Appellant v Respondent

1 By leave granted on 14 November, pursuant to s 148 of the Victorian Civil and Administrative Tribunal Act 1998 (VCAT Act), CGU Insurance Limited (CGU) appeals from orders made by the Victorian Civil and Administrative Tribunal on 19 September 2007 and 5 October 2007. The appeal was not opposed.[1]

2 As between CGU and the respondent (Insured), the Tribunal proceeding concerned the question whether CGU was obliged to provide indemnity to the Insured under relevant policies of insurance for the years 2004/2005 and 2005/2006. The answer to this question turned on whether or not the Insured had made the necessary disclosures to CGU of circumstances known prior to the inception of Civil Liability Professional Indemnity Insurance Policy No 03CON0473473 (the "policy") on or about 21 March 2004.

3 The circumstances of the dispute before the Tribunal arose under a domestic building contract. The owners of a building entered into a domestic building contract with a builder. CGU entered into a professional indemnity insurance policy with respect to the services of the respondent which provided the services of a structural and civil engineer. The respondent had been retained by the builder to certify the design of a slab and footings for a house. It so certified.

4 Proceedings between the owner, the builder, the respondent and CGU were issued in VCAT. The owner claimed the builder failed to construct the building properly. The respondent and CGU were joined as parties to the proceedings before VCAT. The proceedings settled except for an indemnity dispute between CGU and the respondent. The dispute essentially revolved around "known claims" and "known circumstances".

5 The contract of insurance excluded known claims and circumstances. Clause 6.1 of the contract provided:

(a) Known Claims (or losses) as at the inception date of this Policy, or

(b) Claims (or losses) arising from a Known Circumstance(s), or

(c) Claims (or losses) directly or indirectly based upon attributable to, or in consequence of any such Known Circumstance or Known Claims (or losses)."

(b) a reasonable person in the Insured's professional position would have thought, before this Policy began

might result in someone making an allegation against an Insured in respect of a liability, that might be covered by this Policy".

6 In summary, therefore, a "known claim" was a claim known at the time of the contract of insurance, on or about 21 March 2004. A "known circumstance" was either any fact, situation or circumstance which the insured knew before the policy began might result in someone making an allegation against the insured in respect of a liability that might be covered by the policy or which a reasonable person in the insured's position would have thought might arise in someone making an allegation of that kind that might be covered by the policy.

7 Before the Tribunal CGU alleged that the respondent was aware or ought have known of such circumstances, in accordance with clauses 6.1 and 12.14 of the policy, by virtue of its design and endorsement of plans for a concrete foundation slab and strip footings for the owner's building. There were allegations of advice given and works proposed by the respondent through its principal, Mr Fallaw on 13 October 1997, April 2002, November 2002, 11 March 2003, 28 January 2004, 18 February 2004 and 27 February 2004. The allegations included that Mr Fallaw prepared a report documenting warping in the relevant concrete slab foundation, conducted further inspections of the property, made a recommendation that a garage building be demolished and re-built using a strip footing. On the basis of these specific allegations, CGU alleged that the respondent knew prior to the commencement of the policy and further or alternatively a reasonable person in the respondent's professional position would have thought prior to the commencement of the policy that the damage to the owner's property, the dispute between the owner and the builder and the role of the respondent might result in allegations being made against the respondent and that such allegations in respect of a liability might be covered by the policy.

8 There was reliance by CGU on the actual knowledge of the respondent and its principal Mr Fallaw. The Tribunal observed:[2]

What is relied on as actual knowledge in this case is the evidence - consisting of those documents[3] and that given by the witnesses together with common or admitted facts. Mr Fallaw did not give evidence. I am asked to find that the [respondent] had actual knowledge of the kind required to by clause 6.1 (a) or had actual knowledge of the kind contemplated by the first portion of clause 12.14.

Further on the Tribunal then formed the view:[4]

Nothing prevents me from finding that Mr Fallaw had actual knowledge of either kind (that is, under clause 6.1(a) or under clause 12.14(a)) out of the fact that he was not called to say what his knowledge was. I can make findings about his knowledge in the absence of him being called. That is because, as I note, I am required to be satisfied on the balance of probabilities. To be so satisfied I do not need to hear from him. The other evidence in the case may be sufficient to satisfy me. I do not need to be certain.

