Angas Securities Ltd v Small Business Consortium Lloyds Consortium No. 9056

Court of Appeal (NSW)|2016-06-15|Before: McColl JA, Leeming JA, Ball J

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.] HEADNOTE [This headnote is not to be read as part of the judgment] A lender advanced funds on the security of mortgages. The lender was the insured under a Mortgage Impairment Policy (Policy) issued by the underwriter. The lender suffered losses when a mortgagor defaulted and the sale of the mortgaged property yielded insufficient funds to discharge the mortgagor's debt. The underwriter paid $597,627 to the lender in satisfaction of its claim under the Policy pursuant to a Deed of Release. The lender, with the financial support of the underwriter, sued the valuer who had valued the mortgaged property. The lender recovered $649,198.07, which sum included compensation both for losses indemnified under the Policy and losses not covered by the Policy. Clause 4(e) of the Deed of Release provided as follows: "[The lender] agree[s] that repayment of the indemnity sum to [the underwriter] takes priority from any funds received from any claim against a Third Party for recovery of damages arising out of the default by the borrower (save for payment of recovery costs)." The primary Judge (Ball J) held that cl 4(e) applied to all funds recovered by the lender from the valuer. Thus, the underwriter was entitled to recoup from the lender all amounts paid by it in satisfaction of the lender's claim in priority to any entitlement of the lender to retain the funds recovered from the valuer. Held, per Sackville AJA (McColl and Leeming JJA agreeing), dismissing the appeal: (1) The rights and liabilities of parties under a contract are determined objectively by reference to its text, context and purpose. While evidence of the parties' subjective intentions and expectations remain inadmissible, evidence of prior negotiations is admissible to the extent, and only to the extent, that it establishes the objective facts known to both parties. Victoria v Tatts Group Ltd [2016] HCA 5; 90 ALJR 392 at [51] citing with approval Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; 89 ALJR 990 at [46]-[51] applied: at [94], [99]-[101]; see too at [19] (per Leeming JA). Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; 149 CLR 337 at 352 applied: at [95]. Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; 219 CLR 165 at [40] and Byrnes v Kendle [2011] HCA 26; 243 CLR 253 at [98] applied: at [17]-[18] (per Leeming JA). (2) The purpose of the Deed of Release, as discerned from the terms of the Deed itself, was to provide full and final settlement of the lender's claim to indemnity from the underwriter: at [14] (per Leeming JA); [99]. (3) The ordinary meaning of cl 4(e) is that the underwriter was entitled as against the lender to be repaid the indemnity sum out of the amount received by the lender from its claim against the valuer in priority to any entitlement of the lender to share that amount (except for recovery costs). Nothing in the Deed of Release construed as a whole expressly or impliedly suggests otherwise: at [103]. (4) While the Policy formed part of the context by which cl 4(e) fell to be construed, this did not mean the parties' pre-existing rights and obligations under the Policy were left unaltered: at [101]. (5) A letter written by the underwriter to the lender before execution of the Deed of Release constituted an objective circumstance by which to construe cl 4(e). The costs sharing arrangement expressly referred to in the letter, whether or not legally binding, demonstrated that cl 4(e) was not intended to merely re-state the underwriter's pre-existing rights of subrogation under the Policy: at [16]-[21] (per Leeming JA); [108]-[110], [112]. (6) The defence of contributory negligence filed by the valuer constituted an objective fact known to both parties when the Deed of Release was executed. A reasonable observer would have concluded that there existed a significant risk that the lender could not satisfy the condition precedent to its claim under the Policy, namely, that it had acted as a prudent lender. This supported the view that the Deed of Release was intended to supersede the terms of the Policy: at [14] (per Leeming JA); [107]. Held, per Leeming JA: (7) Clause 4(e), read literally, did not confer a right of repayment of the indemnity sum upon the underwriter. Rather, it presupposed a right of repayment as well as some competing right, and it gave priority to the underwriter's right over the competing right: at [9]. (8) The commercial inconvenience that would arise in the task of calculating the recovery costs payable to the lender on its construction of cl 4(e) added force to the primary Judge's alternative construction of cl 4(e): at [25]-[30].

