Mason CJ (1), Deane(1), Dawson(1), Toohey(1) and McHugh(1)

On the hearing of this appeal from a judgment of the Full Court of the Supreme Court of South Australia (King CJ, with whom Prior and Mullighan JJ. concurred), there was no opposition, subject to one qualification, by the second respondent, Sun Alliance Insurance Limited ("Sun Alliance"), to the argument of the appellant, Alexander Stenhouse Limited ("Stenhouse"). That argument was supported by the other party to the appeal, the first respondent, Austcan Investments Pty. Limited ("Austcan"). The qualification is that Sun Alliance opposed the form of order proposed by Stenhouse. In due course we shall deal with that question. But, in the first instance, we must explain as briefly as may be why the challenge to the judgment of the Full Court must succeed.

2. Austcan was the owner of a property at Mile End in South Australia. Austcan instructed its insurance broker, Stenhouse, to effect an insurance of the property. In June 1984, Sun Alliance provided cover for the property by way of extension of an existing policy held in the name of another company, which was associated with Austcan, in respect of another property. Austcan's name was never noted on the policy. The then current term of the policy expired on 23 November 1984 and the policy was renewed on or about 28 February 1985 for the year 23 November 1984 to 23 November 1985. When that term expired, the cover remained in force for 90 days pursuant to industry practice or convention. During this 90 day period, a fire damaged the property extensively on 16 January 1986. Shortly afterwards, Austcan renewed the policy to 23 November 1986 with effect back to 23 November 1985.

3. The contract of insurance at all material times contained a term (Condition 2) avoiding the policy with respect to any item should there be any alteration in the trade or manufacture carried on at the property in such a way as to increase the risk of destruction or damage, unless the alteration was admitted by a memorandum signed on behalf of Sun Alliance. It was common ground that, in December 1984, one of the businesses conducted by a tenant on the premises changed to include the manufacture of water beds. A spray booth for spray painting, which involved a great increase in the quantity of inflammable materials stored on the premises, was installed. This alteration was not disclosed to Sun Alliance before the fire.

4. Sun Alliance refused to indemnify Austcan in respect of the damage. Austcan sued Sun Alliance, claiming indemnity, and also sued Stenhouse in negligence and contract, alleging a failure on the part of Stenhouse to arrange proper insurance of Austcan's interest in the property and to draw attention to the requirements of Condition 2 of the contract.

5. The trial judge (Cox J.) upheld Sun Alliance's contention that the contract of insurance did not insure any interest of Austcan and refused Austcan's claim for rectification of the contract to cover its interest in the property. He gave judgment for Sun Alliance in the action brought by Austcan against Sun Alliance. Austcan did not appeal against that judgment.

6. Cox J. went on to give judgment for Austcan in its action against Stenhouse. He found that it was in breach of its contractual duty to Austcan to procure a contract of insurance to which Austcan was a party. He also found that Stenhouse negligently failed to comply with Austcan's instruction to procure as good an insurance cover as Austcan formerly obtained from a previous insurer. In reaching this conclusion, Cox J. rejected an argument by Stenhouse that it could not be liable to Austcan because Austcan, by reason of its breach of Condition 2, could not have required Sun Alliance to indemnify it against its loss, even if it were a party to the contract of insurance. Cox J. rejected that argument on the ground that the agency contract between Austcan and Stenhouse contained an implied term that Stenhouse would exercise reasonable care and skill in placing and superintending Austcan's insurance and Stenhouse was in breach of that duty and its common law duty of care when it failed to draw Austcan's attention to its obligation to disclose under Condition 2 of the contract of insurance.

7. His Honour also considered the application of the Insurance Contracts Act 1984 (Cth) ("the Act") which came into operation on 1 January 1986. He concluded that the Act applied to the contract of insurance for the year 23 November 1985 to 23 November 1986. However, he thought that s.28(3) of the Act would not have entitled Sun Alliance to refuse indemnity, either for breach of condition or for breach of the duty to disclose the alteration in use imposed by s.21(1)(a), but would have simply reduced the damages recoverable by Austcan in its action against Sun Alliance.

