Trustees Executors Ltd v QBE Insurance (International) Ltd
[2010] NZCA 608
•14 December 2010
IN THE COURT OF APPEAL OF NEW ZEALAND
CA671/2009
[2010] NZCA 608BETWEENTRUSTEES EXECUTORS LIMITED
Appellant
ANDQBE INSURANCE (INTERNATIONAL) LIMITED
Respondent
Hearing:10 June 2010
Court:William Young P, Glazebrook and O'Regan JJ
Counsel:H McIntosh and S P H Elliott for Appellant
M R Ring QC and A Challis for Respondent
Judgment:14 December 2010 at 10am
JUDGMENT OF THE COURT
AThe appeal is dismissed.
BThe appellant is to pay the respondent costs for a complex appeal on a Band A basis plus usual disbursements. We certify for second counsel.
____________________________________________________________________
REASONS OF THE COURT
(Given by Glazebrook J)
Table of Contents
Para No
Introduction [1]
Summary of the respective cases on appeal [8]
Issues [10]
Background [11]
Trustees Executors [11]
The Fund [12]
Defaults [15]
The Policy [19]
Evidence on the Policy [22]
Proper approach to interpretation of contracts [27]
Judge’s summary of contractual interpretation principles [27]
Trustees Executors’ submissions [28]
QBE’s submissions [29]
Our assessment [30]
Special rules for exclusion clauses, in particular in
insurance contracts [34]Ronald Young J’s judgment [34]
Trustees Executors’ submissions [35]
QBE’s submissions [36]
Interpretation of insurance contracts [38]
Is this a suitable case for a declaration? [41]
Depreciation [47]
Trustees Executors’ submissions [47]
QBE’s submissions [49]
Our assessment [51]
Causation [54]
Trustees Executors’ submissions [54]
QBE’s submissions [56]
Our assessment [58]
Unauthorised investments [59]
Trustees Executors’ submissions [59]
QBE’s submissions [65]
Our assessment [67]
Result and costs [72]
Introduction
[1] Trustees Executors Ltd (Trustees Executors) has an insurance policy (the Policy) with QBE Insurance (International) Ltd (QBE). It made a claim against that Policy for amounts paid to make good losses incurred by investors in the Tower Mortgage Plus Fund (the Fund). Trustees Executors acted as trustee and manager of the Fund and was also authorised to make investments on behalf of that Fund and to manage those investments under a mortgage management agreement.
[2] In late 2007, a number of the loans held by the Fund had fallen into arrears. It was discovered that these had been made outside the approved loan criteria agreed between Trustees Executors and Tower in the mortgage management agreement. In early 2008 Tower gave Trustees Executors notice that it considered Trustees Executors had breached its obligations under the agreements with Tower and that it would hold Trustees Executors liable for losses.
[3] As required by the Policy, Trustees Executors immediately notified QBE of the Tower claim. By mid February 2008 Trustees Executors had settled Tower’s claim with the written consent of QBE. QBE reserved its rights to refuse indemnity under the Policy. In June 2008 Trustees Executors formally sought indemnity under the Policy.
[4] In November 2008 QBE declined Trustees Executors’ claim on the basis that, although the claim came within the operative part of the Policy, liability was excluded by the Securities Exclusion clause (the Exclusion clause). The Exclusion clause in the insurance policy provides as follows:
Securities Exclusion
Notwithstanding anything to the contrary stated in the Policy or endorsed thereon, it is hereby declared and agreed that this Policy does not provide indemnity against any Claim or Claims arising from or contributed to by depreciation (or failure to appreciate) in value of any investments, including but not limited to, property, shares, securities, commodities, currencies, options and futures or derivative transactions, or as a result of any actual or alleged misrepresentation, advice, guarantee or warranty provided by or on behalf of the insured as to the performance or characteristics of any such investments.
[5] In the High Court, Trustees Executors sought a declaratory judgment that the Policy covers claims caused by negligence of the insured resulting in loss of investment principal irrespective of any market movement and claims arising from or contributed to by the making of unauthorised investments; and that the Exclusion clause does not apply to such claims. QBE maintained that the declaratory judgment process was not suitable for the resolution of the issues but, if the Court decided otherwise, it said that the Exclusion clause did exclude such claims.
[6] On 9 October 2009 Ronald Young J held that the declaratory judgment process was suitable for resolution of the issues before him.[1] He also held that the Exclusion clause excludes not only:
[1]Trustees Executors Ltd v QBE Insurance (International) Ltd HC Auckland CIV-2009-404-1165, 9 October 2009.
(a) claims for loss caused solely by market movement; and/or
(b)claims for loss caused partly by the negligence of the insured and partly by market movement;
(which was common ground), but also excludes:
(c)claims caused by negligence of the insured resulting in loss of investment principal irrespective of any market movement; and
(d)claims arising from or contributed to by the making of unauthorised investments.
[7] Trustees Executors appeals against Ronald Young J’s decision.
