HIH CASUALTY & GENERAL INSURANCE v PADE & ANOR

COUNSEL : Claimant: Mr S Flanigan Opponent: Mr G A Laughton SOLICITORS : Claimant: Middletons Moore & Bevins Opponent: E C Abernethy CATCHWORDS : Insurance claim - letter to solicitor demanding return of title deeds - whether letter asserted cause of action against solicitors - discussion of what constitutes"claim" for the purposes of insurance policy - letter went beyond reservation of rights and embodied a claim - appeal allowed. (ND) DECISION : Appeal allowed.

THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40446/00 DC 2048/98

MASON P STEIN JA HEYDON JA Wednesday 15 November 2000

HIH CASUALTY & GENERAL INSURANCE LTD v Barry Henderson PADE & Anor JUDGMENT 1 MASON P: The opponents invested and lost $380,000 in a real estate development called "Boambee Gardens" that was promoted by Lawnkin Pty Ltd (Lawkin). 2 In 1998 they commenced proceedings in the District Court seeking damages from two professional advisers, their accountant Mr Florent and a solicitor associated with Lawnkin, Mr James Kearns. In September 1999 they joined as third defendants Mr J G Poynten and Ms R Dhaliwal who were solicitors in a law firm, Poynten Dhaliwal, and the successive principals thereof. 3 Mr Poynten had been made bankrupt in April 1999. Accordingly, the opponents sought to add the claimant insurer as a further defendant, pursuant to s6 of the Law Reform (Miscellaneous Provisions) Act 1946. Sinclair ADCJ made this order on 20 May 2000. The claimant seeks leave to appeal. The Court heard full argument as if on an appeal. 4 The claimant was the professional indemnity insurer of Poynten Dhaliwal for the period 1 July 1998 to 30 June 2001, ie the period in which the amended Statement of Claim was served on the solicitors. But it was not the firm's insurer in November 1995. The issue contested in the Motion to join the insurer was whether the solicitors had received notice of the claim that came to fruition in 1999 when they received a letter dated 24 November 1995 from the opponents' then solicitor Mr Abernethy. The 1998-2001 insurance would not respond in those circumstances, because its insuring clause refers to "amounts payable by the Assured to claimants… whensoever occurring arising from any claim or claims first made against the Assured during the Period of Insurance…." 5 Judge Sinclair addressed the Motion on the basis of facts alleged in the pleadings, supplemented by some fairly sparse evidence, mainly correspondence. There is practically nothing about the information actually known by the opponents about the Lawnkin investment in 1994-1996, although the allegations against Mr Florent and Mr Kearns show that they must have had a deal of knowledge about what was happening during this period. 6 The allegations against the three sets of professional advisers are pleaded in the alternative. At this stage they remain allegations, albeit that the parties accept that they are arguable for the purposes of the present application. 7 The background to the alternative claims as disclosed in the pleadings and the evidence is as follows: In 1992 the opponents invested $360,000 by lending it to Lawnkin. The term of the loan was six months and the loan was initially secured by registered first mortgage. In late 1992 a further $20,000 was lent on mortgage, apparently unregistered. In 1994 the opponents executed discharges of the two mortgages, apparently in expectation of receiving some alternative investment interest in Lawnkin. Lawnkin gave a mortgage to the National Australia Bank in November 1994 which was registered as a first mortgage in consequence of the registered discharge of the opponents' mortgage. By late 1995 Lawnkin was in financial difficulties. A voluntary administrator was appointed and the company was subsequently wound-up. The opponents were left with nothing tangible from their original investment. 8 The pleaded allegations against Messrs Florent and Kearns are not presently relevant save that they are expressed in the alternative to the claim pleaded against Poynten and Dhaliwal. 9 As indicated, Poynten and Dhaliwal were added as defendants in late 1999. It is alleged against them that the firm was retained by the opponents in April/May 1993 in relation to the discharge or partial discharge of the registered mortgage; and that at all material times after 10 July 1992, Poynten held on behalf of the opponents the registered first mortgage and the certificates of title to which it related. Various allegations are pleaded in the alternative, but the nub of them (as agreed by counsel for the opponents in argument) is that the solicitors were negligent in failing to retain the security documents and in parting with them without the (informed) authority of the opponents. It is alleged that this enabled the discharge of mortgage to be registered without the opponents receiving the moneys due to them. 10 What is set out above is taken from the opponents' allegations in the pleadings. There were also two affidavits of Mr E C Abernethy, the opponents' solicitor since about 1 November 1995. 11 Mr Abernethy states that on 2 November 1995 he received the results of a title search of Lawnkin's land. That showed that the opponents were then still registered as the owners of the first mortgage securing the initial advance of $360,000. Mr Abernethy advised his clients that it would be a good idea to collect all mortgages, title deeds and correspondence from their former solicitor, Mr Poynten. The letter of 2 November 1995 to his clients indicated his intention to prepare default notices under the mortgage. From this and the allegations in the pleadings I infer that repayment was well overdue, to the knowledge of all concerned. 12 On 6 November 1995 Mr Abernethy wrote to Poynten Dhaliwal as follows: Re: Barry Henderson Pade and Janet Pade I enclose herewith an authority duly signed by the abovenamed in respect of the documents referred to therein. Kindly let me have the same by return. Enclosed was a formal authority signed by the opponents authorising and directing Poynten Dhaliwal to hand to Mr Abernethy all title deeds, mortgages, variation of mortgage and other documents. 13 The response from Poynten Dhaliwal must have rung terrible warning bells, especially if one accepts the truth of the assertions in Mr Abernethy's letter of 24 November 1995 set out below. On 22 November 1995 Poynten Dhaliwal wrote: BH & J Pade We refer to the abovenamed and enclose copy of letter which has recently come to my hands.

