AG-Exports (Australia) P/ L & Anor v EFIC

AG-Exports (Australia) Ltd (First Plaintiff)

PARTIES : Brian John Lawn (Second Plaintiff)

Export Finance & Insurance Corporation (Defendant) JUDGMENT OF : Master Harrison

Mr A T McInnes QC (Plaintiffs) COUNSEL : Mr M A Jones (Defendant) John McEncroe & Co (Plaintiffs) SOLICITORS : Minter Ellison (Defendant) CATCHWORDS : Strike out paras of statement of claim - security for costs Supreme Court Rules LEGISLATION CITED : Corporations Law Supreme Court Act Limitation Act 1969 (NSW) Associated Securities Finance Ltd v Harrow Properties Pty Limited (NSWSC Lee J, 26 May 1977 unreported) Air Services Australia v Zarb (NSWCA unreported, 26 August 1998) Dey v Victorian Railway Commissioners (1948-49) 78 CLR 62 General Steel Industries Inc v Commissioner for Railways (1964) 112 CLR 125 Webster & Anor v Lampard (1993) 177 CLR 598 CASES CITED : Penrith City Council v GIO (1991) 24 NSWLR 564 Davey v Garrett (1878) 7 Ch D 473 Seymour v Seymour (1996) 40 NSWLR 358 Hamilton v Kaljo (1989) 17 NSWLR 381 Mann v Commonwealth of Australia [2000] NSWSC 353 H 1976 Nominess Pty Limited v Galli Ltd & Quarries Ltd (1979) 30 ALR 181 DECISION : (1) The defendant's notice of motion filed 2 April 2001 is dismissed; (2) The plaintiffs are to file and serve an amended statement of claim within 28 days; (3) The plaintiffs are to provide security for costs in the sum of $48,000 in accepted form. The proceedings are stayed until such time as the security is provided; (4) Each party is to pay its own costs.

THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION

20702/2000 - AG-EXPORTS (AUSTRALIA) PTY LTD & ANOR v EXPORT FINANCE AND INSURANCE CORPORATION JUDGMENT (Strike out paras of statement of claim; security for costs) 1 MASTER: By notice of motion filed 2 April 2001 the defendant seeks firstly an order pursuant to Part 15 rr 13 and 26 of the Supreme Court Rules (SCR) that paragraph 17 (from the words "and fraudulently" to the end of that paragraph), particulars (a) and (b) to paragraph 17, paragraph 20, particulars (a) and (b) to paragraph 23, to paragraph 24 (insofar as it refers to paragraph 17) and paragraph 25 of the amended statement of claim filed 12 March 2001 be struck out. Secondly, an order pursuant to Part 13 r 5 SCR that the proceedings be dismissed generally. The defendant relied on the affidavit of Pamela Anne Madafiglio sworn 2 April 2001. The first plaintiff is AG-Exports (Australia) Pty Limited and the second plaintiff is Brian John Lawn. The defendant is Export Finance and Insurance Corporation (EFIC).

2 The statement of claim alleges that in 1991 the first plaintiff was the exporter of goods to overseas countries mainly in Asia. The second plaintiff was the managing director and principal shareholder in the first plaintiff. The defendant was a credit insurer of goods exported by Australian companies. 3 In 1991 the first plaintiff had a comprehensive shipments policy (the policy) being No 210171/01/83 which insured the first plaintiff against the risk of overseas customers being unable to pay for goods supplied by the first plaintiff. The policy was assigned to the Hong Kong Bank of Australia Limited (HKB) which advanced to the first plaintiff 95% of the value of goods exported as each shipment was made. The second plaintiff guaranteed the first plaintiff's indebtedness to the HKB. It was a terms and condition of the policy that the first plaintiff would notify the defendant by posting or delivering by hand a declaration within seven days of the dispatch of a shipment of goods overseas. Clause 10 of the contract contains a provision requiring the plaintiff to notify the defendant of the gross value of goods within seven days of the date of export. 4 In May and June 1991 the first plaintiff was in arrears with the payment of some premiums due under the policy and the defendant, as it was entitled to do, provided that it first gave notice to the first plaintiff, suspended the policy on about 14 June 1991. The defendant in breach of the policy did not notify the first defendant that it intended to suspend the policy. Had the defendant notified the plaintiffs that it intended to suspend the policy the first plaintiff would have paid all premiums due. Apparently the policy remained suspended until on or about 23 September 1991. 5 Between 14 June 1991 and 23 September 1991 the first plaintiff alleges it made numerous declarations to the defendant of the dispatch of goods overseas, within seven days of their dispatch, it being unaware that the policy had been suspended. Included in the declarations were a number of shipments to Yoshikawa Chemicals Singapore (Pte) Limited (Yoshikawa) in Singapore. Yoshikawa defaulted in payment in the sum of $565,535. 6 On 27 November 1991 the first plaintiff notified the defendant that Yoshikawa may default in payments on amounts due to it and on 28 January 1992 the first plaintiff made a claim on the defendant in the sum of $565,535, lost to it as a result of the default by Yoshikawa. The defendant paid to the first plaintiff the sum of $41,431.35. The balance of the amount of Yoshikawa's default is claimed. Further damages alleged are that as a result of these actions the first plaintiff was unable to pay its loans and a receiver was appointed. The second plaintiff was called upon as guarantee and was unable to pay and was declared bankrupt.