Summary of the respective cases on appeal
[8] Trustees Executors’ case on appeal is that Ronald Young J was wrong in his interpretation of the term “depreciation ... in value of ... investments” in the Exclusion clause, on the issue of causation and in his finding that the Exclusion clause applies to unauthorised investments. In addition, it is contended that Ronald Young J failed to take the proper purposive approach to the construction of the Policy and the Exclusion clause. In particular, Trustees Executors submits that the commercial purpose of the Policy and industry practice support its interpretation. Had the Judge taken the proper approach, he would have found that the construction contended for by Trustees Executors is correct or at least equally open. In that situation, the law of construction of exclusion clauses in contracts (and, in particular, insurance contracts) means that Trustees Executors’ construction should have been preferred.
[9] QBE supports the Judge’s interpretation of the Exclusion clause and says that the criticisms of Ronald Young J’s approach are unjustified. QBE says that the Judge in interpreting the Policy applied the approach recently restated by the Supreme Court in Vector Gas Ltd v Bay of Plenty Energy Ltd.[2] It also says that there are now no special rules for the interpretation of exclusion clauses and that the Judge interpreted the exclusion clause correctly. QBE does not accept that the investments in this case were unauthorised in the sense used in the (limited) relevant authorities. These were authorised types of investments made under delegated authority but carried out in an (allegedly) unauthorised manner. Although QBE did not file a memorandum of intention to support Ronald Young J’s judgment on other grounds,[3] it says that, if the full facts were not available to make a proper decision on the interpretation of the Policy, then the Judge made the right decision in declining to make the declaration.
Issues
[2] Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444.
[3] Court of Appeal (Civil) Rules (2005), r 33.
[10] After setting out the background in more detail, we deal with the appeal under the following headings:
(a) What is the proper approach to the interpretation of contracts?
(b)Are there special rules for the interpretation of Exclusion clauses, particularly in insurance contracts?
(c) Is this a suitable case for a declaration?
(d) Meaning of “depreciation”;
(e) Causation; and
(f) Unauthorised investments.
Background
Trustees Executors
[11] Trustees Executors is a trustee company operating in New Zealand. It provides general personal and corporate trustee services, custodial investment administration services and mortgage lending and administration. While its primary business is the provision of personal and corporate trustee services, the revenue earned by Trustees Executors from financial services, including fund administration and investment services, is significant.
The Fund
[12] The Fund was a group investment fund under the Trustee Companies Act 1967. Group investment funds are pooled funds similar to unit trusts. The Fund was established on 29 June 1990 for the primary purpose of investing and mortgage lending. The Fund ceased issuing or redeeming units on 4 April 2008 and, at the time of the High Court hearing, was in the process of being wound up. The winding up was not related to the present dispute.
[13] The Fund was divided into units priced at $1 which could be purchased or redeemed at any time by investors, subject to minimum thresholds and notice periods. The trustee of the Fund (Trustees Executors) was able to vary the unit price if the $1 failed to represent the value of the Fund’s assets. The price was not, however, varied at any time prior to the Fund’s closure.
[14] As at 31 March 2007 the Fund had net assets of approximately $268.174 million, representing around 268.18 million issued units. The investments of the Fund were primarily loans secured by first ranking mortgages on residential, commercial and rural property.
Defaults
[15] In late 2007, some $33 million of loans in the Fund fell into default. In early 2008, Trustees Executors carried out an investigation into those loans and found that they had the following characteristics:
(a)the loan servicing ability of the borrowers had not always been adequately evaluated;
(b)the amounts of the loans were inconsistent with the loan to value ratios for residential and commercial properties under the investment guidelines set for the Fund;
(c)the loan to value ratios were based on property values that were significantly in excess of the true market value of the underlying mortgage property at the time of the lending;
(d)there was an inappropriate extent of connectedness between, in various combinations, the vendors, borrowers, guarantors, valuers and introducers of the loans; and
(e)the lessees of some of the properties concerned were closely related to the borrowers or the introducers of the loans.
[16] A further tranche of loans was identified as having the same characteristics and therefore also potentially at risk of default. These totalled approximately $18 million. We understand that these loans have subsequently also fallen into default.
[17] As noted above, Tower made a claim against Trustees Executors with regard to these losses and on 14 February 2008 Trustees Executors settled that claim. Broadly, under the settlement Trustees Executors was obliged to pay to the Fund:
(a)quarterly interest payments necessary where the loans were in default of the borrower’s interest payment obligations; and
(b)any shortfall in the principal amount of each loan at the time of settlement of the sale of the property mortgage as security for each loan.
[18] As also noted above, Trustees Executors notified QBE of the claim against it as required by the Policy and the settlement with Tower was made with QBE’s approval, subject to its right to decline cover. It has done so, saying that the claim is excluded by the Exclusion clause.
The Policy
[19] The Exclusion clause has already been set out above.[4] The main insuring clause of the Policy provides as follows:
1.1 CLAUSE A – ACT, ERROR OR OMISSION INSURING CLAUSE
QBE agrees to indemnify the Insured against legal liability for any Claim for compensation first made against the Insured during the Period of Cover and which is notified to QBE during the Period of Cover, for breach of professional duty in the conduct of the Professional Business Practice carried on by or on behalf of the Insured by reason of any act, error, or omission committed or alleged to have been committed on the part of the Insured.
[4] See at [4] above.