Judgment

McCOLL JA: I agree with Sackville AJA's reasons and the orders his Honour proposes.
LEEMING JA: I agree with Sackville AJA that the appeal should be dismissed and that Angas should pay SBC's costs of the appeal. Subject to what follows - which is principally by way of elaboration rather than qualification - I agree with his Honour's reasons.
As Sackville AJA has explained, the question of construction that arises in this appeal is whether Angas must repay its insurer SBC the entirety of the amount paid to it, it having obtained a judgment in its favour of more than that amount against a third party, Valcorp Australia Pty Ltd. The judgment obtained by Angas included damages in respect of only 50 per cent of the losses which were indemnified under the Policy, but it also included damages in respect of losses not indemnified under the Policy. Angas has partly repaid SBC, to the extent that it received damages in respect of indemnified losses, but disputes that it is required to repay SBC from damages in respect of losses which were not indemnified.
Sackville AJA has reproduced the salient portions of the Policy, the 2010 Letter and the Deed of Release. The essential position is that the Policy contained relatively standard provisions for contractual subrogation which did not support an entitlement on the part of SBC to recover the amount in issue. After proceedings had been commenced by Angas and two related parties against Valcorp, SBC made, by the 2010 Letter, a written offer concerning the indemnity to be paid, funding of the existing litigation, and the distribution of proceeds. That offer was accepted by Angas. The 2010 Letter proceeded on the basis that the agreed indemnity would be paid upon execution of a Deed of Release. A Deed of Release was entered into a few days later, which contained a promise by SBC in cl 2 to pay Angas $597,627, an amount defined as the "Indemnity Sum". The Deed did not deal with funding of the proceedings against Valcorp at all, but did make reference, in cl 4(e), to SBC's rights as to the repayment of the amount indemnified. Clause 4(e) was the final of five subclauses under the heading "Release & Terms" each of which was stated to be "[s]ubject to and conditional upon the payment of the Indemnity Sum".
It is clear that if SBC has a right to recover the whole of the Indemnity Sum then that right is based on documents executed by Angas and SBC after the event, rather than from the Policy or SBC's rights at common law and in equity.
The starting point is the text of cl 4(e) of the Deed of Release, which was in the following terms: "[Angas] agree[s] that repayment of the indemnity sum to SBC takes priority from any funds received from any claim against a Third Party for recovery of damages arising out of the default by the borrower (save for payment of recovery costs)."
It was not in dispute that the money received pursuant to the judgment obtained by Angas against Valcorp answered the description of "any funds received from any claim against a Third Party for recovery of damages arising out of the default by the borrower". Nor was there any dispute concerning the deduction of recovery costs or their quantum.
There is no doubt that cl 4(e) is less than perfectly expressed. A minor defect, about which no point was taken, is the failure to capitalise the defined term "Indemnity Sum" (in contrast with the position in cll 2, 3 and 4(d)). I agree that the uncapitalised words in cl 4(e) must be taken to refer to the amount promised and defined in cl 2, for what else could be the subject of any "repayment" by Angas to SBC?
A less easily resolved defect is central to this appeal. If cl 4(e) be read literally, then the clause does not in terms confer a right of repayment of the Indemnity Sum upon SBC. Instead, it presupposes a right of repayment as well as some competing right in respect of the same amount, and it gives priority to SBC's right over the competing right.
Central to Angas' submissions on the appeal was that the clause should not be construed so as to confer such a right of repayment of the Indemnity Sum upon SBC. Angas submitted that as cl 4(e) was premised upon the existence of an obligation to repay the full amount of $597,627, and only dealt with priorities in relation to that pre-existing right, the clause could not itself be the source of the right to repayment. Angas also submitted that to the extent that the clause should be construed as giving rise to a right of repayment, that right was to be confined to sums received by way of recovery of the amount indemnified. As it was put orally: "In my submission, it is contractually enshrining the proposition that the insurer has the right over the funds themselves, but in my submission it is not expanding the scope of the entitlement or creating a repayment obligation over funds that the insurer didn't formally have an entitlement to but rather indicating that insofar as there is a stock of money, a fund that is recovered from a third party, that there is a priority in the sense of that competition between rights that is in favour of the insurer ..."
There was no dispute that to the extent that Angas recovered funds corresponding to losses against which it had already been indemnified, it was required to repay SBC. That right had been expressly conferred by the Policy, and existed both at common law (in the nature of an action for money had and received) and in equity (which has long imposed an obligation to account: see British Traders' Insurance Co Ltd v Monson (1964) 111 CLR 86 at 94). The difficulty therefore is that the construction favoured by Angas gives no work for cl 4(e) to do.
This is a case where there are powerful considerations for construing cl 4(e) so that it is not mere surplusage. For one thing, cl 4(e) is a condition to which the promise to pay the Indemnity Sum is subject. For another, cl 4(e) is one of very few bespoke provisions in a very short document - of the fifteen clauses in the deed, cll 1 and 5-15 are boilerplate, while cll 2 and 3 are the promise to pay the Indemnity Sum and the means and timing by which it will be paid. A third consideration is that the general words "any funds received from any claim against a Third Party for recovery of damages arising out of default by the borrower" are to be contrasted with the use of the words "any subrogated claim against a third party" in the immediately preceding clause, cl 4(d). If as Angas submitted cl 4(e) is to be read as confined to claims for recovery of the Indemnity Sum itself, then it would have been natural for the clause to repeat the language of "subrogated claim", and there is no explanation for the use of different, wider, language to describe the claims which are the subject of the clause.
I am conscious that "the argument from redundancy is seldom an entirely secure one", because "people often use superfluous words", as Lord Hoffmann observed in Beaufort Developments (NI) Ltd v Gilbert-Ash (NI) Ltd [1999] 1 AC 266 at 274. But in the circumstances of this appeal I would not lightly conclude that the words have no meaning. Clause 4(e) is an important, and bespoke, provision which departs from wording which had been used in the immediately preceding clause: see by way of comparable examples AFC Holdings Pty Ltd v Shiprock Holdings Pty Ltd [2010] NSWSC 985; 15 BPR 28,199 at [13] and Perpetual Trustees Victoria Ltd v Cox [2014] NSWCA 328; 17 BPR 33,313 at [76].
Angas submitted that the clause should be construed harmoniously with the Policy, especially in circumstances where, so it was put in writing and orally, there was no dispute about Angas' entitlement under the Policy. I disagree, both as a matter of law and on the facts of this case. In point of law, the deed was a deed of release. The point of a deed of release is to draw a line under the parties' pre-existing contractual rights, which are ordinarily the subject of a dispute, so that thereafter the parties may look exclusively to the rights in the deed. On the facts, the Letter of Offer on its face referred (in paragraph 9) to Angas' claim that an amount of $40,000 received belatedly from the borrower was to be credited to principal (and therefore offset against the Indemnity Amount) rather than to interest. The amount of $597,627 offered by SBC rejected this aspect of Angas' claim. Additionally, as Sackville AJA has stated, the deed put an end to the possibility, apparent on the face of the pleadings, that the contributory negligence asserted by Valcorp amounted to a failure on the part of Angas to comply with the criteria, policies and procedures of a prudent lender.
The trial judge's finding that the words were ambiguous, which was not challenged on appeal, removes any need to address whether ambiguity is necessary before resort is had to the surrounding circumstances. However, Angas nevertheless contended that the Letter of Offer was a matter to which regard could be had only if it gave rise to a binding agreement, and that the primary judge had erred in relying upon it. Angas submitted that an analysis in accordance with Masters v Cameron (1954) 91 CLR 353 was required at the threshold level of whether the documents could be used as evidence of surrounding circumstances. "ROBERTS: ... [T]he starting point for that analysis, in my submission, needs to be the question as to whether this is a binding agreement as relates to the Valcorp proceedings or not. If it's not a binding agreement, it's my submission that what is there contemplated is classically a negotiation. LEEMING JA: Why isn't it just part of the context or the purpose? ROBERTS: Because, in my submission, if it is not a binding agreement, it is merely an announcement of what the parties would contemplate, and to that end it is their subjective intentions. If, on the other hand, it is a binding agreement that would see the funding of the Valcorp proceedings proceeding that way. I would accept that it then can stand as, at least potentially, an interconnected agreement that would need to be part of the context." Senior counsel for Angas very fairly acknowledged that this was not an submission which had been advanced before the primary judge.
I do not accept the submission. The subjective intentions of the parties are irrelevant to any of the questions of construction arising on this appeal. However, that does not mean that the admissibility of the Letter of Offer sent by SBC's solicitors a few days before the Deed of Release was executed turns upon whether it was enforceable immediately upon its acceptance by Angas. This is readily demonstrated by supposing, contrary to the fact, that Angas had responded to the Letter of Offer by saying, "We agree with what you propose, but until such time as a deed is executed, neither of us is bound". I think it is clear that even if it was perfectly clear that the Letter of Offer did not give rise to a contract prior to the execution of the Deed of Release, regard could be had to it for the purpose of construing the deed. For example, the Deed of Release is plainly to be construed in the light of the fact that the $597,627 was calculated on the basis that $40,000 originally claimed by Angas was not accepted by SBC, and that acceptance of the Indemnity Sum would disentitle Angas from making any subsequent claim to that $40,000. Another example is that cl 4(e) in the Deed is to be construed in light of the fact that there were pending proceedings against Valcorp in respect of which SBC had offered to pay 48 per cent of the costs, something which it was not hitherto obliged to do.
All this accords with the "principle of objectivity" which is central to contractual construction. In Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; 219 CLR 165 at [40], the High Court unanimously said: "This Court, in Pacific Carriers Ltd v BNP Paribas, has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction." [Citations omitted.]
The distinction between impermissible regard to the parties' subjective intentions and expectations and permissible recourse to objective matters known to the parties may be seen in a number of recent decisions of the High Court. Without purporting to be exhaustive, in Byrnes v Kendle [2011] HCA 26; 243 CLR 253, Heydon and Crennan JJ said at [98]: "A contract means what a reasonable person having all the background knowledge of the 'surrounding circumstances' available to the parties would have understood them to be using the language in the contract to mean. But evidence of pre-contractual negotiations between the parties is inadmissible for the purpose of drawing inferences about what the contract meant unless it demonstrates knowledge of 'surrounding circumstances'. And in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd this Court said: 'It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe.'" [Citations omitted.]
Substantially the same distinction was drawn by French CJ, Nettle and Gordon JJ in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; 89 ALJR 990 at [50]: "Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties' statements and actions reflecting their actual intentions and expectations."
I note that the references in both of those passages to evidence being "inadmissible" are references not to the evidence being tendered, but to its being used in some particular process of reasoning, a point recently emphasised in D Reynolds, "Construction of contracts after Mount Bruce Mining v Wright Prospecting" (2016) 90 Australian Law Journal 190 at 193.
Hence, I am of the view that regard can be had to the 2010 Letter, which was an objective matter known to both of the parties giving rise to the Deed of Release. I think the position is no different from that stated by Gleeson CJ in International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; 234 CLR 151 at [8]: "This is a case in which the Court's general understanding of background and purpose is supplemented by specific information as to the genesis of the transaction. The Agreement has a history; and that history is part of the context in which the contract takes its meaning." [Citation omitted.]
The construction upheld by the primary judge and for which SBC contends is entirely consistent with para 18 of that letter.
Although in this respect my analysis differs from that adopted by Sackville AJA, I respectfully agree with him that, even if the 2010 Letter be put entirely to one side, the other considerations referred to above and to which he has referred sustain the same result.
There is one final matter which supports the construction upheld by the primary judge, which turns upon the concluding words of cl 4(e), "save for payment of recovery costs".
There was no dispute that the costs of recovering on a claim against a third party were to be deducted from the amount to which SBC was entitled under cl 4(e). In light of the way in which the issues arose for determination, the potential for practical difficulties in performing that deduction were not disclosed. But even so, I find it helpful to ask how, if Angas' construction be accepted, are the recovery costs to be computed in respect of proceedings against the third party for recovering both insured and uninsured losses.
Those proceedings might be settled or might result in a judgment and a costs order (as occurred in fact). But even if there were (as here) a favourable costs order, the "recovery costs" will not be satisfied from that costs order; party-party costs orders never provide a complete indemnity. It follows that the first ranking obligation to pay recovery costs must, at least in part, come out of the recovered judgment sum itself. If the proceedings are settled for a lump sum, then the whole of the recovery costs must come out of the settlement amount.
The point to be observed is that where the claim against a third party yields a payment attributable to insured losses and uninsured losses, it will inevitably be necessary to resort to that payment in order to reimburse Angas for at least part (and possibly all) of the "recovery costs" before any amount is repaid to SBC.
But how is that to occur? Some of the recovery costs may be attributable to the insured losses, others to the uninsured losses, and others (perhaps, most) may not readily be capable of attribution. Does the clause require each component of recovery costs to be allocated to insured or uninsured losses? Does the clause require a proportionate allocation of costs between the components attributable to insured and uninsured claims? If not, how is the first-ranking obligation to pay recovery costs to be performed?
All this is of some importance, because the value of SBC's entitlement to be repaid would seem to depend, if Angas' construction be correct, on the extent to which the recovery costs are deducted from the component of the payment from the third party which corresponds to insured losses, rather than uninsured losses, and in every case there will need to be resort to some component of the payment in order to pay recovery costs.
It is easy to see how there will be delay, expense, difficulty and dispute in performing the allocation required on Angas' construction. That may be contrasted with the alternative, which is that SBC is entitled to be repaid from the whole of any recovery from a third party, subject to the whole of the recovery costs first being deducted. To my mind, that is a further reason for preferring the construction upheld by the primary judge: so as to avoid a result which would work commercial inconvenience. However, the parties not having been heard on this point, this is not a matter on which I rely for the purposes of this appeal.
For those reasons, as well as those given by Sackville AJA, I would dismiss the appeal with costs.
SACKVILLE AJA: The appellant, Angas Securities Ltd (Angas), appeals against orders made by a Judge of the Equity Division (Ball J) on 16 October 2015. [1] The primary Judge gave judgment in favour of the respondent, Small Business Consortium (SBC), the plaintiff in the proceedings, in the amount of $329,718.32.
SBC was the underwriter of a Lloyds Mortgage Indemnity Impairment Insurance Policy (Policy) and Angas was the insured party under the Policy. Angas made a claim under the Policy for losses sustained in consequence of a default by mortgagors, to whom it had lent moneys, on the security of a first mortgage over a penthouse owned by the mortgagors. In satisfaction of the claim, SBC paid $597,627 to Angas pursuant to the terms of a Deed of Release executed in March 2010.
Prior to receiving the payment from SBC under the Deed of Release, Angas instituted proceedings in the Federal Court against a valuer alleging, among other things, negligence in valuing the penthouse for the purposes of the mortgage loan. Angas succeeded in obtaining judgment against the valuer. Although Angas did not receive the full amount it had claimed, the judgment included damages in respect of losses not indemnified under the Policy. The valuer paid the amount of the judgment awarded against it.
The present dispute concerns the entitlements of SBC and Angas, respectively, to the net proceeds (after costs) of the Federal Court judgment. SBC, which partially funded the Federal Court proceedings, contends that under the terms of the Deed of Release it is entitled to recoup the full amount of the indemnity of $597,627 paid by it to Angas in priority to any entitlement of Angas to retain the net proceeds of the judgment. Angas denies that SBC is entitled to priority and maintains that it has already paid SBC its full entitlement to the amount recovered from the valuer.

