Hansen v Sedrak [2017] NSWLC 4 | Case summary

Setting Aside Judgment Entered Against Good Faith

The first limb of the plaintiffs' notice of motion seeks order to set aside the earlier consent judgment to avoid the consequences of section 24. The motion seeking to set aside the consent judgment relies on the provisions of UCPR 36.15. The Rule provides as follows: (1) A judgment or order of the court in any proceedings may, on sufficient cause being shown, be set aside by order of the court if the judgment was given or entered, or the order was made irregularly, illegally or against good faith.
The plaintiffs submit that the earlier consent judgment was obtained by the defendants against good faith.
Where a judgment has been entered as a consequence of an agreement between parties then ordinarily parties will be bound to that agreement. The circumstances that would warrant a Court setting aside a consent judgment include, but are not limited to, the circumstances in which the Court might relieve a party from a contractual agreement.
In Chand v Zurich Australian Insurance Limited [2013] NSWSC 102 Adams J reviewed earlier authorities on the meaning of "good faith". Adams J referred to Taylor v Johnson (1983) 151 CLR 422 at 432 (Mason ACJ, Murphy & Deane JJ): The particular proposition of law which we see as appropriate and adequate for disposing of the present appeal may be narrowly stated. It is that a party who has entered into a written contract under a serious mistake about its contents in relation to a fundamental term will be entitled in equity to an order rescinding the contract if the other party is aware that circumstances exist which indicate that the first party is entering the contract under some serious mistake or misapprehension about either the content or subject matter of that term and deliberately sets out to ensure that the first party does not become aware of the existence of his mistake or misapprehension.
Further at 432-433: In such a situation it is unfair that the mistaken party should be held to the written contract by the other party whose lack of precise knowledge of the first party's actual mistake proceeds from wilful ignorance because, knowing or having reason to know that there is some mistake or misapprehension, he engages deliberately in a course of conduct which is designed to inhibit discovery of it.
Bryson JA in Kendell v Carnegie & Ors [2006] NSWCA 302; (2006) 68 NSWLR 193 considered that the phrase "against good faith" is "an expression which requires the impeachment of the intention or behaviour of the person whose good faith is impugned" (at [60]).
The circumstances in which a party might be said to have acted "against good faith" cannot be exhaustively defined.
The plaintiffs rely on the Morganite principle expounded by Smart J in Morganite Ceramic Fibres Pty Ltd v Sola Basic Australia Ltd (1988) 5 ANZ Ins Cas 60-883. In that case the insured had purchased faulty machinery. The insured signed a release with the seller which the seller relied on as a defence to a subsequent claim by the insurer acting under rights of subrogation. Smart J held that the defendant's plea of accord and satisfaction failed based on a proper construction of the release. Smart J went on to find, in the alternative, that the release did not bind the insurer because the defendant knew that payments had been made by the insurer and knew of the insurer's rights of subrogation. Smart J referred to the following passage from the United States decision of Ocean Accident and Guarantee Corp v Hooker Electrochemical Co (1925) 147 NE 351 : … when the (defaulting contractual party), chargeable with notice of (the insurer's) rights which largely had become detached from and independent of those retained by the (insured), made a settlement with the latter to which the insurer was not a party, it must be regarded as having made such settlement subject to and with reservation of the rights possessed by (the insurer), and with the implication of a consent that the rights of the two parties should become separated even though originally part of an indivisible cause of action.
While Smart J considered there was merit in what was said by the United States Court in Ocean it is clear that he did not rely on the decision, as he hypothesises "if I were to follow that path it would follow that the present proceedings are incorrectly constituted and that the insurer should be a plaintiff".
Smart J noted, however, comments of Mason JA in Sydney Turf Club v Crowley [1971] 1 NSWLR 724 (at 734) and Barwick CJ in State Government Insurance Office (Queensland) v Brisbane Stevedoring Pty Ltd (1969) 123 CLR 228 (at 240-241) and concluded that those decisions preclude any view that an independent action can arise in the insurer in the case before him.
Smart J went on to refer to the exception referred to by Barwick CJ: It is also settled law that an insured may not release, diminish, compromise or divert the benefit of any right to which the insurer is or will be entitled to succeed and enjoy under his right of subrogation. On occasions an attempt by the insured to do so will be ineffective against the insurer because of the knowledge of the circumstances which the person under obligation to the insured may have.
