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[2006] FCA 2
Federal Court of Australia
2006-01-06
North J
Original judgment source is linked above.
REASONS FOR JUDGMENT 1 This judgment addresses four cross-claims brought against CGU Insurance Limited (CGU) for indemnity under a superannuation trustees' liability insurance policy. The cross claims arise in the following way.
Background 2 Australian Integration Management Services Corporation Pty Ltd (previously called Corrections Corporation of Australia Pty Ltd) (AIMS) ran a number of prisons under contracts from State governments. The Corrections Corporation of Australia Pty Ltd Staff Superannuation Fund (the fund) was established to provide superannuation benefits for the employees of AIMS. The trustee of the fund was Corrections Corporation of Australia Staff Superannuation Pty Ltd (CCAS). Terence Arthur Lawson (Lawson) and John Kenneth Twomey (Twomey) were directors of CCAS. 3 CGU issued a superannuation trustees' liability insurance policy (the policy) for the period 12 November 1999 to 12 November 2000. Chubb Insurance Company of Australia Limited (Chubb) issued a trustees' liability insurance policy for the period 12 January 2001 to 12 January 2002, and another for the period 12 January 2002 to 12 January 2005. 4 On 29 April 2002, 63 ex members of the fund commenced proceedings against CCAS alleging that it had breached its duties as a trustee of the fund, and that they had suffered loss as a result. Claims were also made against AIMS, Lawson and Twomey. On 6 June 2003, additional applicants were joined so that ultimately there were 73 applicants. 5 On 11 July 2003, CCAS, AIMS, Lawson, and Twomey brought cross claims against CGU and Chubb seeking indemnity under the trustees' liability policies. 6 On or about 13 November 2003, the applicants and CCAS, AIMS, Lawson, and Twomey agreed to settle the claim on terms that CCAS would pay the applicants $275,000 plus their taxed costs, and the proceeding between them would be dismissed. The costs were taxed or agreed in the sum of $539,009. CCAS paid these amounts to the applicants. 7 At the same time, CCAS, AIMS, Lawson and Twomey agreed to settle the cross claims against Chubb on terms that Chubb would pay $500,000 and the cross claims against Chubb would be dismissed with no order as to costs. CCAS, AIMS, Lawson and Twomey entered into an agreement (the apportionment agreement) that the money paid by Chubb would be applied first in payment of AIMS costs of defending the proceeding, then in payment of Lawson and Toomey's costs of defending the proceeding, and, finally, in payment of CCAS's costs of defending the proceeding. 8 Against this background, CCAS, AIMS, Lawson, and Twomey (the cross-claimants) cross-claim against CGU under the policy and seek payment of $275,000 plus the costs of $539,009 paid to the applicants, and the balance of the costs of the cross claimants defending the proceeding brought against them by the applicants, to be assessed, after taking into account the payment by Chubb and the effect of the apportionment agreement.
Relevant Provisions of the Policy 9 The following clauses of the policy are relevant to the arguments in this matter: Insuring Agreement A 1.1 Trust/Employer Reimbursement Cover The Insurer will pay on behalf of the Trust and/or the Employer any Loss payment they become legally obligated to pay arising out of any Claim by reason of any Wrongful Act committed by the Trustees first made against the Trustees during the Period of Insurance and notified to the Insurer during the Indemnity Period. Insuring Agreement B 1.2 Trustees Liability Cover The Insurer will pay on behalf of the Trustees any Loss payment they become legally obligated to pay for which the Trustees may not be indemnified by the Trust and/or Employer arising out of any Claim by reason of any Wrongful Act committed by the Trustees first made against the Trustees during the Period of Insurance and notified to the Insurer during the Indemnity Period… 4.9 Notification of Claims Circumstances If during the Period of Insurance, the Trustees become aware of any fact, situation or circumstance that might give rise to a Claim under this Policy and elect during the Indemnity Period to give notice in writing to the Insurer of such fact, situation or circumstance then any Claim which may subsequently arise out of such fact, situation or circumstance shall be deemed for the purpose of this Policy to be a Claim made during the Indemnity Period. … 5.1 Claim "Claim" shall mean: (1) any writ, summons, application or other originating legal (criminal, civil or otherwise) or arbitral proceedings, cross claim or counter-claim issued against or served upon any Trustee alleging any Wrongful Act; or (2) any written demand alleging any Wrongful Act communicated to any Trustee under any circumstances and by whatever means; (3) any proceeding commenced by service of a notice of receipt of a complaint by the Superannuation Complaints Tribunal. … 5.10 Trustee/Trustees "Trustee/Trustees" shall mean: Any person who was or now is or may hereafter become a Trustee or Trustees of the Trust and includes the director, officer, secretary, and employees of the Trustees, and members of any policy committee which has been established by or under the governing rules of the Trust. 5.11 Wrongful Act "Wrongful Act" shall mean: Any actual or alleged, breach of duty, breach of trust, neglect, error, mis-statement, misleading statement, omission, breach of warranty of authority or other act done or attempted by or any other matter claimed against any Trustee wherever or whenever while executing any of the functions of the Trust.