Although the evidence in this case - particularly the documentary evidence - is suggestive of knowledge or the kind required on the part of the [respondent] (particularly as regards clause 12.14(a)), in my view, it does not extend beyond that as I say. In my view, it is not more probable than not that the [respondent] had knowledge of the kind required. Knowing of the [owner's] complaints about cracking, designing rectification works or making recommendations do not mean the [respondent] had actual knowledge of the kind required relating to claims or possible or reasonably possible claims.

9 In the hearing before the Tribunal the respondent resolved not to call as a witness Mr Fallaw. It also transpired in the hearing that CGU wished to call evidence from one of the owners, Mr Greg Campbell. He had been present at the hearing. He had offered to support the case of CGU. The Tribunal refused to permit Mr Campbell to give evidence it seems on two bases. First, that he had been present in the hearing room up to that point and, secondly, CGU should have made arrangements earlier to call the witness.

10 On 19 September 2007, the Tribunal found that CGU was obliged to provide indemnity to the Insured. Written reasons were provided. Consequential orders were made, including the listing for an additional hearing on 5 October 2007. At the conclusion of the additional hearing, the Tribunal made further consequential orders, including a costs order in favour of the Insured.

11 The Notice of Appeal identifies several questions of law upon which the appeal is brought. These may be conveniently summarised as follows:

(a) Did the Tribunal err in its application of, or alternatively err in holding inapplicable, the rule in Jones v Dunkel?[6]

(b) Was the refusal by the Tribunal to allow CGU to call evidence from Mr Campbell erroneous, either because it was contrary to provisions of the Act or because it was an erroneous exercise of discretion?

(c) Did the Tribunal err in construing, and further or alternatively in applying, clauses 6.1 and 12.14(b) of the policy?

The application of the rule in Jones v Dunkel

12 CGU alleged that, before the policy began, there were facts and circumstances which a principal of the respondent, Mr Fallaw, knew might result in an individual making allegations against the respondent as the Insured. It relied upon documentary evidence in support of this allegation. The Tribunal concluded that this documentary evidence was 'suggestive of knowledge of the required kind on the part of the respondent.'[7]

13 Mr Fallaw was a director and principal of the Insured and the Tribunal, referring to H L Bolton (Engineering) Co Ltd v T J Graham & Sons Ltd,[8] identified Mr Fallaw with the respondent. Mr Fallaw was present in the Tribunal hearing room and available to be called. The respondent decided not to call Mr Fallaw as a witness in the proceeding. This decision was not explained.

14 Applying the principle in Jones v Dunkel, CGU submitted that the Tribunal was entitled to presume that if Mr Fallaw could have helped the respondent's case (for example, by giving evidence that he did not know, before the policy began, that someone might make an allegation against the Insured), he would have done so. Since he had not, the Tribunal could infer that:

15 In response to this submission, the Tribunal reasoned as follows:

I would agree that this is an argument which is open, except for the rejoinder supplied by the [respondent's] Counsel which I think is correct. That is, that the [CGU] Party also failed to call Mr Fallaw to give evidence when he was clearly compellable and able to do so. [CGU, no less than the [respondent], could have called Mr Fallaw to give evidence concerning his actual state of knowledge at material times. Yet it failed to do so too. But he was present and available to be called by it also. Therefore, Jones v Dunkel justifies me in drawing an adverse inference against the [CGU]. The inference is that, had he been called, the evidence he may have given could have been unfavourable to that party.

In terms of Jones v Dunkel it seems to me that both parties, in effect, cancel one another out. The [respondent] could have called Mr Fallaw but did not do so. That justifies me drawing an adverse inference. But [CGU] also failed to call him when it could have done so. That also justifies me in drawing an adverse inference. Each adverse inference it seems to me is of equal weight and, in my view, one cancels the other out.

16 This reasoning misconceives the operation of the rule in Jones v Dunkel. It is the 'unexplained failure by a party to call a witness who is in the camp of that party'[9] (emphasis added) that attracts the operation of the rule in Jones v Dunkel. If the rejoinder supplied by the respondent as described by the Tribunal in the above quote were sustainable the rule could never have application; in every case, there would be adverse inferences of equal weight cancelling out each other. Elsewhere the Tribunal demonstrated an apparently correct appreciation of the rule in Jones v Dunkel.[10]

17 It follows that the first category of ground is made out.

18 Mr Fallaw not having been called, no witness gave evidence on the central issue of the respondent's knowledge, prior to inception of the policy, of the possibility of an allegation being made against it in connection with the owners' building.