8. The Full Court dismissed an appeal by Stenhouse but its reasons differed from those given by the trial judge. Although the Full Court concluded that Austcan was a party to the contract of insurance with Sun Alliance, the Court found that Sun Alliance was justified in refusing to pay the claim by reason of Austcan's failure to disclose the change in use of part of the premises. Their Honours took the view that s.54 of the Act applied to the contract of insurance and that s.54(2) avoided the contract because the change in use could reasonably be regarded as capable of causing or contributing to the fire. The conclusion that Austcan was a party to the contract of insurance undermined the trial judge's finding that Stenhouse was in breach of duty in failing to effect a contract of insurance to which Austcan was a party. But it left on foot his finding that Stenhouse was in breach of duty in failing to advise Austcan of its obligation under Condition 2, a finding which the Full Court confirmed.

9. Essential to the Full Court's reasoning was another conclusion, namely, that s.28 of the Act did not apply to non-disclosure of alterations in use in 1984 occurring before the last renewal on 23 January 1986 but after the initial contract of insurance was entered into in 1984. Section 28(2) restricts the right to avoid the contract for non-disclosure to cases of fraudulent non-disclosure. The conclusion that s.28 did not apply rested on the view that literal effect could not be given to the terms of s.11(9). It provides that a reference to "the entering into of a contract of insurance" includes a reference to:

"(a) the making of an agreement by the parties to a contract

of insurance to renew, extend or vary that contract".

The Full Court thought that the provision that renewal should be treated as entry into a contract must be disregarded because it was inconsistent with the intention and general scheme of the Act. It may well be that the Court's view of s.11(9) also led to the conclusion that s.54 did apply because the alteration of use occurred after the initial contract was entered into though it occurred before the last renewal on 23 January 1986.

10. Stenhouse's case in this Court is that the Full Court was wrong in disregarding the clear terms of s.11(9). The only specific reason mentioned by King CJ for the view that the literal terms of s.11(9) were inconsistent with the clear intention and scheme of the Act was that:

"(i)f the duty imposed by section 21 applied to renewals, then

section 22 would also apply."

Section 22 imposes a duty on the insurer, before entry into a contract of insurance, to inform the insured in writing of the general nature and effect of the duty of disclosure for which s.21 provides. King CJ thought it would be absurd if every year the insurer were required to inform the insured of this matter. His Honour's attention seems not to have been drawn to s.11(10)(a) which explicitly provides that, where the information required by s.22 is provided before entry into a contract or a renewal, the requirement to give information shall be deemed to be satisfied at or before any subsequent renewal. Consequently, the absurdity perceived by his Honour does not arise.

11. King CJ did suggest that the scheme of the Act, considered in itself and by reference to the report of the Australian Law Reform Commission ((1) Report No.20, Insurance Contracts, (1982).) upon which it was based, disclosed that s.28 was concerned with non-disclosure and misrepresentation before entry into the original contract. However, nowhere does it appear that the scheme of the Act is thus limited and s.11(9) speaks to the contrary in absolute and unqualified terms. Moreover, the report supports, if anything, a conclusion different from that reached by his Honour; the report states that the common law duty to disclose arose not only on entry into the original contract but also on each renewal ((2) par.153.) The report does not express any intention to depart from the common law in this respect. It is also significant that sub-ss.(9) and #10 of s.11 were introduced on 18 December 1986 retrospectively with effect from 1 January 1986. They were not provisions which the report contemplated or addressed.

12. Accordingly, s.11(9) must be applied according to its terms with the consequence that Sun Alliance was not entitled to avoid the contract and s.28(3) applies. Section 28(3) relevantly provides:

"If the insurer is not entitled to avoid the contract or, being

entitled to avoid the contract (whether under sub-section (2) or

otherwise) has not done so, the liability of the insurer in

respect of a claim is reduced to the amount that would place him

in a position in which he would have been if the failure had not

occurred".

Another consequence of the application of s.11(9) is that s.54 does not apply. Section 54(1) provides that:

"... where the effect of a contract of insurance would, but for

this section, be that the insurer may refuse to pay a claim,

either in whole or in part, by reason of some act ... being an

act that occurred after the contract was entered into but not

being an act in respect of which sub-section (2) applies, the

insurer may not refuse to pay the claim by reason only of that

act but his liability in respect of the claim is reduced by the

amount that fairly represents the extent to which the insurer's

interests were prejudiced as a result of that act".

13. Section 54 does not apply because the relevant contract was entered into with effect from 23 November 1985 and the relevant act - the omission to disclose the change in use - happened before not after entry into the relevant contract. Likewise, there was no breach of Condition 2 of that contract because that condition refers to "any alteration in use after the commencement of this insurance" (emphasis added), that is, 23 November 1985.