Allegations of fraudulent concealment 7 In paragraph 17 of the amended statement of claim the plaintiff alleges that the defendant allegedly refused to pay the balance of the claim and fraudulently represented to the plaintiffs that it did not receive all the declarations for shipments dispatched to Yoshikawa and concealed from them the fact that the said declarations were in fact received. 8 The plaintiffs allege firstly that the defendant fraudulently claimed that it had not received the declarations when in fact the officers of the defendant knew that the declarations had been received; secondly, that the defendant concealed from the plaintiff that the declarations had been received; thirdly, the fact that the defendant had suspended the policy, but in breach of the terms of the policy, had not notified the plaintiff; and fourthly, that the responsible officers of the defendant had been influenced in their dealing with the first plaintiff's claim, on a false rumour circulating within the defendant's office, that the plaintiffs were habitual selective insurers of shipments. This last allegation is speculative to say the least. The plaintiffs alleged that the directors of the first plaintiff and second plaintiff did not become aware of the true reason of the failure to pay the amount claimed from the defendant until the year 2000. Hence the plaintiff submitted that time does not run until 2000. 9 The defendants have sought that the proceedings be dismissed pursuant to Part 13. The proceedings for fraudulent concealment cannot be summarily dismissed under this Part due to s 88 of the Supreme Court Act 1970 (SCA). 10 Section 88 SCA states: "Proceedings on a common law claim in which there are issues of fact - (a) on a charge of fraud against a party; or (b) on a claim in respect of defamation, malicious prosecution, false imprisonment, seduction or breach of promise of marriage, shall be tried with a jury. 11 In Associated Securities Finance Ltd v Harrow Properties Pty Limited (NSWSC Lee J, 26 May 1977, unreported) stated: "Applying the same reasoning to s 88 it follows that when Pt 13 r 1 excludes from the procedure for summary judgment "proceedings within the application of s 88 of the Act" this excludes not only the case when a cause of action in fraud is being asserted but also the case when an issue of fraud arises under a defence of fraud pleaded by a defendant. The English rule dealing with summary judgment, O 14 r 1(2)(b) only excludes from the remedy of summary judgment "an action which includes a claim by the plaintiff based on an allegation of fraud", but r 1 of Pt 13 cannot, in the way it is expressed, be given a similar restrictive meaning. It follows, therefore, that whilstever the statements of defence allege a defence of fraud it is not open to the plaintiff to move for summary judgment, and the plaintiff must look elsewhere in the Rules for a remedy if he claims that the defences filed by the defendant should not be allowed to stand. His remedy then, is to be found in Pt 15 r 26 which entitles the court to strike out pleadings in whole or in part." 12 Under s 88 SCA and the authority of Harrow, summary judgment under Part 13 is not permitted. This part of the defendants' claim fails. 13 However the proceedings can be struck out pursuant to Part 15 r 26. Part 15 r 26 says: "(1) Where a pleading - (a) discloses no reasonable cause of action or defence or other case appropriate to the nature of the pleading;

(b) has a tendency to cause prejudice, embarrassment or delay in the proceedings, or