The Facts

The following account is based largely on the findings made by the primary Judge, but also takes into account the judgment of the Full Federal Court given in the proceedings against the valuer. [2] There is no dispute as to the facts.
In 2007, Angas carried on a business of providing loans to borrowers on the security of mortgages over real property. The Policy, which was issued on or about 23 May 2007, covered Angas in respect of losses suffered as a result of borrower defaults notified to SBC during the period of insurance (1 July 2007 to 30 June 2008).
I set out the relevant terms of the Policy later. [3] It is sufficient to note here that the amount Angas was entitled to recover in respect of a borrower's default was the amount of outstanding principal and expenses remaining after realisation of Angas' security. The indemnity under the Policy did not extend to outstanding interest or fees.
In November 2007, Angas advanced the sum of $2,340,000 to Mr and Mrs Opie (Opies), including fees and prepaid interest of $71,286. The loan was repayable after 12 months and was secured by a first mortgage over a penthouse in an apartment block located in Glenelg North, South Australia (Property).
Two other entities associated with the directors of Angas, Barker Mortgages Pty Ltd (Barker) and KWS Capital Pty Ltd (KWS), made further loans of $360,000 and $180,000, respectively, to the Opies who were in some financial difficulty. These loans were secured by second and third mortgages over the Property. The three loans were made to enable the Opies to discharge existing mortgages over the Property.
Prior to the loans being made, Angas obtained a valuation of the Property from Valcorp Australia Pty Ltd (Valcorp), a company providing valuation services. Valcorp valued the Property at $3,600,000, or $3,200,000 on a forced sale. Each of Angas, Barker and KWS (together the Mortgagees) relied on the valuation for the purposes of advancing moneys to the Opies.
On 1 February 2008, the Opies defaulted on payments due under the loans. Angas subsequently issued proceedings in the Supreme Court of South Australia seeking an order for possession of the Property. Angas took possession as mortgagee on 11 December 2008.
On 4 July 2009, Angas entered into a contract to sell the Property for $1,750,000. On settlement, Angas received $1,686,971.47, being the sale price less sale expenses of $63,028.52. Barker and KWS received nothing from the proceeds of sale.
On 30 October 2009, the Mortgagees, with the consent of SBC, commenced proceedings against Valcorp in the Federal Court (Valcorp Proceedings). The Mortgagees contended that Valcorp had been negligent in preparing its valuation and had engaged in misleading or deceptive conduct in contravention of s 52 of the Trade Practices Act 1974 (Cth). Each of the Mortgagees claimed damages for the loss of principal advanced and consequential losses. Their claims included compensation for the loss of interest on alternative loans that they claimed would have been made, had they not advanced moneys to the Opies.
On 7 December 2009, Valcorp filed its defence in the Valcorp Proceedings. The defence pleaded that if Valcorp caused the Mortgagees to suffer any loss or damage, such loss or damage was caused by the Mortgagees' failure to take reasonable care and that, accordingly, any damages awarded to the Mortgagees should be reduced to the extent that the Court considered just and equitable.
In March 2010, SBC and Angas executed the Deed of Release, the relevant terms of which are set out later. [4] Following execution of the Deed of Release, SBC paid Angas the sum of $597,627, which the parties agreed was the amount of the indemnity due to Angas under the Policy. A letter of 9 March 2010 (2010 Letter) from SBC to Angas, which preceded the Deed of Release, set out the calculation of Angas' entitlement to indemnity as follows: "a) Loan amount $2,340,000 b) Less fees and interest -$71,286 c) Less payment by the borrower -$40,000 d) Less sale proceeds -$1,750,000 Sub total $478,714 e) Plus sale expenses +$63,029 f) Plus expenses whilst mortgagee in possession +$55,884 TOTAL $597,627"