[20] “Professional Business Practice” is defined in the Schedule to the Policy as follows:
Professional Business Practice
Provision of financial, insurance, reinsurance, retirement, investment, travel, funds management, property and legal services, Trustee company providing trustee and custody services, personal client services, prudential supervisor services, managed investment products and services, mortgage lending and management, group superannuation and insurance scheme administration, financial planning services and services related to the above.
[21] By cl 1.2, QBE agrees to pay, in addition to the Limit of Indemnity, all costs and expenses incurred with the written consent of QBE in the defence and in settlement of any Claim covered by the Policy. The “Limit of Indemnity” in the schedule to the Policy is set at $20m for “any one Claim and in the aggregate”. Claim is defined as meaning:
“Claim” shall mean:
(a)the receipt by the Insured of any written or verbal notice of demand for compensation made by a third party against the Insured.
(b)any writ, statement of claim, summons, application or other originating legal or arbitral process, cross-claim, counterclaim or third or similar party notice served upon the Insured.
Evidence on the Policy
[22] In an affidavit filed in the High Court Mr Anderson, the General Manager of the Corporate and Special Risks Division of QBE, said that it is well known that, in periods of market weakness where investments may depreciate significantly, claims generally increase. He points out that, even if such claims do not succeed, there is a significant cost in defending them. Exclusion clauses are commonly used to exclude claims relating to the depreciation of investments, particularly since the 1987 market crash. He notes that there are other financial products available, such as mortgage indemnity cover, which are designed to cover losses of this nature. Mr Anderson notes that this is one of the reasons that QBE’s professional indemnity policies cap defence costs and why certain areas of potential coverage are excluded by endorsement. Mr Anderson states that QBE did not think it was necessary to cap defence costs in this case because of the existence of the Exclusion clause.
[23] Mr Anderson says that, despite the Exclusion clause, there remains significant coverage under the Policy for Trustees Executors, especially in relation to Trustees Executors’ core activities as a trustee. He details a number of claims that have been accepted or paid under the Policy. He deposes that in fact the aggregate amount which QBE has paid to date on claims, including defence costs, exceeds the aggregate premiums which Trustees Executors has paid to QBE.
[24] Trustees Executors’ insurance broker, Mr Grantham, deposed in the High Court that, until QBE declined this claim, he had never come across a case where an insurer had sought to rely on an exclusion clause of this type, which are commonly called ‘market fluctuation’ or ‘performance guarantee’ clauses, to exclude a claim caused by the negligence of the insured as opposed to one caused by market movement.
[25] Mr Grantham says that, according to his firm’s records, over the period from 2003 to 2009 Trustees Executors paid total premiums of $865,000 to QBE and during that period QBE paid claims under the Policy of $358,148. Of the claims paid by QBE he says that all but one related to Trustees Executors’ trustee business. Only one related to its financial services business. That concerned a claim arising from allegations concerning the purchase by Trustees Executors of a wrong parcel of shares and capital growth lost on the shares that should have been purchased.[5]
[5]Mr Anderson also detailed a claim relating to the documentation of mortgages, which he said QBE hoped would go no further following a letter to the claimant denying liability on behalf of Trustees Executors.
[26] Mr Grantham also said in his affidavit that QBE was aware of the financial services business undertaken by Trustees Executors because it received a renewal submission every year which provided details of that business and there was also a description of Trustees Executors’ business in the schedule to the Policy.
Proper approach to interpretation of contracts
Judge’s summary of contractual interpretation principles
[27] In the High Court, the Judge said:
[29] The starting point is, as always, the words themselves. The words of a contract should, unless the context clearly requires otherwise, have their ordinary meaning. Assistance can be gained from the context in which the disputed words occur, including the phrase, the paragraph and the whole of the contract itself. The relevant factual matrix can also assist.
[30] The key is to ascertain objectively the common intention of the parties using the above factors. If there is ambiguity or other interpretative difficulties then an assessment of the commercial realities, common sense and a consideration of whether a particular result might lead to an unreasonable outcome are relevant.
Trustees Executors’ submissions
[28] Trustees Executors submits that the Judge wrongly focussed on the ordinary meaning of the words in the abstract, rather than determining their meaning in the context of the purpose and background of the Policy. In its submission, the Judge considered, wrongly, that the background was relevant only if there were ambiguities or other interpretive difficulties. In any event, there were clearly ambiguities in the Exclusion clause, which should have been resolved, even on the Judge’s approach, by reference to the background and commercial purpose of the contract.
QBE’s submissions
[29] QBE submits that the Judge used the proper approach. He started with the words themselves and with their ordinary meaning. He recognised that, generally, it will be difficult to show that the context requires rejection of a meaning which is plain and unambiguous. The Judge then “cross-checked” the ordinary meaning against the background and “business common sense”, recognising that business common sense is a mutual or bilateral concept, not based on the unilateral perspective of one party or another. The Judge held, correctly, that this cross-check did not require abandonment of the ordinary meaning.
Our assessment
[30] We accept Trustees Executors’ submission that the Judge’s formulation could be seen as having misstated the test for contractual interpretation, although we are by no means convinced that he in fact applied an incorrect test.[6] We consider that the Judge’s formulation might wrongfully have suggested the background circumstances are only taken into account where there is an ambiguity. The statement at [27] could also be seen as creating a presumption in favour of ordinary meaning.[7]
[6]The Judge’s formulation is set out above at [27].
