Bathurst Regional Council v Local Government Financial Services Pty Ltd [2010] FCA 1395 | Case summary

REASONS FOR JUDGMENT 1 These are three notices of motion brought by Local Government Financial Services (LGFS) seeking a grant of leave to file a second cross-claim against American Home Assurance Company (AHAC) pursuant to O 5 r 8 of the Federal Court Rules. That rule provides that "a respondent may cross-claim against an applicant or any other party without the leave of the Court, but may not cross-claim against any other person not being a party without such leave". As American Home Assurance Company is not a party to these proceedings leave is required. 2 The notices of motion are supported by an affidavit of Stephen Klotz, a solicitor employed by the solicitor for LGFS. In effect, that affidavit annexes a sequence of correspondence between the solicitor for LGFS and the solicitor for AHAC in respect of cover under the insurance policy. 3 The documents show that LGFS made a claim under the policy at some time before 25 May 2009. On that date, AIG Australia (which is the former name of AHAC) advised LGFS's broker that it accepted the claim and granted indemnity but otherwise reserved its position in relation to any new information. 4 Thereafter, an issue arose between AHAC and LGFS with respect to disclosure by LGFS before entry into the insurance policy in respect of LGFS's knowledge or otherwise that the Rembrandt notes (which are the subject of these proceedings) might be regarded as derivatives and that dealing in those derivatives would be outside the scope of LGFS's financial services licence. 5 The correspondence between LGFS's solicitor and AHAC's solicitor culminates in a detailed letter from AHAC's solicitor to LGFS's solicitor of 29 April 2010. In paragraphs 1.17 to 1.26 of that letter, AHAC's solicitor sets out in detail a set of considerations which it said led to the view that … the Notes are derivates and obviously so and that your client clearly understood the structure of the Notes. 6 In paragraph 2 of the same letter, AHAC's solicitor requested further information from LGFS in support of the claim under the policy. That information was subsequently provided, subject to a claim for privilege over certain documents. 7 On 15 September 2010, a letter from AHAC's solicitor to LGFS's solicitor identified what it described as "indeterminate matters". According to this correspondence, "certain factual matters, or mixed matters of fact and law, relevant to coverage are in dispute at the date of this letter" and AHAC did not propose "to determine those disputed matters for the purpose of stating its position on coverage". The letter said that: Chief amongst those matters is the question of whether or not, to the knowledge of your client, the financial products the subject of these claims were derivates. 8 The letter then notes that LGFS denied that the products were derivatives but otherwise leaves that matter undetermined. 9 By a letter dated 14 October 2010, in response to further correspondence from LGFS's solicitor in relation to the so-called indeterminate matters, the solicitor for AHAC said that its letter of 15 September 2010: … did not suggest that the matters under that heading [that is, "indeterminate matters"] should be regarded as being in dispute between your client and ours. 10 This course of correspondence ultimately led to the solicitor for LGFS forwarding a draft cross-claim to the solicitor for AHAC on 25 October 2010. 11 It is also relevant that on 25 June 2010 in a without prejudice communication from the solicitor for LGFS to the solicitor for AHAC, a proposal was put forward in which LGFS indicated that it would not make any cross-claim against AHAC in these proceedings pending their final determination, including on appeal, on the basis that AHAC would: - (i) agree to be bound in any subsequent proceedings between LGFS and AHAC by any findings of fact or law otherwise made in these proceedings relevant to the question of indemnity, (ii) not argue in any subsequent proceeding that it had been prejudiced or that LGFS ought to be refused relief of any kind by reason of LGFS not having joined AHAC as a cross-respondent in these proceedings. It appears that there either was no formal response to this communication or at the least it should be assumed that by the passage of time the offer set out in that letter has not been accepted. 12 AHAC's most recent position, as set out in a letter dated 19 November 2010, is that joinder of AHAC is unnecessary and premature and that AHAC has been meeting LGFS's defence costs "on the basis of a reservation of its rights". According to that letter, "the simple point is that the policy does not respond to claims but to civil liability". Further, as there is at present no such liability and such a liability may never be established, the proposed cross-claim against AHAC is "entirely speculative". 