Was there a deemed claim within 4.9 of the policy 10 From cl 1 it can be seen that the policy is designed to provide indemnity against claims made in the period of insurance. Clause 4.9, however, extends the scope of the indemnity by deeming a claim to have been made where: · the trustee becomes aware of any fact, situation, or circumstance that might give rise to a claim under the policy, and · the trustee elects to give notice during the indemnity period to the insurer of such fact, situation, or circumstance, and · the claim subsequently arises out of the fact, situation, or circumstance. 11 There was contention between the parties as to the construction of cl 4.9 in relation to the first element. The cross claimants submitted that the trustee must be aware of a fact, situation, or circumstance but need not appreciate its capacity to give rise to a claim under the policy. That characteristic is to be judged objectively by the Court. The questions to be asked on this construction are - of what fact, situation or circumstance was the trustee aware, and might it, when objectively judged, give rise to a claim under the policy? 12 CGU submitted that the trustee must be aware of the fact, situation or circumstance, and its capacity to give rise to a claim under the policy. The questions asked on this construction are - of what fact, situation, or circumstance was the trustee aware, and did the trustee subjectively appreciate that it might give rise to a claim under the policy? 13 Whichever approach is taken to this question of construction of cl 4.9 in this case, the cross-claimants are entitled to succeed on this aspect of the case, on the facts. I will explain my reasons for this conclusion in the following parts of this section. As the result is resolved on the facts it is not necessary to traverse the complex and conflicting authorities relied on by the parties. Thus, in the following parts of this section the issues addressed will be: · Of what fact, situation, or circumstance relating to the fund was the trustee aware in the period of insurance, and might such fact, situation, circumstance, objectively judged, give rise to a claim under the policy? (The Objective Awareness) · Did the trustee subjectively appreciate that the said fact, situation, or circumstance might give rise to a claim under the policy? (The Subjective Awareness) · What claims were made by the applicants against the respondents, and did the claims arise out of the said fact, situation or circumstance? (Causation) · The requirement of notification of the said fact, situation or circumstance by CCAS to CGU. (Notification)
The Objective Awareness 14 The evidence establishes, and I find, that the following circumstances faced the fund from about mid 2000. The financial position of the fund as reported to the directors meeting held on 15 August 2000 demonstrated that the fund was overly concentrated on real estate assets. The assets of the fund totalled $6,514,226.05. Real estate assets totalled $5,030,880. They included two industrial properties, one at 4 Tottenham Parade, West Footscray, Victoria (Tottenham Parade) valued in the books $310,000 and one at 7 Fleet Street, Laverton, Victoria (Fleet Street) valued in the books at $550,000. The major investment was valued at $4,170,880 and comprised units in the Gardiner Place unit trust. The unit trust owned a two level commercial office building at 9 Gardner Close, Milton, Queensland (Gardner Close). The fund's unit holding was based on a valuation of the property of $5,700,000. In substance the fund's holding of units amounted to a direct property holding. The unit trust was able to borrow funds whilst the fund was not. The structure adopted allowed the fund to participate indirectly in an investment using borrowed funds. Apart from real estate the fund held shares in a US corporation, related to AIMS, called Prison Realty Trust Inc. The shares were purchased in August 1999 for $333,163.62, and by May 2000 had dropped in value to $58,500. 15 In June 2000, Arthur Andersen wrote to CCAS following the completion of the 1999 audit, and made the following suggestion to management:
Conclusion 41 CCAS was aware of the circumstances of the fund outlined above. Those circumstances suggested that members might take legal action against CCAS and its directors. By 12 November 2000 there were grounds for apprehension that the members would suffer losses on the sale of Gardner Close. Fleet Street and Tottenham Parade had already been sold below their carrying values and below their purchase prices. There were signs that the members were unhappy with the prospect of losses. The freezing of entitlements increased that apprehension. The directors had been told by Arthur Andersen and Aon in the recent past that the investment portfolio was not diversified enough and the directors had acknowledged the fact. As a result of the preponderance of real estate investments the fund was not in a position to meet the outflow of funds resulting from the loss of the Borallon and MWCC contracts. It was on the cards that members would hold the fund responsible for their losses and might take legal action against CCAS and its directors. The situation of the fund, judged objectively by 12 November 2000, might have given rise to a claim by members for losses suffered by them as a result of the investment policy of the fund.