[7] There is no such presumption: see discussion at [33].
[31] The approach to contractual interpretation in New Zealand is based on the principles set out in Investors Compensation Scheme Ltd v West Bromwich Building Society.[8] The Investors Compensation principles were accepted as applying in New Zealand in Boat Park Ltd v Hutchinson[9] and were most recently considered by the Supreme Court in Vector.[10]
[8]Investors Compensation Scheme Ltd v West Bromich Building Society [1998] 1 WLR 896 (HL) at 912‑913.
[9] Boat Park Ltd v Hutchinson [1999] 2 NZLR 74 (CA).
[10]Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444.
[32] The majority of the judges in Vector[11] adopted the approach in Investors Compensation whereby the language the parties have used must be read in the context of the document as a whole and the surrounding circumstances. Under that approach, the wider background and circumstances should always be considered, even if there is no ambiguity or other interpretive difficulty with the words used by the parties.[12] Evidence of background circumstances is not, however, relevant if it does no more than tend to prove what individual parties subjectively intended or understood their words to mean or to prove what a parties’ negotiating stance may have been at a particular time.[13]
[11]Apart from Wilson J, who differed from the other judges on this point, stating that resort can only be had to evidence that is extrinsic to the contract in three situations: in cases of ambiguity; where the ordinary meaning does not make commercial sense; and if estoppel by convention applies. See at [119]–[124]. It is to be noted that Wilson J also acknowledged at [126] that recourse can be had to such evidence when a court is considering rectification but considered that rectification of a contract is not of itself a question of interpretation.
[12]See Vector at [4] per Blanchard J (with whom Gault J agreed); at [23] per Tipping J; and at [64] per McGrath J. Potterv Potter [2003] 3 NZLR 145 (CA) at [33]–[34], to which we were referred by QBE, is not good law to the extent it may be seen as suggesting that background is only relevant in the case of ambiguity. Potter v Potter, as McGrath J pointed out in Vector at [64], was overruled on that point by this Court in Ansley v Prospectus Nominees Unlimited [2004] 2 NZLR 590 at [36].
[13]Vector at [19] per Tipping J. See also Blanchard J (with whom Gault J agreed) at [14] and McGrath J at [76].
[33] While it usually makes sense to start with the words of the contract[14] and then move to the context of the contract before considering the wider background and circumstances, there is no presumption in favour of ordinary meaning. A meaning that may appear, when devoid of external context, to be plain and unambiguous, may not ultimately be what the parties intended when considered against all the relevant circumstances.[15] As was noted by Tipping J in Vector, any initial view of the meaning must be provisional only and the reader must be prepared to accept that the provisional meaning may be altered once context has been brought to account.[16]
Special rules for exclusion clauses, in particular in insurance contracts
Ronald Young J’s judgment
[14]The most obvious reason for this is that a court needs to know what is to be interpreted before it can ascertain the extent of, and understand, the relevant background and surrounding circumstances. In Vector Blanchard J at [4] (with whom Gault J agreed) started with the ordinary meaning of the words at issue. It is apparent that a prerequisite of examining ordinary meaning must be to look at the meaning of the words themselves. See also Vector at [24] per Tipping J and at [77] per McGrath J.
[15]Vector at [23] per Tipping J and at [66] per McGrath J.
[16] At [24].
[34] The Judge said:
[31] In particular in relation to exclusion clauses:
(a)the onus of establishing that an exclusion clause applies is on the insurer;
(b)exclusion clauses should be narrowly construed;
(c)ambiguities are generally to be construed against the insurer if they have drafted the Policy.
Trustees Executors’ submissions
[35] Trustees Executors submits that the specific and well established principle that exclusion clauses are to be narrowly construed should be applied and that any ambiguities in the clause should be construed against QBE. It is further submitted
that in the insurance context the authorities are clear that, if in the relevant context both parties’ interpretations are reasonably available, then it is no longer a question of the court choosing the one which it thinks better: the insured’s interpretation is to be preferred.
QBE’s submissions
[36] QBE accepts that previously the courts have recognised a principle of interpretation that an exclusion clause is to be construed narrowly. It submits, however, that, on the Supreme Court’s approach in Vector, there is no logical justification for treating any clause in the contract differently to any other just because of its apparent purpose or content. In particular, there is no logical basis to assume an intention on the part of the insurer that the word or expression has the most favourable meaning to the insured, depending on its location in the policy.
[37] QBE submits that exclusion clauses assume that the operative clause extends to providing indemnity and, as a result, it is necessary to provide words of exclusion for the specified circumstances.[17] As stated in Derrington & Ashton, in substance every exclusion is potentially in conflict with the operative covering clause for that is its very purpose.[18]
Interpretation of insurance contracts
[17]Walton v National Employers’ Mutual General Insurance Association [1973] 2 NSWLR 73 (NSWCA) at 84 per Bowen JA.
[18]Desmond Derrington and Ronald Ashton The Law of Liability Insurance (2nd ed, LexisNexis, Chatswood (NSW), 2005) at [7-11].