13 On the motions today, the position of StateCover (an applicant in one of the proceedings) is that is does not oppose joinder. Standard and Poor's (the second cross-respondent) also consents to joinder. Insofar as the Corowa and Parkes Shire Councils are concerned, they have nothing to say about the motions subject only to a strong preference that the date for mediation, scheduled to commence on 10 December 2010, is maintained. Insofar as Bathurst Regional Council is concerned, it supports the position taken by AHAC, on the basis of a concern that the date for mediation not be lost and that the dates for hearing not be adversely affected. 14 LGFS has prepared a proposed cross-claim. The essence of that cross-claim is that despite repeated requests AHAC has refused or failed to inform LGFS whether it accepts that it is liable to indemnify LGFS for any civil liability that it has in these proceedings. Further, there is a claim that AHAC (as a result of the sequence of events briefly referred to above) is in breach of s 13 of the Insurance Contracts Act 1984 (Cth) because it has not acted with the utmost good faith. 15 By reason of these matters, either individually or together, LGFS says that it is entitled to a declaration that AHAC is liable to indemnify LGFS for any civil liability it has in these proceedings and for defence costs relating to the proceedings up to the maximum liability. Further LGFS claims, in the event that judgment is entered against it, judgment for the same amount (up to $20 million), less defence costs actually paid, against AHAC and judgment for any unpaid defence costs as well as interest. 16 The short position of LGFS is that, in the factual circumstances of this matter: - (i) the mediation can proceed next week, (ii) arrangements can be made so that the hearing dates can be maintained, and (iii) the claim is not premature. There is an existing cause of action based on the allegation that there has been a refusal of cover and a failure to act in the utmost good faith. If judgment is entered against LGFS, there would be an immediate right for indemnity which has not been conceded by AHAC. Accordingly, there is an existing cause of action which LGFS is entitled to litigate. Further, there is no prejudice to AHAC by reason of this joinder application. 17 For its part, AHAC acknowledged that LGFS could commence fresh proceedings in relation to the insurance issues. It did so on the basis that although in theory such proceedings could commence, AHAC would have the right in those proceedings to seek to strike out the proceedings on the basis that they do not disclose an arguable cause of action. This, said AHAC, was relevant in that there is authority, by analogy to O 6 r 8 of the Federal Court Rules (dealing with the joinder of parties), that the Court must be satisfied that there is an arguable case against the proposed respondent before granting leave: see Apotex Pty Ltd v Les Laboratoires Servier (No 4) [2010] FCA 1202. By reason of the prematurity issue, AHAC claimed that there was no arguable cause of action against it. 18 Although I have some concern about the issue of prematurity, I am persuaded by Mr Giles's submissions on behalf of LGFS. 19 The proposed cross-claim does disclose an arguable cause of action against AHAC, certainly at least on the good faith ground. Although the claim against AHAC is contingent, it is not relevantly hypothetical. For that reason, it seems to me the fact that LGFS could commence other proceedings, as Mr Giles submitted, weighs in favour of the joinder of AHAC to these proceedings. As Mr Giles foreshadowed, if such other proceedings were commenced, it is difficult to see that they would not in any event, as a procedural matter, end up subject to some form of notice of motion to be dealt with in conjunction with or in relation to these proceedings. Precisely the same procedural arrangements can be made within the context of these proceedings, without the need to force LGFS to commence new proceedings. 20 Although AHAC says it has not declined indemnity but has simply reserved its position, the correspondence suggests that the reservation is on the basis of a stated position. In the correspondence of 29 April 2010 AHAC stated: Our client's view is that the Notes are derivatives and obviously so and that your client clearly understood the structure of the Notes. 21 That clear statement has to be considered with regard to the later correspondence referring to what AHAC described as "indeterminate matters." In these circumstances, there is clearly an issue between LGFS and AHAC about LGFS's knowledge regarding the status of the Rembrandt notes. 22 Further, there appears to be an issue regarding AHAC's payment of ongoing defence costs. AHAC has reserved its right to withhold paying defence costs should LGFS not provide it with certain information which LGFS says is subject to a claim for privilege. 