the subjective awareness 42 The awareness required by cl 4.9 is the awareness of 'the trustees'. This term is defined in cl 5.10 of the policy to include a director or secretary of the trustee. This definition has the effect that the awareness of one director will satisfy cl 4.9, even if other directors do not have the same awareness. Cl 4.9 does not require the board of directors as a body to have a corporate awareness. Thus, whilst several directors of CCAS gave evidence, and each professed different levels of awareness, or lack of awareness, for reasons which I will explain, it is only necessary to come to a conclusion about the awareness of Mr Conde. 43 Mr Conde was initially employed by Correction Corporation of Australia Pty Ltd (now known as AIMS) on 24 November 1999. On 2 December 1999 he was appointed secretary of the company. On 6 December 1999, he was appointed secretary of CCAS. Then, on 12 October 2000, he was appointed a director of CCAS. He replaced Mr Anderson, who also gave evidence in this case. Mr Conde is an accountant by profession and holds a Bachelor of Business, Master of Business Administration, and a Graduate Certificate in Business Law. He is a certified practising accountant, Fellow of the Chartered Institute of Secretaries, and Associate of the Securities Institute of Australia. It seems that he was appointed a director of CCAS in October 2000 in order to steer CCAS through a very difficult period. His experience was needed. Mr Anderson did not have the experience necessary to address the situation. 44 Mr Conde filed a witness statement in this proceeding. The statement demonstrates that he was aware of the facts outlined in the previous section of these reasons. It also explains that the main concern of the directors of CCAS from July to November 2000 was to manage the liquidity crisis facing the fund in a way which was both legal and equitable. This principally involved arranging for the sale of the real property of the fund. But that primary concern did not exclude Mr Conde giving attention to the possibility that CCAS or its directors might be sued. 45 This thought seems to have first arisen shortly after the loss of the Borallon contract when, in early August, Pat Jennings estimated that Gardner Close would sell in the range of $5,200,000 to $5,400,000 if the leases could be extended. These prices would mean that the fund would have a significant loss for the year against the carrying value of Gardner Close. Mr Conde thought that even these prices may not be achieved and the loss would not be offset by any increases in the value of Fleet Street and Tottenham Parade given their relative size in the portfolio. Mr Conde concluded at this time: In light of these matters I became concerned at that time that if the CCA Fund were to suffer a loss, as I expected, a legal case could be brought by members against CCAS and its directors in respect of the manner in which the CCA Fund's property investments were sold. While that was my primary concern I did have some concern that a legal case could be brought by members against CCAS and its directors regarding the structure of the CCA Fund, by which I mean the lack of diversification and liquidity of fund investments. 46 Then, in September 2000, after Mr Conde received the marketing submissions from Chesterton International showing a sharp drop in the value of Tottenham Parade and Fleet Street, he did a calculation which indicated a potential loss to the fund of 10 per cent for the year. Mr Conde said: There was now the likelihood of significant losses in the CCA Fund and I was concerned at the possibility of a legal case being brought against CCAS and its directors. This concern was based on: (a) The responsibility of the trustee to act properly in the current circumstances and to ensure that all members were treated equitably. In that regard it was of concern that the CCA Fund would, in the normal course of operation, accept new members and new contributions and pay out entitlements to departing members; and (b) The level of loss that the CCA Fund was likely to incur might provoke members to seek recovery based on the lack of diversification and liquidity of the fund, although there was nothing that the trustee could do at that time about the past investment decisions. In light of the matters raised in the previous paragraph, I was mindful that if the members lost money, particularly if the losses were in excess of 10%, they may seek to recover any loss they incurred from CCAS and its directors. It was when I received the Chesterton International marketing submission and performed calculations similar to those set out above that I first realised there was a real prospect that legal proceedings could be brought by members against CCAS and its directors. I was particularly concerned with the investment in Gardiner Place and the fact the majority of the leases had expiry dates shortly after the Borallon contract was due to expire. 