[38] The rules of construction for insurance contracts are the same as those for ordinary contracts.[19] Accordingly, this Court recently stated in Lumley General Insurance (NZ) Ltd v Body Corporate No. 205963, when examining the interpretation of exclusion clauses in insurance contracts, that the overall objective must be to ascertain the mutual intention of the parties: [20]
We agree that, as an exclusion clause, [the clause] should be construed narrowly. But that does not mean a strained interpretation is to be adopted. The overall objective is to ascertain the presumed mutual intention of the parties.[21]
[19]Molyneux Holdings Ltd v IAG New Zealand Ltd CA 218/06, 22 June 2007 at [22]; D A Constable Syndicate 386 v Auckland District Law Society Inc [2010] NZCA 247, [2010] 3 NZLR 3 at [23].
[20] Lumley General Insurance (NZ) Ltd v Body Corporate No. 205963 [2010] NZCA 316 at [27].
[21]In Vector at [19] Tipping J stated that the objective is “to establish the meaning the parties intended their words to bear”; see also D A Constable Syndicate 386 v Auckland District Law Society Inc at [23]; and David Kelly and Michael Ball Principles of Insurance Law (looseleaf ed, LexisNexis) at [5.0280].
[39] It is also clear that the Court will employ the contra proferentem rule, by which a court will resolve an ambiguity against the party who proffered the phrase, in cases of genuine ambiguity. As recently acknowledged by this Court the contra proferentem rule has a place for resolving ambiguity in the interpretation of insurance contracts as it does in other contracts.[22] However, there is need for a genuine ambiguity to exist before the contra proferentem rule is applied by a court. It was stated in Lumley that:[23]
When the clause is read as a whole, we agree with Lumley that there is no genuine ambiguity. There is no basis to bring into play the contra proferentem rule and therefore interpret the clause in favour of the insured.
[22] D A Constable Syndicate 386 v Auckland District Law Society Inc at [69].
[23] At [31].
[40] In light of the recent decisions of this Court, it is apparent that, while exclusion clauses (including those in insurance contracts) are to be narrowly construed, a court should adopt an interpretation that correlates with the presumed mutual intention of the parties. We do not, therefore, accept the submission of Trustees Executors that the insured’s interpretation is, by default, always to be preferred. While it is clear that, in cases of genuine ambiguity, a court will resolve the ambiguity against the party who proffered the phrase, a court should be wary of creating an ambiguity when no such ambiguity exists.[24]
Is this a suitable case for a declaration?
[24]See Direct Travel Insurance v McGeown [2003] EWCA Civ 1606 at [13] and the discussion in Malcolm Clarke The Law of Insurance Contracts (6th ed, Informa Publishing, London, 2009).
[41] Ronald Young J considered that the essential factual context in this case included the terms of the Policy, the circumstances of the loans (including that they were unauthorised in terms of Trustees Executors’ contract with Tower), the losses that had occurred by reference to that breach and the fact that there had been a claim by Tower. These facts were not in dispute. While the Judge recognised that resolution of the interpretation of the Exclusion clause would not necessarily resolve all the issues between the parties, he considered that a declaratory judgment would be a simple and inexpensive way to resolve a fundamental question of interpretation of the Policy.
[42] We do not consider that the Judge was correct in this assessment. We consider that the interpretation of the Policy should be undertaken at a full trial where the question can be considered other than in what is somewhat of a factual vacuum. This is particularly the case because we were urged to consider the background circumstances by both parties (with each asserting that the relevant background supported their interpretation).
[43] Trustees Executors submits that, on a proper construction of the Policy, the parties objectively intended Trustees Executors to have substantial cover in respect of its Fund business, whereas on QBE’s interpretation, Trustees Executors has almost no cover for claims brought in respect of any of its investment-related businesses because such claims will almost always involve investment losses. It is submitted that QBE could have excluded claims for “any loss in any investments” to achieve the result QBE says was intended. Instead, QBE chose to adopt the language of “depreciation in value of any investments”, which is commonly used in the market to exclude claims resulting from market fluctuations.
[44] QBE submits that Trustees Executors’ interpretation is not based on the presumed common intention of the parties, but on Trustees Executors’ unilateral perspective that, because otherwise it was uninsured for these claims, there must have been a common intention to insure all its business activities. If there are apparently sensible reasons that may have led each party to agree to contract on the relevant terms, by definition the interpretation contended for cannot “flout business common sense”. QBE says that there are very sensible commercial reasons for the Exclusion clause in this case. It also says that mortgage lending and management is a lesser aspect of Trustees Executors’ overall business and the Policy still covers a significant range of risks. Further, significant claims have been made and approved under the Policy.
[45] We do not consider that we have sufficient evidence to evaluate the different contentions properly. For example, we do not know the exact extent of the investment business of Trustees Executors and exactly how much QBE knew about that business and its extent. We have had no information on the pricing of the Policy as compared to other policies with similar alleged coverage or to those with more extensive coverage. We have limited information on market practice. We also have limited information on exactly how the losses eventuated and the link with the alleged breaches of contract. For example, merely having links between borrowers, valuers and lessees might increase the risks of default but by itself is not necessarily causative of loss. We also have no information on market trends during the relevant period and limited information on market practice.[25] There may also be issues relating to subsequent conduct[26] and possibly even prior negotiations.
