Is the Commercial List Response a "Claim"?
47 The Insurers maintained that the Commercial List Response fell within both sub-clauses (a) and (b) of the definition of "Claim" although, as to sub-clause (a), they acknowledged that the Commercial List Response did not claim "compensation or damages". On that basis, the Commercial List Response does not fall within sub-clause (a).
48 As to sub-clause (b), the issue is whether the Commercial List Response is "a suit, civil … proceedings [or a] counter-claim…brought against [LM]".
49 The Insurers did not suggest that the Commercial List Response was a suit or civil proceeding per se. Rather, the Insurers argued that the Commercial List Response is a "counter-claim" because it was "designed to counter the demands of LM" against Mr Wong. It was not suggested that the Commercial List Response was a "suit" or "civil proceedings" on any separate basis.
50 The applicants relied on the decision of Myers v Simcoe & Erie General Insurance Co (1994) 18 OR (3d) 475 ("Myers"), affirmed on appeal: Myers v Simcoe & Erie General Insurance Co (1994) 115 DLR (4th) 607.
51 In Myers, it was held that a claim for set off was a "civil suit" within the relevant insurance policy. That case involved a claim by architects for professional fees. The clients claimed, by way of set off, damages resulting from the architects' negligence. In its reasons for dismissing an application for leave to appeal, the Ontario Court of Appeal noted that the damages claimed by way of set off, when assessed, would represent damages which the architects "would be required to pay or assume in the form of diminution of their claim for fees and disbursements".
52 Myers does not support a conclusion that the Commercial List Response is a suit, civil proceedings or a counter-claim within the meaning of the definition of "Claim" in the policy. In Myers, the issue was the insured's entitlement to coverage under a provision by which the insurer agreed to defend the insured "in any civil suit…arising out of a claim for which coverage" was provided by the policy. Thus, the issue concerned the construction of a different form of insuring clause.
53 Further, in Myers the matters pleaded by way of set off could have been (and had been) pleaded by way of a separate counter-claim for damages. In contrast, in the Commercial List Response, Mr Wong asserted a right to raise certain defences to an action on a guarantee. He did not claim any relief against LM Investment Management in the Commercial List Response.
54 In argument, Senior Counsel for the Insurers put that, in order to obtain the relief sought in paragraph 105 of the Commercial List Response, Mr Wong had to assert a civil liability on behalf of LM to account to Bellpac. No authority was cited in support of that proposition. To the contrary, in GE Capital Australia v Davis (2002) 180 FLR 250 at 275 to 279 ("GE Capital"), Bryson J identified the following entitlements of a guarantor in a claim brought by a creditor, where the primary debtor is not a party to proceedings:
a) An equitable set-off relying on an entitlement of the principal debtor to set-off a credit on the taking of accounts between the creditor and debtor (at [83]);
b) An equitable defence related to the guarantor's right to be subrogated to the rights of the principal creditor against the security if the guarantor pays out all of the secured debt (at [85]);
c) An entitlement to a pro tanto reduction in liability for the conduct of a secured creditor which sacrifices the security or diminishes the value which the security would have yielded (at [87]). In support of this right, Bryson J cited, among other authorities Williams v Frayne (1937) 58 CLR 710 at 738 per Dixon J and Buckeridge v Mercantile Creditors Ltd (1981) 147 CLR 654 at 675 per Brennan J.
55 In Ultimate Property Group Pty Ltd v Lord (2004) 60 NSWLR 646 at 658 ("Ultimate Property Group"), Young CJ in Equity noted that under the general law the mortgagee owes "a fiduciary duty of some kind at least to the guarantor, of the mortgage debt: see Fisher & Lightwood [20.18] at 459."
56 In any event, the Commercial List Response does not allege "a civil liability on behalf of LM to account to Bellpac". More importantly, Bellpac did not assert any liability or claim any relief by way of the Commercial List Response. Thus, the Commercial List Response does not satisfy the criterion identified by the Insurers for its classification as a "Claim".
57 By alleging in paragraph 102 of the Commercial List Response that LM breached its duty to Bellpac, Mr Wong identified equitable grounds for the relief claimed by him. It is not entirely clear how paragraph 65 of the Commercial List Response operates in that context, since it asserts an entitlement of Bellpac to the taking of accounts if Bellpac made a claim against PTAL, not a claim against LM. Nevertheless, what is important is that the Commercial List Response seeks to establish a basis for the reduction or discharge of Mr Wong's liability to LM, namely that it would be "unjust to allow the creditor to claim more against the guarantor than it could have claimed when accounts were taken between mortgagor and mortgagee": Ultimate Property Group at [77].
58 To the extent that the Commercial List Response pleads an equitable set-off, it is relevant to consider the true nature of that claim. In AWA v Exicom (1990) 19 NSWLR 705 at 710-711, Giles J noted that the so-called equitable set-off could be better described as an equitable defence. In Lord v Direct Acceptance Corporation Ltd (1993) 32 NSWLR 362 at 367, Sheller JA (Kirby P and Meagher JA agreeing) noted the requirement that the debtor establish an equity which "impeached" the creditor's title to demand payment.
59 This interpretation is congruent with the nature of the policy, which is to indemnify the insured against liability to third parties and not for losses sustained by the insured. The inclusion of "counter-claim" in the definition of "Claim" is directed to the possibility that the insured may suffer a liability to a third party by reason of a counter-claim. The language of the definition of "Claim" does not require the artificial construction suggested by the Insurers.
60 Even if the Commercial List Response could properly be described as a "counter-claim" to the extent that it asserts a liability on behalf of LM to account to Bellpac, it is also necessary to consider the requirement that a relevant suit, civil proceedings or counter-claim be "brought against" the insured to fall within the meaning of "Claim" in the policy.
61 The primary judge concluded that the Commercial List Response was not "brought against" LM Investment Management within the definition of "Claim" in the policy because "a defence, such as the Commercial List Response which asserts a set-off, does not seem to me to be one which is brought against the insured in the ordinary sense in which those words are used to qualify the nature of the proceeding that constitutes a Claim".
62 I agree with the primary judge that, used in their ordinary sense, the words "brought against" refer to an action that is positive rather than defensive in nature. The words entail proceedings involving a claim for relief or for the enforcement of a right: cf Deutsche National Bank v Paul [1898] 1 Ch 283 at 289.
63 Accordingly, I agree with the primary judge that the Commercial List Response is not "brought against" LM. On that basis, the Commercial List Response is not a "Claim" within the meaning of the policy.