47 When Mr Conde received the news of the cancellation of the MWCC contract his concerns over the situation of the fund were increased. The decision of the directors at the meeting held on 12 October 2000 to revalue the assets of the fund heightened Mr Conde's concern that members may take action to sue CCAS and its directors for the losses incurred by the fund. He said: In light of the matters discussed at that meeting on 12 October 2000, my earlier concerns with lack of diversification and liquidity of the CCA Fund investments, and the issue regarding the Gardiner Place property being poorly structured to enable its book value to be realised (particularly as no new leases had actually be entered into and, at most, only one tenant had said it would agree to extend their lease), were magnified. 48 After the meeting Mr Conde asked Mr Kidd from Aon to arrange a meeting with APRA, and also to recommend a lawyer for CCAS. He explained his reasons thus: I wanted CCAS to obtain legal advice so that we could inform APRA of the situation being faced by the CCA Fund and, in light of the problems regarding a lack of diversity, a lack of liquidity and the expected realisable value of investments being less than their values as recorded in the financial statements for the year ended 31 December 1999, seek advice as to the risk of CCAS and its directors being sued and any potential liability to members. I also wanted advice regarding the appropriateness of the actions now being undertaken by CCAS. 49 As to the situation near the end of October Mr Conde said: It was clear to me, especially since the CCA Fund was "frozen" and the number of member complaints increased dramatically, that there was a real possibility the members would get less than they felt they were entitled to and may be paid later than they expected to be paid. Given the level of angst expressed by members, both in phone calls to me and at the Borallon meeting, I thought there was an increased risk of members bringing an action against CCAS and its directors for the losses suffered. 50 On 8 November 2000, when Mr Conde saw the sale price estimate for Gardner Close from PRD Realty of $4,500,000 to $5,000,000, and became aware that only one of the tenants was prepared to agree to an extension of the lease, he was concerned that the likely loss to the fund would be greater than previously contemplated. 51 Although Mr Conde asked Mr Kidd on 12 October 2000 to arrange a meeting with a lawyer, this only occurred on 16 November 2000 because several solicitors who were approached were unable to act. Although this meeting occurred after the period of insurance ended, it throws some light on the state of mind of Mr Conde in the period before the meeting. 52 The meeting on 16 November 2000 was attended by Mr Conde, and another director, Mr Green, Mr Kidd from Aon, and Glenys Hodges and Erin Feros from Allen Allen and Hemsley (now Allens Arthur Robinson). Mr Conde's main concern was to obtain advice about the plan to realise the assets of the fund, and the legality of freezing the withdrawal of members entitlements. Mr Conde also wanted Allens to be involved in the consultations with APRA. 53 In his witness statement Mr Conde said that there was also discussion about the potential liability of CCAS and the directors, although most of the meeting was a briefing session for Allens and related to the current action being taken by the fund. 54 Ms Hodges was a senior associate who had worked at Allens for 11 years. She acknowledged in oral evidence that the major focus of the meeting was directed to the issues of immediate concern in the administration of the fund. However, in her witness statement she said that there was discussion at the meeting that the expected large negative returns of the fund made it highly likely that there would be complaints from unhappy members and that the matter could end up in court. She also said that Mr Conde asked whether any potential liability which Lawson had to the fund for past decisions made as a director could be set off against his entitlement as a member of the fund. Ms Hodges replied that all directors involved in the investment decision making process and CCAS were potentially liable. Ms Hodges said in cross examination that her recollection of these discussions came from reading her file note of the meeting. A number of the facts referred to in the witness statement are expressly referred to in the file note. As to the other facts recalled in oral evidence, I am satisfied that Ms Hodge's recollection is generally accurate. There is strong confirmatory evidence in the written advice provided by Allens on 23 November 2000. The advice included the following: We have not considered whether there have been any past breaches of duty by the trustee or directors and we do not have sufficient information about the background and circumstances to advise what those breaches and the potential liability of the trustee and directors might be. This would involve examining in depth the complete history of the fund and the trustee's decisions. At this stage this is premature to consider this issue other than to be aware of it. After the GP property is sold and all benefits have been paid, it would then be appropriate to consider whether the assets remaining in the fund are sufficient to justify investigating and pursuing this issue further. 