In the 2010 Letter, SBC stated that it was prepared to contribute towards the costs of the Valcorp Proceedings that the Mortgagees had already instituted. The relevant terms of the 2010 Letter are set out later. [5]
In a judgment delivered on 17 March 2011, the Mortgagees succeeded in their claims against Valcorp. [6] The trial Judge found that Valcorp had been negligent and awarded damages to each of the Mortgagees. However, his Honour reduced the damages by 25 per cent by reason of the Mortgagees' contributory negligence. After taking account of the reduction, Angas was awarded $973,797.09 in damages, while Barker and KWS were awarded $458,510.31 and $256,595.15, respectively. The damages awarded to Angas included $432,541.71 for loss of the opportunity to make an alternative loan (after allowing for the reduction of 25 per cent).
Valcorp paid Angas $973,797.09 in satisfaction of the judgment against it, but appealed to the Full Federal Court. In a judgment delivered on 9 March 2012, the Full Court allowed the appeal in part. [7] The Full Court found that Valcorp and the Mortgagees were equally responsible for the losses sustained by the Mortgagees. Accordingly, the Full Court decided that the allowance for contributory negligence by each of the Mortgagees should be increased from 25 per cent to 50 per cent.
As a consequence of the Full Federal Court decision, Angas' damages were reduced to $649,198.07, made up as follows: $ Funds advanced 313,622.45 Loss of opportunity to invest funds elsewhere 288,361.14 Interest at Court rates on funds advanced from 7 April 2010 to 17 March 2011 24,597.88 Interest at Court rates on loss of opportunity damages from 7 April 2010 to 17 March 2011 22,616.60 649,198.07

Angas refunded to Valcorp the difference between $649,198.07 and the amount Valcorp had previously paid in satisfaction of the orders made by the trial Judge.

On 26 October 2012, Angas paid SBC the sum of $310,340.21. Angas asserted that this was the full amount for which it was required to account to SBC from the moneys recovered from Valcorp. Angas said that the amount due to SBC was the proportion of the total amount Angas had recovered from Valcorp that represented damages for the loss of principal (a loss indemnified under the Policy). Angas' position was that the balance of the amount recovered from Valcorp represented damages in respect of losses, notably the lost investment opportunity, that were not indemnified under the Policy and thus did not have to be refunded to SBC.
SBC took a different view. It claimed that under the Deed of Release it was entitled to be reimbursed the whole of the indemnity it had paid to Angas in priority to any entitlement of Angas to retain the moneys it had recovered in the Valcorp Proceedings (other than in relation to costs).
On 13 May 2013, SBC commenced proceedings against Angas in the District Court claiming damages of $329,718.32. This figure represents the difference between the amount paid by SBC to Angas ($597,627.00) and the amount reimbursed by Angas to SBC ($310,340.21), plus interest of $42,431.55. The proceedings were subsequently removed to the Supreme Court.

The Documents

There are three documents of particular significance in this case: the Policy, the 2010 Letter (and Angas' response) and the Deed of Release. I deal with each in turn.

The Policy

Clause 1.1 of the Policy relevantly provides: "Subject always to the terms of this policy, if during the Period of Insurance and in respect of an Insured Loan, any of the following events occur: (a) You [Angas] become entitled to issue a Statutory Default Notice as a result of any Default by the Borrower under an Insured Loan; or (b) … and You notify Us [SBC] of that Event within the Period of Insurance, then We will pay the deficit if the proceeds of any sale or the compensation monies in each case without any deduction are less than the Outstanding Debt due to You under the Insured Loan."
"Outstanding Debt" is defined in cl 4.2 to include "the Outstanding Principal Amount" together with legal expenses incurred in the sale of the mortgaged property, other costs of realisation and other reasonable legal expenses incurred in attempting to recover the Outstanding Principal Amount. "Principal Amount" is defined to mean the amount actually advanced by Angas to the Borrower under the Insured Loan, but excluding any amount advanced for the payment of interest or any fees or charges payable to Angas.
Clause 4.13 of the Policy relevantly provides as follows: "In respect of each Insured Loan, You must: (a) comply in all respects with: (i) Your own criteria, policies and procedures in respect of entering into, monitoring and enforcing Insured Loans and Mortgages, and in respect of procuring and maintaining Valid Insurance, which criteria, policies and procedures You warrant are those that a prudent lender would apply and which comply with any regulatory or statutory requirement. These criteria, policies and procedures must include, but are not to be limited to, the obligation to ensure that the Valuation in support of the Insured loan is obtained prior to the first drawdown of the loan…" [Emphasis added.] Clause 4.17 states that cl 4.13 (among other clauses) is a condition precedent to SBC's liability under the Policy.
Clause 4.18 of the Policy states that: "The terms of this policy can be amended or waived only by endorsement issued by [SBC] and attached to this policy."
Clauses 4.27, 4.29 and 4.30 of the Policy are as follows: "4.27 Where, in Our absolute discretion, circumstances exist that will or may give rise to a claim under this policy, We may at any time pay You: (a) the Outstanding Principal Amount due to You under the Insured Loan, and shall upon making such payment be relieved of all further liability under this policy and shall to the extent of such payment be subrogated to Your rights and interests in accordance with clause 4.29 below; or (b) the Outstanding Principal Amount and other sums then due to You under the Insured Loan and thereupon You shall assign to Us all of Your rights and interests under the Insured Loan, the Mortgagee and all other securities You hold in respect of the Insured Loan. … 4.29 Upon accepting any claim under this policy, We are subrogated to Your rights of recovery or indemnity from any other Person and against any Mortgaged Property. You must, at Our expense, do and concur in doing and permit to be done anything reasonably required to enforce, or secure, any claim for recovery or indemnity. 4.30 If, after We have paid a claim by You under this policy, You recover any amount from any other party that reduced the loss or damage suffered by You in respect of, or in any way relating to, that claim, You shall immediately give Us written notice and return to Us any amount for which You would not have been indemnified under this policy, had Your recovery against that other party occurred prior to Us paying Your claim."

The 2010 Letter

On 9 March 2010, the solicitors acting for SBC wrote to Mr Luckhurst-Smith of Angas informing him that SBC had finalised its determination of indemnity. As I have recorded, [8] the 2010 Letter explains that SBC calculates that Angas is entitled to an indemnity of $597,627 under the Policy. The 2010 Letter states (para 12) that SBC is: "prepared to advance this sum to Angas … on execution of an appropriate Deed of Release with regard to the claim for indemnity."
Under the heading "Recovery Proceedings", the 2010 Letter continues as follows: "13. We confirm that Madsen Rowley [Solicitors] have been retained on behalf of [Angas] with [SBC's] consent, to pursue [Valcorp]. We note proceedings have been instituted on behalf of the first, second and third [mortgagees]. 14. We confirm [SBC's] agreement for Madsen Rowley [Solicitors] to represent all three lenders in the proceedings subject to issues of priority … which are discussed below. We confirm that we have received regular updates from Madsen Rowley with regard to the conduct of the proceedings. 15. In accordance with policy provisions [SBC is] prepared to contribute towards the cost of the recovery proceedings. [SBC's] contribution must be assessed against the recovery. In this regard we note the claim by [Angas] is for the total amount of the advance of $2,340,000 less net proceeds. Noting the property sold for $1,750,000 and sale expenses were incurred of $63,029, in addition to costs whilst in mortgagee in possession of $55,884, the net realisation was $1,631,087. The claim by [Angas] is therefore $708,913. The second [mortgagee] claims $360,000 and the third [mortgagee] claims $180,000. The total claim is therefore $1,248,913 plus interest and costs. In the event [Angas] accept [SBC's] offer of indemnity above (of $597,627) this sum represents 48% of the total loss. 16. On this basis [SBC] are prepared to contribute 48% of Madsen Rowley's costs in relation to the ongoing proceedings against the valuer. We await your response. 17. We understand that [Angas] have attended to payment of accounts already and accordingly reimbursement of 48% of such accounts is appropriate. 18. We also wish to confirm issues of priority in relation to the recovery proceedings. In this regard we note that on receipt of any settlement or verdict the following order of priority is to be paid: a) Recovery costs (as paid by [SBS], [Angas] and the second and third [mortgagees]). b) [SBC's] payment of indemnity. c) Remaining losses of [Angas] as first [mortgagee]. d) Second [mortgagee's] loss. e) Third [mortgagee's] loss. 19. We look forward to hearing from you. …" [Emphasis added.]
Mr Luckhurst-Smith replied to the letter by email on 10 March 2010 as follows: "[Angas] accepts both proposals submitted by you on behalf of [SBC] namely as to:- • Indemnity • Recovery Proceedings Would you please have the appropriate Deed of Release prepared & sent to me for execution?"