14. In the result, subject to the qualification to be discussed, Austcan would be entitled to judgment against Sun Alliance, Stenhouse's appeal must be allowed and Sun Alliance must pay the costs of the other parties in this Court and in the courts below.

15. It is at this point that a debate arose as to the form of order to be made. Mr Sackar Q.C. for Sun Alliance seeks that this Court should, by its order, remit the matter to the trial judge or, possibly, a master to determine the extent of Sun Alliance's liability under s.28(3). Mr Sackar suggests that evidence could be led to show that, had Sun Alliance known of the risk, it would have required certain fire precautions the effect of which would have been to eliminate the risk of fire or, alternatively, to have reduced the damage.

16. On the other hand, Mr Anderson QC for Austcan and Mr Heydon Q.C. for Stenhouse resist a remitter in these terms. They assert that the s.28(3) question is foreclosed. That view of the matter derives some support from the form of order as expressed in the reasons for judgment of the trial judge and from another part of his reasons. After pronouncing judgment for Austcan against Stenhouse, his Honour said:

"In accordance with the arrangement between the parties before the

trial began, the damages will be assessed, in default of

agreement, by a Master."

His Honour's order indicates that he did not contemplate that there was any outstanding issue which remained for him to determine. On the findings that he made, all that remained was damages and that was to go to a master. Some confirmation of that view of the position emerges from his Honour's discussion of s.28(3) in his reasons for judgment. He expressed himself as not being satisfied that:

"in the circumstances of this case Sun Alliance would have refused

absolutely to insure the Mile End property had it been informed

at the proper time of the nature and extent of the manufacturing

operations".

He expressed this conclusion in the course of reviewing evidence which had been directed to this issue and went on to say that Sun Alliance would have charged a higher premium and probably would have investigated the tenant's fire precautions with care but more likely than not would have continued to insure. His Honour also thought that the evidence suggested that the broker would have in any event been able to find another insurer.

17. When the matter came before the Full Court, the application of s.28(3) was the subject of some discussion. However, it is not entirely clear to us from the few pages of the transcript of argument in that Court which we have seen whether the Full Court took the view that the s.28(3) issue had been completely resolved by findings made by the trial judge on the evidence before him.

18. In these circumstances, as we are unable to resolve the question on the materials before us, we consider that the appropriate course is to remit the matter to the Full Court so that it can determine what course should be taken with respect to the s.28(3) issue, in particular, whether the parties should be at liberty to call further evidence on that issue and whether further findings are to be made. If it should transpire that Sun Alliance is at liberty to call evidence with a view to establishing that, by reason of s.28(3), its liability is reduced to nil, it would not be right for us to order at this stage that judgment be entered for Austcan against Sun Alliance. That is an order which the Full Court can make, if it be appropriate, having regard to its determination of the s.28(3) issue. It will also be necessary, in the light of the determination of that issue, to determine whether, and if so to what extent, Stenhouse is liable to Austcan in damages.

(i) Appeal allowed.

(ii) Set aside orders made by Cox J. on 31 October 1991 and by

the Full Court of the Supreme Court of South Australia on

27 May 1992.

(iii) The respondent Sun Alliance Insurance Limited to pay the

costs of the appellant and the respondent Austcan

Investments Pty. Limited in this Court and in the courts

below.

(iv) Remit to the Full Court of the Supreme Court of South

Australia the question of the entitlement, if any, of the

respondent Sun Alliance Insurance Limited to have its

liability reduced pursuant to s.28(3) of the [Insurance

](/cgi-bin/viewdoc/au/legis/cth/consol_act/ica1984220/)Contracts Act 1984 (Cth) by reason of conditions which it

might have imposed upon the respondent Austcan Investments

Pty. Limited had proper disclosure been made and the

question of any consequent liability of Alexander

Stenhouse Limited to Austcan Investments Pty. Limited.

Set aside the orders made by Cox J. on 31 October 1991 and by the Full Court of the Supreme Court of South Australia on 27 May 1992.

The respondent Sun Alliance Insurance Limited to pay the costs of the appellant and the respondent Austcan Investments Pty. Limited in this Court and in the courts below.

Remit to the Full Court of the Supreme Court of South Australia the question of the entitlement, if any, of the respondent Sun Alliance Insurance Limited to have its liability reduced pursuant to s. 28(3) of the Insurance Contracts Act 1954 (Cth) by reason of conditions which it might have imposed upon the respondent Austcan Investments Pty. Limited had proper disclosure been made and the question of any consequent liability of Alexander Stenhouse Limited to Austcan Investments Pty. Limited.