55 Ms Hodge's evidence is significant. She is independent of the parties. She had no personal interest in giving her evidence. Her recollection was clear, firm and consistent. It was supported by contemporaneous written material. I found her an impressive and convincing witness. I am satisfied from her evidence that the issue of liability of CCAS and the directors for losses resulting from past investment decisions concerning the diversity of the assets of the fund were raised as matters of concern by Mr Conde in mid November 2000. Ms Hodge's evidence supports Mr Conde's evidence that he was aware before the end of the period of insurance that CCAS and the directors might be sued by members who felt that CCAS and the directors were responsible for the losses incurred by the fund. 56 On the day after the meeting with Allens, 17 November 2000, Mr Conde and another director, Mr Cooper, signed a proposal for renewal of the policy with CGU. Question 7(c) of the proposal asked: "Have there been any claims made or claims circumstances that have not been reported to CGU professional risks insurance?". Mr Conde indicated an affirmative answer to the question, and wrote "refer attached" next to the question. Attached was a letter signed by Mr Conde which included the following answer: Item 7(c) Whilst the fund is in a position to meet current claims from current liquid funds available it is aware that there will be additional large amounts of member withdrawals from the fund within a short time period. These have occurred as a result of the loss of the employer company's operating contracts and the resignation of a number of employees. The fund has taken the following action: 1. It entered into a program of realisation of its property investments. (i) Two properties in Victoria are now under contract, and (ii) A commercial property held by the fund in Queensland is currently being marketed to go to auction on 14 December. It is expected to be sold on a 30 day contract. 2. Fund payments are currently being held pending realisation of the above property to ensure that the fund is able to meet all member obligations. 3. APRA have been advised of the current situation being faced by the fund and are being kept informed on developments. Attached is a cash flow schedule covering the period to March 2001 showing how the fund is expecting to meet the member obligations. The fund has received one demand letter from a former employee's solicitor, that has been referred to the fund's solicitor. 57 Mr Murdoch QC, who appeared with Ms Brimer for CGU, placed particular emphasis on this response in connection with the question of the awareness of Mr Conde. He argued that the answer was given immediately after the meeting with Allens when current issues were under scrutiny, and the question directed Mr Conde's mind directly to the question about claims circumstances. The answer, it was argued, contained no reference to potential claims against CCAS or the directors arising out of the losses caused by investment decisions made in breach of duty. Consequently, the answer showed that Mr Conde had no awareness of such potential claims at this time. 58 Mr Conde was challenged in cross examination on this issue. His response was frank and compelling. He said that in retrospect he would have added more details, and if he had had a fuller appreciation of the meaning of claims circumstances he may have been more expansive. He said that the answer was 'done under the pressure of the work at the time … there was a lot of things on at the time'. 59 Mr Conde is no longer employed by AIMS and does not hold any position in CCAS. He had no reason to give false evidence. He was strongly pressed in cross examination. His evidence was careful and considered. He impressed me as a conscientious and professional person. I regard his evidence as honestly given and I accept his explanations as to why there was no reference in the answer to question 7(c) on the proposal to the possibility that CCAS or the directors might be sued for breach of duty. In part, the absence of such reference was a result of Mr Conde's lack of familiarity with the requirements of such policies, but, primarily, it was the result of the pressure of the circumstances existing at the time and the need to address immediately pressing issues including selling the real estate assets of the fund and implementing a freeze on the entitlements of members. The fact that these were the overriding concerns explains why they figure in the answer to the question. The potential liability of CCAS and its directors for past conduct was a matter of concern, but did not call for any immediate action. 