14 The enclosed letter was from Nambucca Investments Pty Ltd, Lawnkin's holding company, signed by the Trustee on behalf of Debenture Holders and addressed to Mr Kearns, Solicitor of 2 O'Connell Street, Sydney. It read as follows: Dear Jim, I hereby appoint you to act as Solicitor for the Nambucca Investments Group on Acquisition of the Nambucca Group by the Equitable Group. In addition, you are also instructed to act as Solicitor for Mr BH and Mrs J Pade on release of the Mortgage on the Lawnkin Pty Limited and you are to ensure that they are to receive the sum of $380,000 on discharge.

The letter was dated 29 September 1994, ie over one year earlier.

15 Mr Abernethy responded in the following terms on 24 November 1995. It is this letter that is said to be the claim "first made" against Poynten Dhaliwal that came to fruition in the amended statement of claim. I refer to your letter and enclosure of the 22nd inst, the contents of which I have noted. I have referred the same to my clients who have informed they have no knowledge of any such arrangements as are referred to in the copy of the Nambucca Investments Pty Ltd letter you enclosed, nor have they ever received the funds secured by their registered Mortgage. In addition it is noted that the amount referred to in the letter is some $20,000 greater than the amount referred to in my clients' registered Mortgage. I am instructed that the amount of the Mortgage was increased by my clients and that you acted on my clients behalf in that transaction. My search has not disclosed the registration of any variation of the mortgage. Would you kindly explain? My clients are becoming concerned at their inability to obtain possession of their Mortgage document and the Title Deeds secured thereby. In the circumstances that have developed one can readily understand their concerns and my clients look to you as the solicitor who acted on their behalf to allay their concerns and to do so promptly. I have therefore been instructed to inform you that unless Mortgage registered Number E662892 together with Certificate of Title Identifier 72/832860 together with the satisfactory explanation as to the variation requested above, are placed in my possession within seven (7) days from the date hereof the matter is to be taken further.

16 Judge Sinclair held that this letter was not a claim. He recognised it as a demand for the return of the opponent's security documents and, to that extent, an assertion of a right to the return of those documents. But it was not a claim within the policy, because an assertion of a right to the return of the security documents: …is not the substance of the plaintiffs' claim against the third defendants, the gravamen of their claim is that the mortgage was wrongfully discharged, that the plaintiffs have lost their position as secured creditors and are entitled to damages for the whole sum plus interest. 17 The legal principles are not disputed between the parties, each of whom cite Bowen JA in Walton v National Employers' Mutual General Insurance Association Ltd [1973] 2 NSWLR 73 at 82 where he said: In my opinion the word 'claim' is here used in its primary sense of a demand for something as due, an assertion of a right to something. It imports the assertion, demand or challenge of something as a right.