The Deed of Release

The Deed of Release, which is undated, was executed some time in March 2010, presumably shortly after 10 March 2010.
The Deed of Release recites the history of Angas' dealings with the Opies, culminating in the sale of the Property for $1,750,000.00. It further recites (Recital L) that Angas had made a claim under the Policy for losses comprising loan principal, legal fees and various miscellaneous expenses. Recital M records that the parties had "negotiated an agreed amount representing the full and final settlement of the claim for indemnity by [Angas]".
Clause 2 of the Deed of Release provides as follows: "In exchange for the promises set out in this deed SBC agrees to pay [Angas] the sum of $597,627 inclusive of costs, interest and disbursements ('the Indemnity Sum')." Clause 3 states that SBC will pay the Indemnity Sum to Angas within 28 days.
Clause 4 relevantly provides as follows: "Subject to and conditional upon the payment of the Indemnity Sum: (a) [Angas] releases and forever discharges SBC … from all claims, demands, actions, suits an causes of action of every and any description whatsoever which they have or may have had against SBC … but for this Deed both at law and in equity, including interest and costs, including but not limited to, arising (whether directly or indirectly) out of the circumstances relating to the subject of the matters recited in this Deed, or the negotiations relating to the agreement of indemnity. … (d) [Angas] agree[s] that payment of the Indemnity Sum is on the basis that [Angas] will provide all reasonable assistance to SBC in any subrogated claim against a third party for recovery of the indemnity sum, interest and costs. (e) [Angas] agree[s] that repayment of the indemnity sum to SBC takes priority from any funds received from any claim against a Third Party for recovery of damages arising out of the default by the borrower (save for payment of recovery costs)."

Costs of the Valcorp Proceedings

It will be seen that the Deed of Release makes no express reference to SBC's offer to contribute 48 per cent of the costs of the Valcorp Proceedings. However, the primary Judge found that between 19 May 2010 and 20 October 2010 SBC contributed a total of $108,366.21 to the costs of the Valcorp Proceedings. [9]
In consequence of the judgment of the Full Federal Court, Valcorp was ordered to pay the Mortgagees' costs of the Valcorp Proceedings at first instance, while Angas was ordered to pay a proportion of Valcorp's costs of the appeal and cross-appeal determined by the Full Court. On 22 April 2013, Angas paid SBC $54,687. According to the primary Judge, this sum represented 48 per cent of the costs Angas received from Valcorp in satisfaction of the costs orders against it. (There seems to be a small discrepancy in the figures, but nothing turns on it for present purposes).

The Primary Judgment

The primary Judge recorded that SBC's main contention was that cl 4(e) of the Deed of Release entitled it to the amount recovered by Angas from Valcorp (net of recovery costs) up to the full indemnity paid by SBC under the Policy. SBC claimed that it was entitled to recoup the amount of the indemnity in priority to Angas' entitlement for any portion of the amount recovered (other than recovery costs). [10] Before addressing that contention, his Honour made three preliminary observations.
First, there was no dispute that SBC was entitled under the Policy to be subrogated to any rights Angas had against a third party, the exercise of which might reduce the insured loss. [11] SBC's right of subrogation extended to any claim referable to the loss in respect of which indemnity was provided. The relevant loss in the present case was the loss of the principal advanced to the Opies and the costs of recovery. It followed that Angas would not be fully indemnified if SBC, in purported exercise of its rights of subrogation, recouped amounts compensating Angas for losses it had sustained, but for which SBC had not provided an indemnity.
Secondly, his Honour accepted that where only part of a loss is insured but the insured has a claim against a third party in respect of the whole loss, in the absence of agreement, the insured is entitled to control the proceedings against the third party. [12] However, in that case the insured is liable to pay the costs of the proceedings if the claim against the third party fails. If the claim succeeds, the insured is entitled to retain an amount equal to the costs of recovery before being required to account for any amount recovered from the third party. [13]
Thirdly, where an insured retains control of proceedings which prove successful, the insured must account for any amount recovered in respect of the indemnified loss (after payment of recovery costs), except to the extent that the insured is not fully indemnified by the insurer. [14]
In his Honour's view, these principles were reflected in the terms of the Policy. Clause 4.29 provided a right of subrogation, while cl 4.30 required Angas to account for any amount it recovered that reduced the loss or damage the subject of Angas' claim, "but only to the extent that the amount would not have been paid under the Policy if Angas had recovered against [Valcorp] first". [15]
The primary Judge said that it was plain from the 2010 Letter that Angas had suffered losses greater than the amount for which SBC was offering an indemnity. [16] Paragraph 18 of the 2010 Letter set out an order of priority for payment out of the amount recovered that differed from the order of priority applicable under the general law. His Honour accepted that an agreement between SBC and Angas could not bind Barker and Angas. Nonetheless, what was proposed as between Angas and SBC was that, after recovery costs, SBC would be reimbursed in full and, to that end, would be paid ahead not only of Angas but also ahead of Barker and KWS. [17]
His Honour pointed out that the offer in the 2010 Letter of $597,627 as the indemnity payable to Angas was conditional on the execution of the Deed of Release. The condition was satisfied by the execution of the Deed of Release which embodied some, but not all of the terms of the 2010 Letter. In particular, it did not deal with the costs of the action against Valcorp. His Honour further observed that although Angas did not receive independent legal advice, Mr Luckhurst-Smith was an experienced solicitor who retained a practising certificate. [18]
Against that background, the primary Judge turned to cl 4(e) of the Deed of Release. He considered that, although clumsily expressed: [19] "[i]t appears to be saying that if any recovery is made from a third party, then after the payment of recovery costs, the amount recovered should be applied in repaying to SBC the amount it paid to Angas."
In answer to this rather straightforward proposition, Angas had advanced five arguments: [20] (i) The expression "any funds received" had to be read as a reference to any funds received in respect of a loss for which Angas had received an indemnity under the Policy. (ii) This reading of cl 4(e) was supported by cl 4(d) of the Deed of Release. If SBC had taken action against Valcorp using its right of subrogation, it would not have been able to keep any recovery if the effect was to deprive Angas of full indemnity. The result should be the same if Angas instituted the proceedings against Valcorp. (iii) The Deed of Release had to be construed consistently with the Policy. Under cl 4.30 of the Policy, if Angas recovered an amount from a third party, it was only liable to account to SBC to the extent that, as a result of the recovery, it obtained more than a full indemnity. The parties could not have intended the Deed of Release to amend the Policy in such an important respect. (iv) The language of "priority" used in cl 4(e) assumed that the entity claiming priority had a pre-existing entitlement. SBC had no such entitlement in relation to losses for which it afforded no indemnity to Angas. (v) The construction for which SBC contended was uncommercial because it radically altered Angas' rights under the Policy.
The primary Judge rejected these submissions. He considered that the expression "funds received" in cl 4(e) of the Deed of Release meant any amount recovered from a third party arising from a default by a borrower. [21]
His Honour thought that cll 4(d) and 4(e) dealt with different issues. Clause 4(d) was concerned only with assistance in subrogated claims brought by SBC in the name of Angas against a third party. It required Angas to provide reasonable assistance in relation to such a claim. Clause 4(e), on the other hand, dealt with the allocation of recovery. [22]
The primary Judge accepted that cl 4(e) was ambiguous, in that it was not clear whether it applied only to claims brought by Angas or whether it also applied to claims brought by SBC in exercise of its rights of subrogation. He preferred the latter interpretation. On that basis there was no tension between the two provisions: [23] "They are concerned with different matters. The former is concerned with the conduct of the recovery proceedings where SBC is in control and depends on assistance from Angas in order to conduct them. The latter is concerned with the distribution of any recoveries."
His Honour acknowledged that his interpretation of cl 4(e) made a substantial change to the rights of subrogation arising under the Policy in respect of the particular loss arising from the loan to the Opies. However, in his Honour's view, that was not an amendment to the Policy for the purposes of cl 4.18: [24] "The Policy provides cover against losses arising from defaults by any borrower up to limits specified in the Policy. The Deed of Release does not affect the terms on which it does so. Rather, it sets out the basis on which SBC was prepared to pay the amount it offered to pay in settlement of a particular claim having regard to circumstances that were peculiar to that claim after the claim was made."
The primary Judge said that the context in which the Deed of Release had to be construed included the Policy. But in his view it also included the agreement reached when Angas accepted the offer contained in the 2010 Letter. [25]
His Honour noted that under cl 4.13 of the Policy it was a condition of Angas' entitlement to an indemnity that it acted as a prudent lender. It appears that no one had turned their mind to the possibility that Angas had not satisfied the condition precedent. Nonetheless, the defence filed in the Valcorp Proceedings was part of the circumstances against which an objective assessment of the parties' conduct had to be made. [26]
His Honour observed that the provisions of the Policy relating to rights of subrogation and rights in respect of recoveries by Angas were consistent with the general law. However: [27] "[t]he application of those rights was made more complicated in the particular circumstances of this case. Angas had already commenced recovery proceedings before indemnity was granted and those recovery proceedings were also brought on behalf of uninsured persons and were brought in respect of uninsured losses. One thing is clear, though, and that is, absent agreement with SBC, if Angas wished to retain control of those proceedings, it bore the risk of a costs order against it if the proceedings failed. Against that background, SBC proposed in a letter dated 9 March 2010 that it would provide an indemnity in accordance with the terms of the Policy and that it would contribute towards the costs of the claim against Valcorp. However, it was a term of that offer that any recovery would be applied first to the payment of costs and then to reimbursing SBC for the amount it had paid under the Policy and it was a condition of the offer that the parties execute a Deed of Release. Angas accepted that offer. It is to be expected that the Deed of Release would embody some, if not all, of the terms of the agreement arising from the offer and acceptance. It should not lightly be inferred that the parties would depart substantially from the agreement they reached when executing the deed contemplated by that agreement."
Two points flowed from these matters: [28] "First, it would be wrong to seek to construe the Deed of Release in the context of the Policy without also considering the agreement arising from the 9 March 2010 letter and the acceptance on 10 March 2010 of its terms. That context demonstrates that in the particular circumstances of this claim, the parties did intend to depart from the rights conferred by the Policy. Second, the context demonstrates that the interpretation of cl 4(e) of the Deed of Release contended for by SBC is not unreasonable or lacking in commercial commonsense. SBC was being asked to contribute to legal costs. It was proposing to grant an indemnity in accordance with the Policy, even though the defence of contributory negligence pleaded by Valcorp at least raised the possibility that it was not obliged to do so. SBC agreed to do those things but on condition that it was given a priority that it did not otherwise have. That priority was only of any real significance if the defence of contributory negligence succeeded. If it failed, Angas would have recovered the full amount of its loss from Valcorp and would have been required under the Policy to reimburse the amount paid to it by SBC. In that context, the construction of cl 4(e) for which SBC contends makes commercial sense."
Finally, his Honour considered that if cl 4(e) was concerned only with priorities relating to pre-existing rights, it would be meaningless. [29] The language of cl 4(e) created a right in SBC to payment of a specified "indemnity sum" from the funds received as a result of a claim against a third party.