19 The owner, Mr Campbell, attended the Tribunal during the hearing. He approached CGU's solicitors and informed them that he had, during 2002, threatened Mr Fallaw that if the damage to the building were not fixed, the matter 'would end up in court'. He volunteered to give evidence before the Tribunal and a witness statement was prepared and signed by him. CGU's solicitors had not spoken with Mr Campbell prior to the Tribunal hearing and had no prior knowledge of the alleged threat about which he had volunteered to give evidence.

20 During the morning of the third day of the hearing (at which time CGU had not yet closed its case), counsel for CGU informed the Tribunal that CGU had that morning obtained a further witness statement. The Tribunal inquired as to the nature of the evidence sought to be given by the witness and counsel for CGU summarised the evidence sought to be given by Mr Campbell as follows:

This witness would give evidence that, on two occasions during 2002 ... he spoke with Mr Fallaw at the property in question and he said to Mr Fallaw that, if the damage were not remedied, then proceedings would be issued

and that Mr Fallaw and therefore the insured ... during 2002 ... had been threatened that proceedings would be issued if the damage were not remedied.

21 Mr Fallaw was present in the Tribunal to hear the evidence from Mr Campbell and to provide instructions to counsel for the respondent as necessary for cross-examination of Mr Campbell. Further, CGU conceded that it would not object to the respondent re-opening its case to the extent necessary for any evidence to be called by the respondent in reply to the evidence from Mr Campbell.

22 In such circumstances, the respondent would have suffered no detriment or prejudice if CGU had been given an opportunity to call evidence from Mr Campbell. If an adjournment was necessary there appears to have been no suggestion of prejudice that could not be met by an order for costs.

23 Nevertheless, the Tribunal ruled that CGU could not call Mr Campbell to give evidence and gave ex tempore reasons relying upon a case management direction of the Tribunal made on 21 March 2007.

24 Section 97 of the VCAT Act requires the Tribunal to act fairly and according to the substantial merits of the case in all proceedings. Sub-section 98(1) of the Act provides that the Tribunal is bound by the rules of natural justice, may inform itself on any matter as it sees fit and must conduct each proceeding with as little formality and technicality as the requirements of the Act and the enabling enactment and a proper consideration of the matters before it permit. Section 102 of the Act provides that the Tribunal must allow a party a reasonable opportunity to call evidence.

25 In Keirl v Kelson,[11] Byrne J proceeded on the basis (in obiter) 'that it would amount to a breach of natural justice for the Tribunal to refuse to receive relevant evidence offered by a litigant.' Similarly, in Beling v Dimkovski,[12] Smith J concluded that the Tribunal had denied a party natural justice and a reasonable opportunity to call evidence by refusing to grant an adjournment to collect evidence necessary to prove the party's claim. That conclusion was drawn notwithstanding an assumption that the need may have arisen because of 'sloppy preparation' by the party (who was a solicitor), because the opportunity to adduce the evidence could, in his Honour's view, have been given without detriment to the other party.

26 I am persuaded the evidence sought to be called from Mr Campbell was relevant, going to a central issue about which no other witness had given evidence. If CGU had been allowed to adduce the evidence, the respondent would not have suffered relevant prejudice. CGU submitted before me that the refusal by the Tribunal to allow CGU to call evidence from Mr Campbell was contrary to sections 97, 98 and 102 of the Act. I accept that submission.

27 Further or alternatively, CGU submitted that the refusal by the Tribunal to allow CGU to call evidence form Mr Campbell constituted an erroneous exercise of discretion by the Tribunal.

28 In Bell Corp Victoria Pty Ltd v Stephenson,[13] where directions had been made as to witness statements in a form relevantly identical to those made in the Tribunal proceeding, Ashley J concluded that the Tribunal had erred by 'failing to take into account, in the exercise of its discretion, the important consideration that a party should ordinarily be heard upon the merits of matters in issue' and by treating 'that consideration, running in the plaintiffs' favour, as lost to them by reason of the fact only that the order for witness statements had not been obeyed without reasonable excuse'.[14]

29 Similarly, in Smith v Gannawarra Shire Council,[15] where an application for adjournment on the ground that a principal witness was unavailable had been denied, Charles JA held that, having regard to Queensland v JL Holdings,[16] the exercise of discretion by the trial judge had miscarried. Ordinarily, an adjournment application ought be dealt with by an appropriate order for costs in the absence of any prejudice to the other party not compensable by an order for costs.[17]

30 The Tribunal proceeded on the erroneous basis that its case management directions constituted the appropriate test for determining whether CGU should be permitted to call evidence from Mr Campbell. It failed to apply the appropriate test for determining whether CGU should be permitted to call evidence from Mr Campbell, namely, whether the evidence was relevant and, if so, whether it could be received without irremediable prejudice to the Insured.[18] The Tribunal did not conduct a balancing exercise as to the interest of CGU which was required as explained in Bell.