[25]We are not necessarily to be taken as saying that all of the above information would be necessary to evaluate the parties' contentions.
[26] See below at [71].
[46] Despite having come to the view that the interpretation of the Policy should take place at a full trial, we go on to make some preliminary comments on the issues arising out of the parties’ submissions as the case was fully argued before us and conceivably this could aid the parties in coming to some settlement of the claim. These preliminary comments are not intended to bind any court in any subsequent proceedings.
Depreciation
Trustees Executors’ submissions
[47] Trustees Executors’ case is that depending on the context, the word “depreciation” can mean either:
(a) simple “loss of value” (eg as used in accounting); or
(b)“loss of value relating to market fluctuations”, ie meaning a reduction in value as a result of market forces.
[48] In Trustees Executors’ submission, the second meaning is the correct interpretation. That meaning is objectively more consistent with the commercial purpose of the policy, the industry context and the reference to performance guarantees in the second half of the Exclusion clause. Against that background, properly construed, Trustees Executors submits that the Exclusion clause is intended to exclude claims caused by either:
(a) a reduction in the value of an investment due to market forces; or
(b) a combination of the insured’s breach and such reduction.
QBE’s submissions
[49] QBE submits that the ordinary meaning of “depreciation” is the “action or process of lowering in value”.[27] It is especially applied to a fall in the exchange value of currency but it also applies to a fall in the value of any investment. In itself, the word conveys nothing about the cause of this fall in value. For example, it is common to refer to the “depreciation” of one currency against another, even when the direct cause is the deliberate act of the relevant Finance Minister in devaluing it.
[27] Shorter Oxford English Dictionary On Historical Principles (5th ed Oxford University Press, Oxford, 2002).
[50] QBE points out that, in order for the Exclusion clause to apply, the essential elements of operative clause must already be satisfied, in that there must already be a claim for breach of professional duty by reason of “any act, error or omission committed or alleged to have been committed” by Trustees Executors. The parties could not have assumed the Exclusion clause applied only to a complaint about a drop in value resulting from market forces unaccompanied by any actual or alleged “act, error or omission” on Trustees Executors’ part.
Our assessment
[51] The phrase used in the Exclusion clause is “depreciation (or failure to appreciate) in value of any investments”. When read as a whole and in the context of the whole clause (including the reference to performance guarantees in the second part of the clause), contrary to QBE’s submission, we do not consider that the word “depreciation” means loss in value from whatever cause. If we had accepted QBE’s interpretation of this clause, this would appear to exclude any coverage at all for Trustees Executors’ investment business.[28] This is because it is difficult to imagine a situation where there is a claim but no loss in value of the Fund.[29] It cannot have been the mutual intention of the parties to exclude all coverage for Trustees Executors’ investment business.
[28] Subject to what we say below at [53] and [58].
[29] See discussion in next section.
[52] On the other hand, we consider that there are issues with Trustees Executors’ interpretation of the Exclusion clause as only excluding depreciation (or failure to appreciate) related solely to market forces. In his oral submissions before us, Mr McIntosh indicated that, as the defaults in this case had occurred in a rising market, they were not attributable to market forces. This, of course, is not necessarily the case. Even in a rising market there can be particular types of investments or sectors that go against the trend. Further, in the case of mortgage investments, there will always be a percentage of defaults unrelated to general market trends[30] and the risk of such losses is built into any investment strategy.
[30] For example due to illness, redundancy or personal business failure.
[53] Our inclination would thus be to categorise the Exclusion clause as excluding what can be broadly described as losses arising from investment forces. The Exclusion clause therefore would not apply, for example, to issues relating to the negligent documentation of mortgages.[31] Any losses in such a situation would clearly be related to negligence and not investment forces. We recognise that other situations may not be so clear-cut. There may be an issue as to the construction of the words “contributed to” in the Exclusion clause.[32] It may be that these words should not be interpreted in a manner which would rob the cover under the Policy of meaning. Thus, there may be an issue as to whether every investment movement or failure of any investment to appreciate, however slight, should engage the exclusion, even where the occasion for the claim is clearly negligence.
Causation
Trustees Executors’ submissions
[31] See for example the claim described at [25].
[32]We note, however, that the issue of dual causes for a claim seems to have been conceded before Ronald Young J: see above at [6]. The status of that concession would need to be considered in any substantive proceedings.
[54] Trustees Executors submits that, as the word “claim” has been defined contractually, that is the only permissible meaning of the word in the Exclusion clause. There is, therefore, limited scope for introducing any notion of “loss” into the word “claim” or interpreting it to mean something analogous to “loss”. It is submitted that a “claim” is not the same as a “loss”.[33] In the context of a clause referring to “claims”, the words “arising from” and “contributed to by” are plainly words of causation, not words of quantum.
[33]Bell v Lothiansure Ltd 1993 SLT 421 (IH (2nd Div)) at 427-428 per Clerk (Ross) LJ (Lord Murray concurring).