23 Accordingly, the issue of prematurity does not seem to me to be sufficient, on the facts of this case, to prevent LGFS from seeking joinder of AHAC. 24 AHAC raised a question of delay on the basis that its position was indicated at least by 29 April 2010 and it is now 26 November 2010. AHAC said this delay should be considered in circumstances where there was a directions hearing on 28 September 2010, at which time I fixed the proceedings for hearing and mediation. 25 In one sense, it is true that this application for joinder could have been brought earlier, however the correspondence shows ongoing communications with LGFS attempting, in good faith, to identify the actual position of AHAC in relation to proceedings. On balance, I do not consider that there has been any unwarranted delay by LGFS. I am also not concerned by the hearing date. The hearing date is not until October 2011 (almost a year away), with a quite generous timetable. I have no doubt that AHAC would be able to be ready for the hearing. I am also not particularly concerned by the mediation date. Although the mediation is about two weeks away, AHAC has had notice of and a fairly close involvement in these proceedings since at least December 2009, including electronic access to all of the discovered documents. The fact that AHAC knows or says it knows little about the StateCover proceedings seems to be an insufficient reason either to refuse joinder or to vacate the current mediation date. I do not see this case as one where there is any real prejudice or unfairness to AHAC. It is not realistic, given the hearing date, to say that it will have to play catch up and, given its prior involvement, I am satisfied that it will be able to attend the mediation in good faith and make a meaningful contribution. 26 In terms of the insurance matters being reasonably discreet from the rest of the proceedings, there is, as Mr Giles said, an area of overlap relating to the nondisclosure argument and LGFS's state of knowledge. 27 If AHAC and LGFS had been able to come to some arrangement, as set out in the without prejudice correspondence of 25 June 2010, then there would have been no prejudice to LGFS by not proceeding with this cross-claim. However, and while it was entirely a matter for AHAC not to agree to that proposal, the consequence of it not agreeing is that LGFS is exposed to substantial prejudice if AHAC is not joined in these proceedings and thereby bound by relevant findings of fact. The risk is that there will be two sets of proceedings and potentially inconsistent factual findings which, in my view, is unacceptable. 28 The case is not analogous to Commonwealth Bank of Australia v Peto (2006) 152 FCR 362; [2006] FCA 516. In that case, Ms Nader (the person proposed to be joined) had signed solicitor's certificates for security to the Commonwealth Bank. Relevant factors against the joinder of Ms Nader included that: - (i) the proceedings had been on foot for some three years, (ii) Ms Nader was an individual litigant who would be sued by a large bank in what was described as "heavy commercial litigation", (iii) the other parties had been involved for "a considerable number of years", and (iv) joinding Ms Nader "would create very substantial practical problems for her lawyers adequately to prepare the matter" (at [68]-[69]). Although it was accepted that there would be prejudice to the bank by reason of Ms Nader not being joined because of the risk of duplication of proceedings, Rares J was satisfied that the interests of justice would be better served by exposing the bank to some prejudice rather than exposing Ms Nader to what his Honour considered to be far more substantive prejudice to her. 29 The same conclusions cannot be reached in the present case. If the matters are not resolved between LGFS and AHAC, then those issues will have to be determined one way or another. I have already mentioned the issue of costs and AHAC's submission that it should not be forced to attend a very lengthy trial when what it described as issues in the insurance claims are reasonably discreet and are still premature. As I have said, there is an overlap between the issues. Further, case management can do the best it can to ensure that AHAC is not unduly burdened by otherwise having to be involved in a case which gives rise to other issues not directly relevant to AHAC. The privilege issues do not seem insuperable, although they will have to be worked out. However, it seems to me that would have to be worked out, in any event, in separate proceedings. 30 The prejudice to AHAC of the type which I have described is far outweighed by the prejudice to LGFS if an order for joinder is not made. 31 Accordingly, I make orders 1 and 2 in each of the notices of motion. I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jagot.

Bathurst Regional Council v Local Government Financial Services Pty Ltd

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