In my opinion the Tribunal erred in law by failing to take into account, in the exercise of its discretion, the important consideration that a party should ordinarily be heard upon the merits of matters in issue. An aspect, inter alia of the rules of natural justice made applicable by s.98(1)(a) and not excluded from consideration by s.98(4), this important consideration did not simply vanish because the plaintiffs failed to obey the direction. It was a necessary matter to put into the balance. Yet I agree with plaintiffs' counsel that the Tribunal treated that consideration, running in the plaintiffs' favour, as lost to them by reason of the fact only that the order for witness statements had not been obeyed without reasonable excuse.

The Tribunal separately considered "the overall justice of the situation". In that connection it referred to Queensland v JL Holdings and to s.97. This ought to have raised, in a slightly different context, consideration of a party's right, ordinarily, to be heard upon matters in dispute. But the Tribunal's focus was only upon disadvantage as it perceived it to the defendant. There was no balancing exercise at all.

32 It follows that the Tribunal was in error in refusing to allow CGU to call evidence from Mr Campbell on both bases as submitted. First, the refusal contravened the provisions of the VCAT Act. Secondly, the refusal constituted an erroneous exercise of the discretion.

33 I turn to the last category of grounds relating to the construction and application of the policy. Clauses 6.1 and 12.14(b) of the policy require for their application a conclusion only that a reasonable person would have thought that there was a real possibility of an allegation against the Insured. The Tribunal considered that there was a basis for blameworthiness on the part of the Insured in respect of such an allegation. However, this is not what is required. Conveniently, Kelly and Ball in Principles of Insurance Law, note:[20]

It does not matter that the allegations are without foundation or based on a complete misunderstanding of the facts. Nor should it matter if the complainant gives no indication of the basis of his or her complaint and the insured is unable, for whatever reason, to identify the circumstances giving rise to it. Provided there is a sufficient connection between the complaint and the claim which is ultimately brought, it is difficult to see why the claim does not arise out of the complaint or why the complaint is not itself a circumstance which can be the subject of a notice.

34 The Tribunal, however, did not construe the policy in this way. Instead, it made and had regard to several findings which were relevant only to the question of blameworthiness. In so doing the Tribunal was in error.

35 A further error of law, it was submitted for CGU before me, was the failure by the Tribunal to determine whether, irrespective of the direct evidence of specific witnesses, the documentary evidence adduced before the Tribunal justified a conclusion that paragraph (b) of the definition of 'Known Circumstance' in clause 12.14 of the policy, properly construed, had been established. The documentary evidence was extensive and included engineering and geological reports, design drawings, file notes, various correspondence between the parties to the original proceedings and other persons, invoices and insurance manuals, proposals and schedules. Mr Donald Peter Haworth was a consulting engineer called as to what a reasonable person in the professional position of the respondent would or should have thought. Evidence was also called by CGU from Ms Nieta Adine Tanian and Ms Dina Reckas, both underwriters. Broadly speaking, they gave evidence as to whether, as underwriters, they would have agreed to underwrite to respondent's risk in light of events, circumstances and knowledge prior to 21 March 2004. Initially Ms Reckas said she would have declined to do so but then said she would have agreed to underwrite the respondent's risk but subject to specific exclusions. Those exclusions are not clear to me, nor is the substance of the evidence of Ms Tanian, but it seems to have been largely consistent with that of Ms Reckas on this point.[21]

36 The Tribunal regarded the three witnesses, Haworth, Tanian and Reckas as truthful. However concluded:[22]

I am satisfied both of [Tanian and Reckas] were telling the truth in the evidence they gave. But that is not to say I should place undue weight on what they said. I find it implausible that they could speak of [the respondent's] knowledge or Mr Fallaw's "knowledge". They have the same limitations as myself in that regard. I take his knowledge to be that of [the respondent] but I am unable to say, except suggestively, what his knowledge either is or was. [Tanian and Reckas] of course, have the added advantage of having been informed of matters by Mr Harry [a witness not called by CGU].