[55] It is submitted that an analysis of Tower’s “demand for compensation” shows that it was not caused by depreciation in value of any investment. It was caused by the fact that Trustees Executors negligently made unacceptably risky loans in breach of the agreed guidelines. Any depreciation in value of any associated investment would therefore be a consequence of the breach and not the cause itself.
QBE’s submissions
[56] QBE submits the relevant “claim” in this case is Tower’s claim against Trustees Executors that, by breaching the investment guidelines and/or negligent lending, Trustees Executors caused Tower to incur liability to investors for the reduction in the value of the Fund. In QBE’s submission, the causal connection between the “depreciation in value” and/or the resulting loss and the “claim”, is self-evident and, in any event, it only has to be indirect, as shown by the use of “arising from or contributed by”.
[57] It is submitted that the claim against Trustees Executors originated in, sprang from or had its foundation in a drop in value in the Fund and the related reduction in the value of each unit. This drop in value was the primary underlying factor in Tower’s claim against Trustees Executors, as clearly there would have been no claim without it. QBE submits that it defies common sense to suggest that the fall in value has no causal relationship at all with the ensuing claim.
Our assessment
[58] We accept QBE’s submission that any claim is intrinsically linked to the loss to investors through the diminution in value of the Fund. The claim is, after all, a demand for compensation for loss. There may, however, still be an issue of causation in this case. The question might be whether the loss in value of the Fund was caused by negligence or by investment forces[34] or both. It may be that the relevant mortgages, because of the breaches of the investment guidelines, were from inception, of lesser value and thus any loss totally related to negligence. The comments we make at [53] are relevant if any loss is a combination of negligence and investment forces.
Unauthorised investments
Trustees Executors’ submissions
[34] Assuming the approach we take in the previous section is adopted.
[59] Trustees Executors submits that, in reliance on the approach taken in Done v Financial Wisdom Ltd[35] (applying Darlington Futures Ltd v Delco Australia Pty Ltd[36]), the Exclusion clause should not apply in respect of the loans in question because they were “unauthorised investments”.
[35] Done v Financial Wisdom Ltd [2008] FCA 1706 (FC NSW).
[36] Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500.
[60] In Done, the insurers argued that losses sustained as a result of unauthorised investment transactions were excluded by a clause which provided:
We are not liable to indemnify you in respect of any claim directly or indirectly based upon, attributable to, or in consequence of:
(a)depreciation (or failure to appreciate) in value of any investments, including but not limited to securities, commodities, currencies, options and futures transactions; or
(b)any actual or alleged representation, advice or guarantee provided by or on your behalf as to the performance of any such investments.
For the sake of clarity we agree that this exclusion does not apply to any claim arising directly or indirectly out of your failure to effect a specific investment transaction pursuant to a specific instruction from a client of yours.
[61] In Done, Perram J held that “investments” within the meaning of that clause should be construed to mean “authorised investments”.[37] He went on to state:[38]
Such a construction is consonant with the final words of the clause which show clearly that the clause was not intended to cover the situation where, contrary to instructions, the insured had failed to effect a particular investment. That demonstrates that the clause is concerned to make clear that the insurers are not underwriting the insured’s investment advice business. However, the clause says nothing, in my opinion, about situations where the liability of the insured is said to arise, not from the execution of instructions in relation to investments, but rather from the expenditure of client funds contrary to instructions. If it were otherwise, the exclusion would apply wherever client money was misappropriated so long as the final destination of money was in an “investment”.
[37]At [21]. Trustees Executors accepts that in the addendum issued to the judgment, Perram J made it clear that his comments in Done were made in a preliminary hearing only, and that he was not expressing a concluded view.
[38] At [21].
[62] Ronald Young J distinguished Done on the ground that the Exclusion clause in that case was “quite different than the current case”.[39] Trustees Executors submits that the clauses are in fact very similar. The key difference relied upon by the Judge was the presence of the final paragraph of the Done clause which states “for the sake of clarity” that claims arising out of a failure to effect an investment as instructed by the client are not excluded.
[39] At [75] of his judgment.
[63] Trustees Executors acknowledges that the Court in Done took some comfort from the final paragraph of the clause in reaching its decision. Specifically, Perram J commented that his reading of the clause as excluding only authorised investments was consonant with the final paragraph. Trustees Executors submits that this is not, however, to be equated with a finding that, without the final paragraph, the meaning of the remainder of the clause would be substantially altered so as to exclude unauthorised investments in circumstances where that would not otherwise have been the case.
[64] Trustees Executors points out that in New Zealand, the Done principle was considered persuasive in Hall v FP North Ltd,[40] It was stated:[41]
[Done] is authority for the principle that a clause in a professional indemnity policy which excludes indemnity for claims against an insured financial adviser in connection with depreciation and value of investments will not apply to acts which the adviser was not authorised to undertake.
[40] Hall v FP North Ltd HC New Plymouth CIV-2008-443-324, 21 May 2009.
[41] At [28].
QBE’s submissions
[65] QBE supports Ronald Young J’s conclusion that Done is clearly distinguishable. Further, it points out Done was an interlocutory decision and there was thus only a low threshold.