Angas' Submissions

In his written submissions, Mr Roberts SC, who appeared for Angas, identified two errors said to have been made by the primary Judge. First, his Honour impermissibly had regard to negotiations between the parties prior to the execution of the Deed of Release as an aid to interpretation of cl 4(e) of the Deed. In effect, his Honour had taken into account the subjective intentions of the parties in concluding that cl 4(e) entitled SBC to recoup the whole of the "Indemnity Sum" before Angas could benefit from its recovery losses, both insured and non-insured.
Secondly, his Honour, in construing the Deed of Release, failed to differentiate between the significance of the Policy and of Angas' acceptance of the terms offered in the 2010 Letter. The Deed of Release referred expressly to the Policy. Therefore, the terms of the Policy provided part of the context in which cl 4(e) of the Deed of Release had to be construed. Under the Policy, Angas was required to account to SBC only for those amounts recovered from Valcorp that related to the indemnified losses. Since the Policy did not give SBC any right to recoup any part of the damages recovered by Angas from a third party that related to non-indemnified losses, cl 4(e) of the Deed of Release should be construed to confer no greater rights on SBC.
By contrast, the Deed of Release did not refer to the 2010 Letter and, in any event, said nothing about the arrangements made between the parties for the funding of the Valcorp Proceedings. According to Mr Roberts, his Honour erred in taking into account the terms of the 2010 Letter, especially para 18 (dealing with "issues of priority in the recovery proceedings"). In adopting this approach to the construction of cl 4(e), his Honour impermissibly had regard to the course of negotiations between the parties.
In his oral submissions Mr Roberts advanced three contentions in elaboration of his written submissions: (i) The primary Judge failed to construe the Deed of Release in the context of the parties' pre-existing rights. In the absence of an express intention to vary those pre-existing rights, his Honour should have construed the Policy and the Deed of Release harmoniously so as to preserve the parties' rights under the Policy. (ii) The background to the Deed of Release includes SBC's entitlement in equity to priority over any specific fund recovered by Angas, but only to the extent that the fund is referable to losses indemnified under the Policy. Clause 4(e) is to be read as establishing a contractual regime that makes explicit the terms that would apply in any event and eliminates any legal uncertainty that otherwise might arise. (iii) The primary Judge took into account matters that did not form part of the factual matrix of the Deed of Release. In particular, he took into account the arrangements for the funding of the Valcorp Proceedings which, according to Mr Roberts, had never become contractually binding.
It followed, so Mr Roberts argued, that the reference to "indemnity sum" in cl 4(e) of the Deed of Release is to be understood as conferring an entitlement on SBC to that sum "but subject to that [entitlement] conforming to the extant entitlement to repayment". In other words, cl 4(e) regulates "the scope or mode of performance of [SBC's] existing entitlement to repayment". Similarly the word "priority" in cl 4(e) refers to priority between extant rights and does not manifest an intention to vary those rights as between SBC and Angas.

SBC's Submissions

Mr Donaldson SC, who appeared with Mr Raffel for SBC, submitted that cl 4(e) uses clear and unambiguous language to describe the funds to which Angas' obligation to repay is attached. Mr Donaldson supported the primary Judge's conclusion that the language cannot be reconciled with the constraints that Angas' construction sought to impose on SBC's entitlement. The absence of any reference in the Deed of Release to the 2010 Letter, so he argued, does not provide a sound basis for departing from the plain literal meaning of cl 4(e).
Mr Donaldson further submitted that the primary Judge was justified in relying on the terms of the 2010 Letter as an aid to the construction of the Deed of Release. SBC's agreement to support the prosecution of the Valcorp Proceedings, over and above that required by the Policy, demonstrates that the parties did not intend the Deed of Release merely to confirm their pre-existing rights under the Policy.