37 The Tribunal then proceeded[23] to reject the evidence of Ms Tanian and Ms Reckas on the basis they gave their evidence from an insurance industry perspective and with the benefit of hindsight. Ultimately their evidence was rejected because the witnesses were not at arm's length from CGU.[24]

38 On the other side, the Tribunal did not accept the evidence of Mr Haworth as to knowledge, on the basis that the assessment is to be made objectively and the witness could not say directly what the state of knowledge of the respondent through Mr Fallaw was. Having rejected the evidence of the three witnesses, the Tribunal was only left with the documentary evidence as to knowledge for the purpose of construing and applying clauses 6.1 and 12.14(b) of the policy.

39 On this question, the Tribunal said that it had only the evidence (apart from the documentation and common facts) of those who gave evidence. However, having found that the evidence of Ms Tanian, Ms Rekas and Mr Haworth did not justify a conclusion on the balance of probabilities that CGU was entitled to refuse indemnity, the Tribunal did not consider whether the documentary evidence itself (or a combination of the documentary evidence and the oral evidence of one or more witnesses) might justify such a conclusion. The omission occurred even though the Tribunal, earlier in its reasons, had acknowledged, that the 'documentary evidence [was] suggestive of knowledge of the required kind on the part of [the respondent]'.

(a) the owners, Mr and Mrs Campbell, had complained almost two years prior to the policy about cracking at the property;

(c) the respondent through Mr Falaow had endorsed a design that had not complied fully with the recommendations in the geotechnical report with which it had been provided before endorsing the design;

(d) the respondent had designed rectification works; and

(e) the respondent had recommended demolition and replacement of part of the works which it had designed.

41 CGU submitted before me that, if the Tribunal had considered the facts proven by the documentary evidence (read with the concessions made at trial), it would have found on the balance of probabilities that CGU was entitled to refuse indemnity under paragraph (b) of clause 12.14 of the policy. I am satisfied that CGU has made out error. However, I would not finally determine the matter on this point. Rather it is a matter to be remitted for rehearing on the evidence.

42 It was urged for CGU that if the appeal was to be allowed, the matter should be finally disposed of by me. It was said that if satisfied on the Jones v Dunkel point, I was capable of determining the matter now, absent the evidence of Mr Fallaw. I disagree. I consider the issues involve the determination of facts based on all the evidence that ought be remitted to the Tribunal for rehearing and determination. It is not a case here in my view that no useful purpose will be served by remitting the matter.[25]

44 The orders made by the Tribunal on 19 September and 5 October 2007 should be set aside and the matter should be remitted for rehearing to the Tribunal constituted by a different member or members.

[1] On 16 April 2008, the respondent made an application on summons for leave to be granted to the solicitors for the respondent to file and serve a Notice of Solicitor Ceasing to Act, pursuant to r 20.03 of the Supreme Court Rules. The application was supported by the affidavit of Mr Craig Alan Terrill, of McCabe Terrill Lawyers, which stated that Mr Terrill had received instructions to cease acting for the respondent as the respondent was not in a financial position to contest the appeal. On 22 April 2008, Master Kings granted leave. At the hearing of the appeal the respondent was called and failed to appear.

[2] [2007] VCAT 1974, [48].

[3] The Tribunal was provided with a book of documents on which CGU relied.

[4] [2007] VCAT 1974, [49].

[5] [2007] VCAT 1974, [50].

[6] [1959] HCA 8; (1959) 101 CLR 298.

[7] [2007] VCAT 1974, [50].

[8] [1957] 1 QB 159, 172.

[9] Ronchi v Portland Smelter Services Ltd [2005] VSCA 83, [32].

[10] See for example the remarks concerning a possible witness, Mr John Harry, [2007] VCAT 1974, [68].

[11] [2004] VSC 224; (2004) 21 VAR 422, [5].

[12] [2006] VSC 17.

[13] [2003] VSC 255.

[15] [2002] VSCA 69; (2002) 4 VR 344, 350-351.

[16] [1997] HCA 1; (1996) 189 CLR 146, 154.

[19] [2003] VSC 255, [65] - [66].

[20] D Kelly and M Ball Principles of Insurance Law, Butterworths, [14.0090].

[21] [2007] VCAT 1974, [67] - [68].

[22] [2007] VCAT 1974, [69].

[23] [2007] VCAT 1974, [70].

[25] cf Kapoor v Monash University [2001] VSCA 247; [2001] 4 VR 483, [50].