See also Sutton, Insurance Law in Australia 3rd ed pp1072-3 and cases there cited. 18 The opponents submit that Mr Abernethy's letter is in such bland and contingent terms that it does not constitute a claim of the right subsequently propounded in the District Court pleading. 19 Relying upon Mr Abernethy's evidence, the opponents further submit that they had every reason to believe that their investment was safe in light of the search showing the first mortgage still registered. It is further submitted that the November 1995 correspondence discloses no concern about the loss of the underlying security represented by the registered first mortgage covering the $360,000 advance or the unregistered mortgage covering the $20,000 increase. The opponents also point to events subsequent to 24 November 1995 as supporting the submission that the letter of that date was not a "claim". In particular they refer to Poynten Dhaliwal's response of 30 November 1995 advising that "the carriage of this matter was taken out of our hands. We have requested Messrs Holliars City who we believe hold the deeds to return them to you direct. You might please notify when they are received". 20 In my view it is not relevant to examine the subjective intent of the opponents or of Mr Abernethy in November 1995. Suppressed concern or unexpressed nonchalance cannot alter the impact of what the client chooses to assert against the insured. A claim is what is brought to the insured's attention. Of course what is conveyed to the insured must be construed in context. 21 Similarly, I see little relevance in an insured's response to the putative claim. It is easy to envisage situations where the most explicit claim is met with a very brazen or very stupid non-response. 22 I return to the letter of 24 November 1995. 23 The letter expressed clearly understandable concern in light of Poynten Dhaliwal's letter of 22 November 1995. The title documents, including in particular the certificate of title, had not been delivered up promptly as requested. Rather, there was the alarming letter from Nambucca Investments Pty Ltd purporting to instruct Mr Kearns to act as solicitor for the opponents "on release of the mortgage" and "to ensure that they are to receive the sum of $380,000 on discharge". The first paragraph of the letter of 24 November was an explicit denial of knowledge of any such arrangements coupled with a statement that the clients have not "ever received the funds secured by their Registered Mortgage". If one infers that Poynton Dhaliwal were privy in some way to the transaction referred to in the 1994 letter from Nambucca Investments (an inference I am prepared to draw from their ready possession of such a letter), then the solicitors must have realised the seriousness of the clients' protestation of ignorance added to what followed in the letter. 24 The second paragraph asserted Poynten Dhaliwal's retainer to act for the opponents in the increase of the mortgage together with concern that Mr Abernethy's search had not disclosed the registration of any variation of mortgage. This alone suggested a default in the performance of the retainer. 25 The third paragraph expressed (very understandable) concern at the opponents' inability to obtain immediate possession of their security documents together with a statement that "my clients look to you as the solicitor who acted on their behalf to allay their concern and to do so promptly". The final sentence reads "I have therefore been instructed to inform you that unless Mortgage registered Number E662892 together with Certificate of Title Identifier 72/832860 together with the satisfactory explanation as to the variation requested above, are placed in my possession within seven (7) days from the date hereof the matter is to be taken further". 26 These statements indicated that the solicitors were going to be held accountable for their actions to the extent (already apparent) that they had breached their retainer. There was an element of formality conveyed by the words "I have therefore been instructed to inform you". There followed a polite but explicit demand that Poynten Dhaliwal deliver up within seven days the security documents along with a satisfactory explanation as to the variation, failing which "the matter is to be taken further". Implicit in the politely expressed formalities is the threat to hold the solicitors' accountable at law for the consequences of their actions. I reject the submission that reporting the solicitors to the Law Society was or was all that was conveyed. 27 If one assumes that the matters pleaded against the solicitors will be made good, they cover the essential matters addressed in the 1995 letter. Common to each are the allegations of retainer and legal responsibility stemming from breach thereof. I disagree with the learned judge's description of the opponents' pleaded claim against the solicitors as being no more than that the mortgage was wrongfully discharged. When one examines par 44 of the Further Amended Ordinary Statement of Claim, the gravamen of the allegation is the solicitors' failure to exercise reasonable care in retaining the security documents, leading to their release, leading to the bank mortgage obtaining priority, leading to loss of the investment. 28 In my view the letter of 24 November 1995 asserted a similar cause of action against the solicitors. It went beyond a reservation of rights. Merely because it offered the solicitors a further seven days to extricate themselves or alternatively provide a satisfactory explanation did not render the letter any less a "claim" (cf Triden Properties Ltd v Capita Financial Group Ltd, 26 November 1993, Court of Appeal, unreported at 57-8 per Sheller JA, Junemill Ltd (in liq) v FAI General Insurance Co Ltd (1997) 9 ANZ Ins Cas ¶61-377). Nor did its polite terms or the pregnant understatement of its concluding sentence. Nor does it matter in the circumstances that any feared loss had not been crystallised at that stage. 29 It is no answer to the broad thrust of the letter to say that Mr Abernethy was in possession of a search showing the opponents as registered first mortgagees at the time. That search raised the questions put in the second paragraph of the letter. Furthermore, the opponents were entitled to expect that their security documents (including certificates of title) would be in the safe keeping of their solicitors and would be handed over on request. The letter records the clients' proper concern about the solicitors' inability to do this, concern heightened by the disturbing letter of 22 November 1995 and its enclosure. If (which I doubt) it is relevant to ask if the opponents knew or suspected that they had a cause of action (apart from what is asserted in the "claim" letter itself), there was more than sufficient. 30 During argument, the opponents accepted that the letter would have been a claim if in substance it contained an assertion that if the solicitors had parted with the security documents they would be sued. In my view this is a fair description of the letter. 31 I propose the following orders: 1. Grant leave to appeal.

2. Note claimant's undertaking to the Court to file notice of appeal and pay the appropriate fee. 3. Appeal upheld.

4. Set aside orders made by Sinclair ADCJ on 26 May 2000 and in lieu thereof order that the notice of motion be dismissed with costs. 5. Respondents to pay appellant's costs of the proceedings in the Court of Appeal and to have a certificate under the Suitors' Fund Act 1951 if qualified. 32 STEIN JA: I agree with Mason P. 33 HEYDON JA: I agree with Mason P.

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