Principles of Construction

In Victoria v Tatts Group Ltd [30] a unanimous High Court approved the statement of principle by three members of the Court in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd. [31] The relevant passage is as follows: "[46] The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose. [47] In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract. [48] Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning. [49] However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding 'of the genesis of the transaction, the background, the context [and] the market in which the parties are operating'. It may be necessary in determining the proper construction where there is a constructional choice. … [50] Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties' statements and actions reflecting their actual intentions and expectations. [51] Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption 'that the parties ... intended to produce a commercial result'. Put another way, a commercial contract should be construed so as to avoid it 'making commercial nonsense or working commercial inconvenience'." [Citations omitted.]
In this passage, French CJ, Nettle and Gordon JJ cited with approval the judgment of Mason J (Stephen and Wilson JJ agreeing) in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales. [32] In that judgment, Mason J explained the difference between negotiations which establish objective facts known to both parties and negotiations which merely evidence the parties' actual intentions and expectations: [33] "Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification. Consequently when the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties' presumed intention in this setting. We do not take into account the actual intentions of the parties and for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the written contract."

Common Ground

There is some common ground between the parties. Mr Donaldson, on behalf of SBC, did not dispute that under the Policy SBC's entitlement to moneys recovered by Angas from Valcorp would be limited to that proportion of the moneys recovered attributable to the recovery of Angas' indemnified losses.
Mr Roberts, on behalf of Angas, did not dispute that the Valcorp Proceedings constituted "a claim against a third party for recovery of damages arising out of default by the borrower" within the meaning of cl 4(e). Mr Roberts also accepted that SBC's agreement to pay 48 per cent of the costs of the Valcorp Proceedings went beyond its obligations under the Policy. This was because SBC agreed to contribute to the costs of proceedings brought by Angas and the two uninsured parties against Valcorp, in which they sought to recover damages in respect of both indemnified and non-indemnified losses.
In the course of argument in this Court, Mr Roberts' attention was drawn to an apparent concession he made in argument before the primary Judge. Mr Roberts stated to his Honour that he did not resist the notion that paras 14 and 15 of the 2010 Letter (by which SBC indicated its willingness to contribute to the costs of the Valcorp Proceedings) provided "relevant background circumstances against which the [Deed of Release] is to be construed". In this Court, Mr Roberts did not seek to resile from the concession, but maintained that since the primary Judge held that Angas' acceptance of SBC's offer did not constitute a binding agreement, the offer and acceptance merely evidenced the subjective intentions of the parties and thus could not be taken into account in construing cl 4(e).

The Construction of cl 4(e)