Smart J gave effect to that qualification by holding a release would be ineffective against an insurer where the obligator knew that it would infringe the insurer's rights.
The comments by Smart J were obiter. On appeal (Sola Basic Australia Ltd v Morganite Ceramic Fibres Pty Ltd [1989] NSWCA 187), the majority of the Court of Appeal found it unnecessary to consider the obiter comments as the majority upheld his Honour's primary decision. Meagher J, who dissented, found that in favour of the defendant on the issue of accord and satisfaction and went on to conclude that the comments by Smart J regarding subrogation "were fundamentally misconceived" for a number of reasons. Meagher J said where an insured entered into an agreement which is in breach of an obligation not to prejudice the rights of the insurer, "One thing is clear, it does not enable an insurer to treat as void a transaction which has been completed in breach of the stipulation."
In Chand v Zurich Adams J considered the Morganite principle in the course of dealing with an appeal against a Local Court decision to set aside a consent judgment. In the Local Court the insurer relied on the Morganite principle as a basis to set aside the consent judgment. The Local Court was confronted with circumstance, bearing some similarity to the present case. The insured obtained a consent judgment for loss of use and the insurer subsequently sought to recover the costs of repairs under rights of subrogation. His Honour Magistrate Townsden (as he then was) found that the insurer was unaware of the earlier proceedings commenced for loss of use and the defendant was aware of the intention of the insurer to sue for the cost of repairs when it settled the earlier claim for loss of use. Magistrate Townsden found that the Morganite principle applied and set aside the earlier consent judgment.
In considering the Morganite principle Adams J noted the different opinions of Smart J and Meagher JA. Although there is no clear authority resolving the differing views of Smart J and Meagher JA, Adams J found support for the comments of Smart J in the decision of Handley JA in Baltic Shipping Co v Merchant "Mikhail Lermontov" (1994) 36 NSWLR 361. In that case the Court was dealing with a release procured by a company directly with the insured persons for amounts substantially than the total loss. The Court held that the insured persons would be entitled to relief from the releases under the Contracts Review Act; however, Handley JA (with whom Kirby P and Mahoney JA agreed) went on to state: However, since the Company was on notice the releases were ineffective against the insurers: see State Government Insurance Office (Queensland) v Brisbane Stevedoring Pty Ltd and Morganite Ceramic Fibres Pty Ltd v Sola Basic Australia Ltd (1987) 11 NSWLR 189."
While there might be argument regarding the import of the comments by Handley JA, in Chand v Zurich Adams J formed the view that they were supportive of decision of Smart J and part of the ratio. Adams J considered that the decision of Smart J should be followed.
This Court is similarly bound by these authorities.
The application of the Morganite principle to the present case does not, of itself, lead to a conclusion that the earlier consent judgment should be set aside for reasons of being "against good faith". It remains necessary for evidence to be presented that either expressly or inferentially allows such a finding. In Chand v Zurich Adams J found that it was implicit in the Magistrate's finding that judgment was irregular and against good faith merely as a consequence of finding that the Morganite principle applied. To my mind, it is not clear how one finding necessarily follows the other. However, it is at least open to the inference that the mere step of entering into a consent judgment was done with the intention of defeating an otherwise legitimate further claim arising from the same cause of action and such an intention would be against good faith.
Submissions made on behalf of the defendants were that the present case is distinguishable from Chand v Zurich in that there was no basis to find that the conduct on the part of the defendants was "crafty" to adopt the language of Smart J in Morganite or guilty of "sharp or questionable conduct" to adopt the language of Adams J in Chand v Zurich.
In the present case Mr Amin, the legal representative on behalf of the defendants, gives evidence of his dealings with representatives of both AAMI regarding the claim for cost of repairs and Right2Drive regarding the claim for loss of use. What is apparent from the communications is that claims officers employed by Right2Drive were aware as at 10 February 2016 that the second plaintiff's insurer had arranged for repairs to the plaintiffs' motor vehicle. In an email dated 10 February 2016 Mr Brighton, a claims co-ordinator, on behalf of Right2Drive sent an email to Mr Amin in the following terms: Please see attached all relevant documentation from us, should you require any documentation regarding liability or proof of loss you will need to contact our clients insurer AAMI.