(c) is otherwise an abuse of the process of the Court, the Court may at any stage of the proceedings, on terms, order that the whole or any part of the pleadings be struck out. (2) The Court may receive evidence on the hearing of an application for an order under subrule (1)." 14 In a Court of Appeal decision Air Services Australia v Zarb (NSWCA unreported, 26 August 1998) Rolfe AJA found it useful to remind himself of the highly demanding test imposed on a party seeking summary judgment. His Honour referred to Dey v Victorian Railway Commissioners (1948-49) 78 CLR 62; General Steel Industries Inc v Commissioner for Railways (1964) 112 CLR 125 and Webster & Anor v Lampard (1993) 177 CLR 598. I have reproduced the passages quoted in Zarb. 15 In General Steel Barwick CJ, who heard the application alone stated:

"Although I can agree with Latham CJ in the same case when he said that the defendant should be saved from the vexation of the continuance of useless and futile proceedings, in my opinion great care must be exercised to ensure that under the guise of achieving expeditious finality a plaintiff is not improperly deprived of his opportunity for the trial of his case by the appointed tribunal. On the other hand I do not think that the exercise of the jurisdiction should be reserved for those cases where argument is unnecessary to evoke the futility of the plaintiff's claim. Argument, perhaps even of an extensive kind, may be necessary to demonstrate that the case of the plaintiff is so clearly untenable that it cannot possibly succeed." 16 Barwick CJ also said:

"It is sufficient for me to say that these cases uniformly adhere to the view that the plaintiff ought not to be denied access to the customary tribunal which deals with actions of the kind he brings, unless his lack of cause of action - if that be the ground on which the Court is invited, as in this case, to exercise its powers of summary dismissal - is clearly demonstrated. The test to be applied has been variously expressed; 'so obviously untenable that it cannot possibly succeed'; 'manifestly groundless'; 'so manifestly faulty that it does not admit of argument'; 'discloses a case which the Court is satisfied cannot succeed'; 'under no possibility can there be a good cause of action'; be manifest that to allow them' (the pleadings) 'to stand would involve useless expense." 17 In Webster Mason CJ, Deane and Dawson JJ reinforced the rigorous test stating at 602:

"The power to order summary judgment must be exercised with 'exceptional caution' and 'should never be exercised unless it is clear that there is no real question to be tried." 18 According to Rolfe AJA in Zarb: "The demanding nature of the test is in no way lessened in circumstances where there are the potential for difficult factual and legal issues to arise. Rather, as the decision in Webster made clear, it is heightened: see also Wickstead & Ors v Browne (1992) 30 NSWLR 1 and Esanda Finance Corporation Limited v Peat Marwick Hungerfords (1997) 188 CLR 241." 19 The issue essentially comes down to how the cause of action is framed and whether the claim is solely for breach of contract or a claim for fraudulent concealment. The defendant submitted that the plaintiffs knew that they had a cause of action for breach of contract in 1992 and it is now statute barred. The defendant submitted that the cause of action was complete when the defendant received the letter dated 28 February 1992, because that is the date that the cause of action accrued when the insurer refused to pay - see Penrith City Council v GIO (1991) 24 NSWLR 564 at 571F. If the action was merely for breach of contract the above proposition is correct. 20 On 28 February 1999, the solicitor for the defendant advised the solicitor for the plaintiff that:

"Our client was aware of many of the matters raised in your facsimile. Our client is of the view (with which we concur) that, notwithstanding your client's assertion it followed a particular procedure in making declaration to our client of 17 shipments of goods to Yoshikawa Chemical Singapore (Pte) Ltd, no particulars of the 17 shipments in dispute have been, or could be deemed to be, received by EFIC. In those circumstances our client maintains its position by EFIC. In those circumstances our client maintains its position that the shipments were uninsured." 21 Further, the defendant submitted that whether or not there was an additional or other reason for declining to indemnify the plaintiff under the policy is irrelevant. 22 However, the plaintiff submitted that had the defendant not received the declarations they did not have a cause of action notwithstanding their solicitor's letter to John Kerrin MP dated 5 March 1992 where it was stated: "We do not wish to labour the legal points in the matter as our client could of course take action in the Courts however, the time delay necessarily related to litigation would be such that the bank would withdraw its facility prior to the determination of the matter by the Court." 23 If the proposition that the plaintiffs knew they had a cause of action in contract in 1992 is correct, then the action is statute barred. The proceedings were commenced on 21 December 2000. The limitation period is six years with no extension for breach of contract. The statement of claim should have been filed on 28 February 1998. It was filed over two years out of time. 24 It has always been the plaintiffs' case that they did forward the export declarations to the defendants. It is clear from the correspondence that they were in 1992 and have been until 2000 always under the impression that these declarations were never received. The basis for the claim for fraudulent concealment is contained in an answer to particulars in relation to paragraph 17. The answer reads: "We are further instructed that the real reason for the Defendant rejecting the claim for the 17 shipments was the belief, by some officers employed by the Defendant, that the Second Plaintiff had deliberately not sent Declarations of Export to the Defendant. It has been said to the effect by officers of the Defendant during the year 2000, 'You are wasting your time investigating this matter as we (EFIC) have a witness (Mr Dean Andrew Curotta) who saw him (Second Plaintiff) selecting out his shipments. That is why his Claim was rejected and why EFIC did not call for a Statutory Declaration or audit his records at the time.' In 1992 the true reason for the rejection was not explained to the Plaintiffs." 25 The plaintiffs submitted that it was only when they had been aware that the declarations had actually been received they had a cause of action. The statement of claim referred to the defendant having suspended the policy but in breach of clause 16 it had not notified the plaintiffs of its actions. Section 55 of the Limitation Act 1969 (NSW) reads: "(1) Subject to subsection (3) where: (b) a cause of action or the identity of a person against whom a cause of action lies is fraudulently concealed,

the time which elapses after a limitation period fixed by or under this Act for the cause of action commences to run and before the date on which a person having (either solely or with other persons) the cause of action first discovers, or may with reasonable diligence discover, the fraud deceit or concealment, as the case may be, does not count in the reckoning of the limitation period for an action on the cause of action by him or by a person claiming through him against a person answerable for the fraud deceit or concealment." 26 If the plaintiffs' proposition is accepted then time would stop running in 1992 and start running in 2000. This means that the statement of claim would not have been filed out of time. Whether or not the defendant received the plaintiffs' declarations as required by the policy is a factual dispute. Factual disputes are matters to be determined at the trial. It is my view that the plaintiffs have an arguable cause of action for fraudulent concealment which should be permitted to go to trial. The proceedings should not be struck out. 27 Alternatively, the defendant submitted that the claim for fraudulent concealment was not properly pleaded. The defendant submitted that to satisfy the section the plaintiffs need to prove that the defendant was guilty of the requisite degree of dishonesty or moral turpitude. The defendant also submitted that the information sought from the plaintiffs is not consistent with that required to make out a case of fraudulent representation - see Davy v Garrett (1878) 7 Ch D 473 at 489 where Thesinger LJ said:

"It may not be necessary in all cases to use the word 'fraud' - indeed in one of the most ordinary cases it is not necessary. An allegation that the defendant made to the plaintiff representations on which he intended the plaintiff to act, which representations were untrue, and known to the defendant to be untrue, is sufficient. The word 'fraud' is not used, but two expressions are used pointing at the state of mind of the defendant - that he intended the representations to be acted upon, and that he knew them to be untrue. It appears to me that a plaintiff is bound to show distinctly that he means to allege fraud. In the present case facts are alleged from which fraud might be inferred, but they are consistent with innocence. They were innocent acts themselves, and it is not to be presumed that they were done with a fraudulent intention." 28 The defendant further submitted that the plaintiffs have neither pleaded nor particularised a case upon which the allegation could be supported. The request for the plaintiffs to plead (PAM3) and response (by way of particulars) (PAM6) relevantly provide: "Q. The identity of the officer of the defendant who allegedly made the representation. A. The person to make (sic) the representation was Catherine Burrows. Another person believed to be Karen Godfrey was the next person and since then it has consistently been your clients claim that the declarations were not received. It is entirely within the Defendant's knowledge as to whether Catherine Burrows or Karen Godfrey were aware of the falsity of the representations or whether they were told by someone else to convey the false information to the Plaintiff's representative. Q. Whether the officer represented the relevant mind of the defendant, and providing particulars of every fact or circumstance on which the plaintiffs rely in alleging that he or she was the mind of the defendant. A. The Defendant does not have a mind (it is a corporation: please refer to the Export Finance and Insurance Corporation Act 1991 (as amended)). If the intention of your question is if C Burrows and K Godfrey knew that what they said was false, please refer to (a) above. Q. Whether the officer was guilty of dishonesty when making the representation, and particulars of every fact or circumstance on which the plaintiffs rely in alleging that he or she was guilty of dishonestly. A. For the reasons expressed above it is entirely within the Defendant's knowledge whether the messengers knew that what they were saying was false." 29 The defendant submitted that there is a complete absence of any facts contained within the plaintiffs' particulars that could establish fraud. 30 In Seymour v Seymour (1996) 40 NSWLR 358 Mahoney ACJ discussed the requirements of s 55. His Honour at 372 said: "In my opinion, the section is not confined to simple common law fraud. It extends to conduct beyond that. On the other hand, it is not, I think, sufficient merely that for the defendant to take advantage of the statute of limitations would be unconscionable or inequitable in the wide sense of these terms."