[66] Moreover, if Trustees Executors’ interpretation were correct, QBE submits that the Exclusion clause would be robbed of any utility, because:
(a)before the Exclusion can become relevant, the essential elements of the operative clause must be satisfied, including that Trustees Executors has allegedly or actually committed a breach of professional duty; and
(b)it is a contradiction in terms to hold Trustees Executors legally liable for the consequences of an “authorised” breach of professional duty.
Our assessment
[67] We consider that Ronald Young J was correct to distinguish the clause in Done from the Exclusion clause in this case. Even though the final part of the clause in Done was said to be “for the sake of clarity”, it would nevertheless be relevant to the interpretation of the clause. We also accept QBE’s submission that the decision in Done was not a definitive decision. While Done was considered persuasive in Hall, the clause at issue in Hall contained a similar proviso to that in Done and thus is also of limited assistance to this case.
[68] Further, we do not consider that the cases relied on in Done (Darlington Futures and Council of the City of Sydney v West[42]) are on point. In Darlington Futures, a broker dealing on the commodity futures market engaged in trading contrary to the client’s instructions and heavy losses were sustained. The agreement between the broker and client stated that the broker would not be responsible for any trading loss. The High Court of Australia held that, read in context, the words plainly referred to trading activity undertaken with authority. It was reasoned that it could scarcely be supposed that the parties intended to exclude liability for losses arising from trading activity which the broker had no authority engage in.[43]
[42] Council of the City of Sydney v West (1965) 114 CLR 581.
[43] At 511.
[69] In Council of the City of Sydney, an attendant in the appellant’s parking-building had allowed an unauthorised person with a forged parking ticket to drive away from a parking building. In the view of Barwick CJ and Taylor J, the exclusion clause in that case did not contemplate negligence in relation to an act done with respect to a bailor’s goods that was neither authorised nor permitted by the contract.[44] Accordingly, as possession of the car was retained by the appellant until presentation and surrender of a bona fide parking ticket, the attendant’s delivery of possession of the car, upon receipt of a forged ticket, was neither authorised nor permitted. Thus, the appellant could not rely upon the exclusion clause.[45]
[44]At 488. Windeyer J stated at 503–504 that he was of the opinion that the appeal should be disposed of in the way that Barwick CJ and Taylor J had proposed in their judgment, but he reached the conclusion by a somewhat different route. He held that the appellant, far from choosing words that would exonerate it from the consequences of misdelivery, had expressly introduced into the contract a term designed to ensure that there would not be a misdelivery and this term was breached.
[45] At 489–490.
[70] In both Darlington Futures and Council of the City of Sydney, the party purporting to rely on the exclusion clause had breached the contract and was effectively trying to rely on the exclusion clause to excuse its own breach. In this case it is not QBE which breached the investment guidelines with Tower. It is thus not trying to rely on the Exclusion clause to excuse its breach. This is not the end of the matter, however. We do not rule out the principle in Done or a variant of it applying in New Zealand. It may merely be another way of making the points we make above.[46]
[46] At [53] and [58].
[71] There may also be a question of relevant subsequent conduct here. Recourse can be had, in interpreting a contract, to subsequent conduct but only to the extent that it is objectively capable of shedding light on the meaning the parties themselves placed on the words in dispute at the time of entry into the contract.[47] Although we
do not have full details, it appears that QBE has already accepted a claim relating to an unauthorised investment.[48] The question will be, however, whether the subsequent conduct of accepting that claim throws light on the parties’ intention at the time the Policy was entered into or whether it was a subsequent “misinterpretation” of the contract by QBE.
Result and costs
[47]See Gibbons Holdings Ltd v Wholesale Distributors Ltd [2007] NZSC 37, [2008] 1 NZLR 277 at [7] per Elias CJ; at [62]–[63] per Tipping J; at [74] per Anderson J; and at [122] per Thomas J. Blanchard J at [27] reserved his position. There was disagreement in Gibbons Holdings as to whether mutuality of conduct was required for admissibility. While Tipping and Anderson JJ favoured such a limitation (see at [53] and [73]–[74]), Elias CJ and Thomas J did not (see at [7] and [135]). In Vector, Tipping J, however, stated that the key point of contract interpretation was that extrinsic evidence is admissible if it tends to establish a fact or circumstance capable of demonstrating objectively what meaning both or all parties intended their words to bear (see at [31]).
[48] See the claim discussed at [25] above.
[72] The appeal is dismissed.
[73] QBE submits that this should be categorised as a complex appeal on the basis that its complexity and/or significance required the presence of senior counsel. We accept that submission.
[74] While, at first blush, the appeal involved relatively straightforward arguments related to the interpretation of the Policy with limited factual overlay, it also involved more fundamental questions relating to the interpretation of contracts and in particular insurance contracts. Further, the clarity with which the arguments for each side can be stated masks the complexity involved in resolving the interpretation questions involved. The appeal was also one of significance as these type of clauses are common in the industry and have not previously fallen for consideration by this Court.
[75] The appellant is to pay the respondent costs for a complex appeal on a Band A basis plus usual disbursements. We certify for second counsel.
Solicitors:
Russell McVeagh, Wellington for Appellant
McElroys, Auckland for Respondent
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