On 15 February 2016 Mr Brighton wrote a further email to Mr Amin: Our clients vehicle was repaired through Wunderlich Smash Repairs an approved repairer for our client insurer AAMI and as such they will not provide us with repair documents"
On 4 March 2016 Mr Amin responded to Mr Brighton by email: Please note that the repair documents and the towing invoices received from AAMI suggest that your client's vehicle was towed to the Wunderlich Smash Repairs on 4th of January 2016. The vehicle was assessed on 6th January 2016 and the [sic] it went out from the repairer shop on 15 January 2016.
On 4 April 2016 Mr Amin forwarded to Right2Drive a copy of proof of loss documents received from AAMI.
What is apparent for the correspondence is that Right2Drive was on notice of the existence of the subrogated right of AAMI who had paid for repairs. Mr Amin did nothing to hide the fact and indeed, Mr Amin provided proof of loss material to Right2Drive in what can only be described as an effort to work co-operatively with Right2Drive in relation to the claim. Mr Amin was dealing with claims officers within Right2Drive who were acting as debt recovery agents on behalf of the plaintiffs. The circumstances are far removed from cases such as Morganite and Baltic Shipping Co v Merchant "Mikhail Lermontov" where the defendant was dealing with inexperienced lay persons unfamiliar with the law and sought to take advantage of that inexperience.
Furthermore, there is no evidence to support the proposition that the defendants drafted the consent judgment in a manner that was intended to defeat the interests of the plaintiffs' proof of loss claim. The consent judgment document filed on 9 June 2016 indicates that it was prepared by the legal representatives for the insurer rather than the defendants.
In the circumstances, I am satisfied that the evidence by Mr Amin effectively rebuts any inference that might have been drawn that the defendants obtained the consent judgment against good faith. The defendants did not engage in a course of conduct designed to inhibit discovery of the insurer's claim.
Right2Drive had knowledge of the subrogated right of AAMI, however, for reasons unexplained, it took no steps to inform AAMI of the plaintiffs' concurrent interests. AAMI was under an obligation to obtain authority from its insured to commence litigation in the name of the insured (see Woodside Petroleum Development Pty Ltd v H & R-E & W Pty Ltd (1999) 20 WAR 380 at 387). Accordingly, I can only infer that the plaintiffs were aware of the commencement of the first proceedings. It is not clear why this was not then communicated to Right2Drive as the insured's agent.
I do not construe the Morganite principle enunciated by Smart J as imposing a positive duty upon a defendant to inform a plaintiff of the possible prejudice to a secondary claim. In Kaporis v Riddington [2011] NSWLC 35 the Court at [40] held that Part 6 of the Civil Procedure Act 2005 did not create a duty upon a defendant to inform a plaintiff of the possible impediment to recovery of further damages in subsequent proceedings. In circumstances where it was reasonable to expect that the plaintiff would be aware of the secondary claim and the defendant took no steps to inhibit its discovery it cannot be said that the defendant acted against good faith.
The requirement to show "against good faith" within r 36.15 relates to the conduct in procuring of the earlier judgment. The mere fact that the defendants now seek to defeat the subsequent claim by virtue of that earlier judgment is not a basis for setting aside the earlier judgment.
The plaintiffs have failed to establish that the earlier judgment was entered "against good faith" as required by r 36.15. This limb of the plaintiffs' motion fails.

Striking out Defence under Section 24 CPA

The plaintiff's alternative recourse is to strike out those parts of the defendants' pleading that rely on section 24 of the Civil Procedure Act 2005 pursuant to r 14.28.
Section 24(1) provides: (1) If: (a) a person (the first person) splits any cause of action against another person (the other person) so as to commence proceedings, or make a cross-claim, for part only of the amount for which proceedings may be commenced on that cause, and (b) judgment is given or entered, or a final order is made, on the proceedings of cross-claim,
By paragraph 13 of the Defence filed, the defendants plead that they are entitled to a judgment in their favour pursuant to section 24 by reason of the consent judgment entered in the earlier proceedings on the same cause of action.
The plaintiffs rely upon the decision of Magistrate Milledge in Peters v De Armas (unreported, Local Court of NSW, 16 April 2014) where her Honour found that section 24 did not prevent an insurer commencing and maintaining separate proceedings to recover an insured loss subsequent to a judgment having been entered in favour of the plaintiff against the same defendant for the uninsured loss arising from the same collision.