and further: "In my opinion, there must be in what is involved a consciousness that what is being done is wrong or that to take advantage of the relevant situation involves wrongdoing. At least, this is so in the generality of cases. (There is in this as in many things, the problem of dealing with the person who "closes his eyes to wrong" or is so lacking in conscience that he is not conscious of his own lack of proper standards.)" 31 In Hamilton v Kaljo (1989) 17 NSWLR 381 at 386 McLelland J said: "For my own part, I would regard it as a misuse of language, and unsound, to apply the statutory expression "fraudulently" in s 55 to any conduct which did not involve some form of dishonesty or moral turpitude. I see no reason to think that the expression does not carry the same limited connotation as the expression "fraud" where used in the Real Property Act 1900, s 42 and s 43, and equivalent legislation, as to which see, eg, Assets Co Ltd v Mere Roihi [1905] AC 176 at 210 and Bahr v Nicolay [No 2] (1988) 164 CLR 604 at 613-615 per Mason CJ and Dawson J."

Also see Mann v Commonwealth of Australia [2000] NSWSC 353 paras 72-78. 32 The onus is on the plaintiff in the statement of claim to set out the facts upon which the defendants can become aware of the precise allegations made against them and hence what it is that they have to meet. If a fact is material, it must be pleaded and not merely referred to in particulars - see H 1976 Nominees Pty Limited v Galli Ltd & Quarries Ltd (1979) 30 ALR 181 at 186-187. Additionally, the defendant submitted that it is necessary for the plaintiffs to comply with the requirements of the Supreme Court Rules if such serious allegations are to be made. In particular an allegation of the type alleged needs to be properly pleaded and particularised - see Part 15 r 13 and Part 16 r 2; and that a party to proceedings must not in a pleading or at a trial or hearing make, or put in issue, an allegation of fact unless it is reasonable to do so - see Part 15A r 1. The onus is on the party pleading such a serious allegation. It is difficult for the court to make a determination of this without knowing all the facts. The names of two officers who are alleged to have made the representation that the declarations were not received have been given. It may be that once the interrogatories are administered the answers will either tend to establish or fail to establish the element of dishonesty or moral turpitude. It seems to me that if it is pleaded that the policy had been suspended but another reason has been given for the refusal to pay, this does not appear to be consistent with innocent conduct. Although the real reason for non-payment is alleged, ie, that the defendant had suspended the policy has been pleaded, no factual basis for that allegation has been given. The fact or facts giving rise to this belief are material and should be pleaded. 33 The plaintiff has agreed to provide security for costs in the sum of $48,000 by way of bank guarantee. Although the defendant successfully obtained an order for security for costs, the same result may have come about by means of negotiation and without the need for a motion. Costs are discretionary. However the plaintiff should replead the statement of claim. In these circumstances it is my view that the appropriate order is that each party is to pay their own costs. 34 The orders I make are:

(1) The defendant's notice of motion filed 2 April 2001 is dismissed.

(2) The plaintiff is to file and serve an amended statement of claim within 28 days.

(3) The plaintiffs are to provide security for costs in the sum of $48,000 in accepted form. The proceedings are stayed until such time as the security is provided.

(4) Each party is to pay its own costs. **********

Last Modified: 06/04/2001 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.