insurance Pty Ltd and dismiss the notice of motion filed 16 August 2019 with costs.

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Decision last updated: 20 November 2019