In that case the plaintiff commenced proceedings to recover car hire fees for the loss of use of her motor vehicle arising from a collision on 5 September 2012. Those proceedings were defended and the Local Court sitting in its Small Claims Division gave a verdict and judgment in favour of the plaintiff on 13 February 2013. On 13 November 2012 the insurer commenced a second set of proceedings seeking to recover the cost of repairs to her motor vehicle. Those proceedings were defended and remained unresolved as at 13 February 2013. Two days later on 15 February 2013 the insurer became aware of the earlier proceedings that had been determined.
The defendant then filed a notice of motion seeking orders to dismiss the second set of proceedings on the basis of res judicata, the operation of section 24 and to prevent an abuse of process. The plaintiff filed a notice of motion seeking to set aside the earlier judgment. The motions came before Milledge LCM who determined on an interlocutory basis that section 24 did not apply and that it was therefore unnecessary to set aside the earlier judgment. The ratio of the decision was that the Court viewed the second proceedings as being brought by a different entity (being in substance, the insurer) than the first (being the plaintiff in a personal capacity). Therefore, section 24, by its terms, did not apply.
Both parties lodged an appeal against the decision of Milledge LCM. In De Armas v Peters [2015] NSWSC 1050 Wilson J declined to grant leave to hear an appeal against an interlocutory order of the Local Court. Wilson J did acknowledge that the legal issue was one upon which "reasonable minds might differ"; however, the mere fact that the magistrate was arguably wrong did not provide a sufficient basis for granting leave to appeal against an interlocutory order. Wilson J considered that factors including the relatively modest value of the claim, the need for finality in the proceedings, the absence of prejudice demonstrated between the parties and the fact that the interlocutory decision of a Local Court is not binding authority as factors that weighed against giving leave. As a consequence there was no determination of the correctness of decision of the Local Court.
The decision by Milledge LCM was given ex tempore. The decision does not refer to any particular authority relied upon as a basis for finding that the subrogated insurer has a separate and distinct right from an insured. The general rule is as stated by Mason JA in Sydney Turf Club v Crowley [1971] 1 NSWLR 724 at 734: Where an insurer is subrogated to the rights of the insured against a third party, the insurer does not acquire an independent cause of action in his own right. He succeeds to the insured's cause of action against the third party, in this case a right of action on the policy issued by the Jockey Club. That right of action remains in all respects unaltered, it is brought in the name of the insured and it is subject to all the defences which would be available if the action had been brought by the insured for his own benefit.
The decision of the Local Court in Peters v De Armas operates as an exception to that general rule; however, it is not apparent how that exception arises. Although there is some suggestion that the basis for the exception is a finding that there was no privity of interest between insurer and insured, such a finding is simply unsustainable in light of the extensive line of authority that an insurer acting under subrogation does not have an independent right.
In Chand v Zurich Adams J was dealing with identical circumstances faced by the Court in Peters v De Armas and noted at [25] that section 24 does present a jurisdictional obstacle in circumstances: In the present case, whilst the consent judgment is extant it is clear that Zurich in the exercise of its right of subrogation cannot sue for the cost of repairs, either in Bazetta's name or its own. Hence the necessity to seek to have it set aside. Although the Morganite principle would permit Zurich, through Bazetta, to sue for the repairs if the only obstacle were settlement agreement even if it released all claims, it does not in terms deal with the obstacle created by the ensuing consent judgment.
Adams J does note a possible qualification to the above statement being contained in the judgment of White J in Across Australia Finance v Bassenger [2008] NSWSC 799 at [25]: Nonetheless, the Court has inherent jurisdiction to set aside orders made by consent, even after entry, on grounds on which the contract embodied in the orders could be set aside. Further, where the Court's assistance to carry the compromise into effect is required, the Court may decline that assistance if to provide it would lead to injustice, although the grounds may not be sufficient to invalidate the contract between the parties (Harvey v Phillips [1956] HCA 27; (1956) 95 CLR 235 at 242-243).
Assuming such an inherent power exists in the Local Court I am satisfied in any event that this is not a case in which it should be invoked. Ultimately, the plaintiffs find themselves in the present predicament due to their own failures to protect their interests and the breakdown in communication between themselves and their insurer.
Accordingly, the second limb of the plaintiffs' notice of motion also fails.
The motion is dismissed. Assessor Olischlager Small Claims Division 24 March 2017

Hansen v Sedrak

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