In applying the principles of construction endorsed by the High Court, the starting point must be the language of cl 4(e) of the Deed of Release. However, the language must be construed having regard to the text of the Deed of Release as a whole, the commercial objects or purpose sought to be secured by the Deed and the surrounding circumstances known to the parties. In the present case, the principal purpose of the Deed of Release can be discerned from the terms of the Deed itself. Recital M and cl 2 indicate that the purpose is to record the basis on which the agreed amount "negotiated" between the parties, representing full and final settlement of Angas' claim to indemnity, is to be paid by SBC to Angas. [34] Clause 4(e) constitutes one element of the final agreed settlement of Angas' claim.
The parties in the present case were at odds as to whether cl 4(e) of the Deed of Release is ambiguous. Mr Donaldson submitted that the language is clear; Mr Roberts contended that while the language might appear to be clear, when construed in context it must be read subject to qualifications. As Leeming JA pointed out in Mainteck Services Pty Ltd v Stein Heurtey SA, [35] the proposition that a contractual provision has a "plain meaning" or is unambiguous is a conclusion that cannot be reached without having regard to the context in which the contractual language has been used.
There was no dispute that some matters, other than the text of the Deed of Release itself, must be taken into account in construing cl 4(e). In particular, Mr Roberts submitted and Mr Donaldson accepted that as the Deed of Release refers expressly to the Policy, it is necessary to consider the terms and conditions of the Policy as part of the context. But this does not mean that cl 4(e) must be interpreted so as to leave unaltered the parties' pre-existing rights and obligations under the Policy. It is not necessarily inconsistent with the commercial purpose of the Deed of Release to incorporate agreed terms that effectively vary the parties' respective rights and obligations under the Policy. Whether that is the effect of the Deed of Release depends on its language, construed in accordance with the principles laid down by the High Court.
As Mr Roberts acknowledged, the language of cl 4(e) of the Deed of Release is broad. Angas accepted that repayment of the indemnity sum (defined to mean the sum of $597,627 which SBC agreed to pay Angas as the indemnity due under the Policy) takes priority from any funds received from any claim against a third party for recovery of damages arising out of the default of the borrower. [36] As I have noted, Mr Roberts did not dispute that Angas' claim against Valcorp, including its claim in respect of non-indemnified losses, was a "claim against a Third Party for recovery of damages arising out of the default of the borrower".
The ordinary meaning of this language is that SBC is entitled as against Angas to be repaid the Indemnity Sum out of the amount received by Angas from its claim against Valcorp in priority to any entitlement of Angas to share that amount (except for recovery costs). Even when read with the terms of the Policy, nothing in cl 4(e) or, for that matter, elsewhere in the Deed of Release expressly states or implies that SBC's priority is limited to that proportion of the funds recovered from the third party representing Angas' losses that are indemnified under the Policy.
Mr Roberts pointed to extrinsic circumstances, other than the terms of the Policy, which, so he contended, show that cl 4(e) of the Deed of Release is ambiguous and should be construed so as not to alter the parties' entitlements under the Policy. He relied particularly on the absence of any dispute between the parties as to the amount of the indemnity payable to Angas under the Policy. The absence of any such dispute shows, so he argued, that cl 4(e) cannot be intended to vary the parties' rights and obligations under the Policy, specifically the limitations on the scope of SBC's rights of subrogation.
One problem with this submission is that, as I have noted, the Deed of Release (Recital M) refers to the parties having "negotiated an agreed amount". This language suggests that there was something to negotiate and that, in the absence of a negotiated agreement, the parties' positions regarding Angas' claim were, or at least might have been, at variance.
In any event, Mr Roberts did not explain why the Court, when construing cl 4(e), is entitled to take into account the parties' subjective views as to whether the Indemnity Sum represents full compensation for the indemnified losses sustained by Angas. In particular, it is not clear how the submissions on this question are consistent with Angas' contention that it is impermissible to have regard to the parties' agreement in writing to share the costs of the Valcorp Proceedings.
A further problem with Mr Roberts' submission is that the objective facts known to both parties when the Deed of Release was executed includes the defence filed in the Valcorp Proceedings. Valcorp's defence, which was filed well before the Deed of Release was executed, pleaded that Angas (and the other Mortgagees) failed to take reasonable care when advancing funds to the Opies. Assuming the pleaded defence was not obviously baseless (it ultimately succeeded), a reasonable observer would have concluded, at the time that the Deed of Release was executed, that there was a significant risk that Angas could not establish that it had satisfied the condition precedent stated in cl 4.13 of the Policy (that is, that it had acted as a prudent lender). A reasonable observer would also have concluded that the Deed of Release, while not incorporating mutual releases, effectively prevents SBC from relying on imprudent lending by Angas as a defence to its claim to indemnity under the Policy. [37] I do not accept that cl 4(e) should be construed on the basis that the Deed of Release could not have been intended to resolve any disagreement or potential disagreement between the parties. The very point of the Deed was to bring about a full and final settlement of Angas' claim by the payment of a negotiated agreed Indemnity Sum.
Contrary to Mr Roberts' submissions, there are other "circumstances … external to the contract" [38] that strongly support the construction of cl 4(e) that flows from the ordinary meaning of its language. In particular, the 2010 Letter and Angas' response demonstrate that SBC agreed to contribute to the costs of the Valcorp Proceedings to an extent above and beyond its obligations under the Policy.
The Deed of Release does not deal with the costs of the Valcorp Proceedings, presumably because the parties regarded the issue as settled by the correspondence between them. It is difficult to see how the agreement to share costs can be dismissed as mere negotiations preceding the Deed of Release when the Deed has nothing to say about the costs sharing issue. Moreover, while the 2010 Letter states that SBC's offer to pay $597,627 as the indemnity under the Policy was subject to execution of "an appropriate Deed of Release", it imposed no such condition on the offer to contribute 48 per cent of the Mortgagees' costs of the Valcorp Proceedings.
In any event, as I have pointed out, Mr Roberts accepted that paras 14 and 15 of the 2010 Letter can be taken into account as an objective circumstance in construing cl 4(e) of the Deed of Release. It is not clear why Mr Roberts made that concession only in relation to paras 14 and 15 of the 2010 Letter, as distinct from para 16 (which specifies the percentage of costs SBC was willing to contribute). But if paras 14 and 15 can be taken into account, so can para 16 and Angas' acceptance of SBC's offer. This material makes it clear that the parties entered into a costs sharing arrangement for the Valcorp Proceedings that effectively modified the parties' rights and obligations under the Policy. Since the parties had already agreed to vary their rights under the Policy, there is little reason to strain the language of cl 4(e) in order to ensure that it conforms to the parties' pre-existing rights and obligations.
I do not accept Mr Roberts' submission that the costs sharing agreement should be ignored on the ground that the primary Judge held that it was not a binding agreement. As I read the Primary Judgment, that was not what his Honour held. He said, correctly, that an agreement between SBC and Angas could not bind Barker and KWS since they were not parties to the agreement. But that does not mean that the 2010 Letter and Angas' acceptance of SBC's offer to share the costs of the Valcorp Proceedings did not constitute a concluded agreement between SBC and Angas. Although the point was not fully debated, I incline to the view that, if it matters, SBC and Angas concluded a binding agreement on the sharing of costs and that, if necessary, Angas could have enforced the agreement. Certainly both parties meticulously gave effect to the terms of the costs sharing agreement.
Even if the costs sharing agreement was not contractually binding, the correspondence between the parties evidencing the arrangement is an objective fact that formed part of the surrounding circumstances that can be taken into account in construing the Deed of Release. In Codelfa, the High Court held that discussions between the contracting parties which demonstrated a common understanding as to how work under the contract was to be performed could be considered in construing the contract. [39] The discussions between the parties in that case did not have contractual force, but Mason J considered that it was still legitimate to take them into account. In the present case the costs sharing arrangement, whether or not legally binding, is a surrounding circumstance reinforcing the conclusion that cl 4(e) of the Deed of Release is not intended merely to restate SBC's pre-existing rights of subrogation under to the Policy.
In my opinion, the meaning of cl 4(e), when read in context, is clear. As applied to the facts of this case, cl 4(e) entitles SBC to be paid the Indemnity Sum of $597,627.00 out of the judgment sum of $649,198.07 Angas recovered from Valcorp in priority to any claim Angas has to the judgment sum (other than by way of recovery of costs). Mr Roberts' submissions in effect invited the Court not only to read words in cl 4(e) that are not there, but to imply words that substantially alter the meaning of the words actually used. Moreover, his submissions would mean that cl 4(e) of the Deed of Release simply restates the existing rights and obligations of the parties under cl 4.30 of the Policy. In essence, these submissions assumed rather than demonstrated that the parties could not have intended the Deed of Release to vary their pre-existing rights and obligations under the Policy.
There is, in my view, nothing unbusinesslike or commercially unrealistic about this construction of cl 4(e) of the Deed of Release. Angas made a claim for indemnity under the Policy. The parties negotiated a sum that would satisfy Angas' claim. SBC agreed to support the claim by Angas and the other Mortgagees against Valcorp to an extent greater than it was obliged to under the Policy. In the Deed of Release, Angas agreed to refund SBC a greater proportion of the amount recovered from Valcorp than it was obliged to under the Policy.
I add two further comments. First, I consider that Mr Roberts' criticisms of the primary Judge's reliance on para 18 of the 2010 Letter have more substance than his challenge to his Honour's reliance on the costs sharing agreement. Paragraph 18 is consistent with the construction of cl 4(e) I prefer, but it has the flavour of negotiations preceding the conclusion of a final agreement. The conclusion I have reached as to the proper construction of cl 4(e) in no way depends on para 18 of the 2010 Letter.
Secondly, it will be recalled that the primary Judge considered cl 4(e) to be ambiguous in one respect. His Honour thought that it was unclear whether the provision was concerned only with claims brought by Angas against third parties, or whether it also applied to claims brought by SBC in exercise of its rights of subrogation under the Policy. In my view, his Honour's characterisation of cl 4(e) as ambiguous for this particular reason (which Mr Donaldson did not dispute) is not inconsistent with the construction of cl 4(e) that I have adopted. The ambiguity identified by the primary Judge does not affect the question of whether cl 4(e) on its proper construction entitles SBC to be repaid the Indemnity Sum out of funds recovered by Angas from third parties.

Orders

For the reasons I have given, the primary Judge was correct to conclude that SBC was entitled to receive payment of the Indemnity Sum from the amount recovered by Angas in the Valcorp Proceedings. Accordingly, the appeal should be dismissed. Angas should pay SBC's costs of the appeal.

Endnotes

[2015] NSWSC 1511 (Primary Judgment).
Valcorp Australia Pty Ltd v Angas Securities Ltd [2012] FCAFC 22.
See at [55]-[59] below.
See at [63]-[66] below. The document is undated.
See at [60]-[62] below.
Angas Securities Ltd v Valcorp Australia Pty Ltd [2011] FCA 190; 277 ALR 538.
Valcorp Australia Pty Ltd v Angas Securities Ltd [2012] FCAFC 22.
See at [46] above.
Primary Judgment at [24].
Primary Judgment at [31].
Primary Judgment at [33].
Primary Judgment at [34]. His Honour cited Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd [2008] NSWCA 243 at [307] (Allsop P) for this proposition.
See Insurance Contracts Act 1984 (Cth), s 67(3)(a)(ii). This provision is subject to the terms of the contract of insurance and any agreement between the insurer and insured: s 67(9).
Primary Judgment at [35].
Primary Judgment at [36].
Primary Judgment at [38].
Primary Judgment at [39].
Primary Judgment at [40].
Primary Judgment at [42].
Primary Judgment at [44]-[48].
Primary Judgment at [49]-[50].
Primary Judgment at [51].
Primary Judgment at [52].
Primary Judgment at [53].
Primary Judgment at [54].
Primary Judgment at [55].
Primary Judgment at [55]-[56].
Primary Judgment at [57]-[58].
Primary Judgment at [59].
[2016] HCA 5; 90 ALJR 392 at [51].
[2015] HCA 37; 89 ALJR 990 at [46]-[51] (French CJ, Nettle and Gordon JJ).
[1982] HCA 24; 149 CLR 337.
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales at 352.
See above at [63]-[66] above.
[2014] NSWCA 184; 89 NSWLR 633 at [78]-[79].
Angas takes no point about the absence of capital letters in the expression "indemnity sum" in cl 4(e). Nor does it take any point about the rather awkward use of the word "from" in cl 4(e).
See cl 2 of the Deed of Release reproduced at [65] above.
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd at [50].
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales at 354. 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. Decision last updated: 02 August 2016

Trade Practices Act 1974(Cth)

See Insurance Contracts Act 1984(Cth)

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (19 paragraphs)

Parties

Legislation Cited (3)

Cases Cited (17)