60 In cross examination Mr Conde was also asked why, if he was aware of the risk of litigation as he claimed, there was no reference to any discussion of the subject in the minutes of the board meetings. As with the subject of his answer to question 7(c) in the proposal, Mr Conde explained that the focus of attention at the time was on taking steps to address the pressing issues of the sale of assets and the liquidity crisis. These matters were extensively reported in the minutes. The pressure of the situation is captured in an exchange between Mr Conde and the Court as follows: HIS HONOUR: And your explanation for that, Mr Conde, as I understand it is that there was so much happening at the time that you simply didn't give enough attention to the response to question 7C?‑‑‑Yes, your Honour. It is difficult to explain the enormity of things that were happening at the time but ‑ ‑ ‑ Well, it is important that you try and do that for me because at the moment Mr Murdoch is making a case that, if you really had the belief you say you did, it would appear somewhere ‑ ‑ ‑?‑‑‑Mm. ‑ ‑ ‑ and what he is saying is that it doesn't appear anywhere. Therefore Mr Conde must be reconstructing that, "He had the belief, he might have had it - it might have developed at a later time but it certainly wasn't there then." So I need to understand from you, if you would like to explain it to me, how you do explain those circumstances?‑‑‑Well, the company was under considerable stress at the time. There was the disposal, well, the Borallon contract ‑ ‑ ‑ Mm?‑‑‑ ‑ ‑ ‑ that put the company into what they call the transition period and that required a lot of negotiations with the state over how a range of assets would be valued and dealt with, with the state and with the incoming operator. Borallon had been conducted by the company for a considerable amount of time and, whilst it was a state facility, there were various assets, and quite a number, that had been put in by the company during that time. And with some of them the ownership aspect of them was indeed a little clouded, in that it hadn't been adequately documented whether it was to become a state asset or whether we had some entitlement with it. I can't recall precisely but it was in the vicinity of, well, over $1 million and so it had some significance for the company and there was a lot of negotiations going on. I had responsibility for that. There was the loss of the NWCC [sic] contract and various ramifications, one of which was the Department of Justice in Victoria had a belief that we could separate the NWCC [sic] creditors from our complete creditor list. It was only one company and they wanted continual reports as to our payment of staff and our payment of creditors. They had engaged PricewaterhouseCoopers into our office. We had also just commenced one new contract in Western Australia and another one was pending commencement. The one that has just commenced was the court securities and custodial services. It was the court services, prisoner and prisoner transport. It had been negotiated over a long period with the Department of - sorry, it was then the Ministry of Justice of Western Australia and it had set certain criteria of kilometres to be covered and hours of service. When it started, in fact from day one, the Ministry of Justice was demanding additional services but in fact refusing to pay for them and that was placing considerable stress on our resources in Western Australia. Well, when I say they were refusing to pay; they weren't immediately refusing to pay but they were demanding variation statements and that was putting us to a lot of work in analysing hours of service that were originally estimate per court and those that were actually being provided and transport to try to justify a variation with the Ministry of Justice. We only had - the company only had small resources in finance staff and we were spread very thinly at that regard and had very little time to devote to each of those activities. 61 Again, I accept Mr Conde's explanation for the fact that there is no reference in the minutes of the directors' meetings about the risk of litigation against CCAS and its directors for past breaches of duty. There was too much happening at the time which was of more immediate concern. An appreciation of the liquidity crisis which arose with the loss of the Borallon and MWCC contracts and the need to sell the fund's assets quickly to meet payment of the members' entitlements make this readily understandable.
Conclusion 62 I am therefore satisfied that Mr Conde was aware of the circumstances of the fund set out in the previous section of these reasons, and, by 12 November 2000, believed that they might have given rise to a claim against CCAS and its directors by members for the losses caused to them as a result of the inadequate investment strategy of the fund, and the failure to make proper provision for the chance of payouts to the members employed at Borallon and the MWCC.
Causation 63 The central allegations made by the applicants against CCAS which are relevant to this part of the case were that CCAS acted in breach of its fiduciary duty and its statutory duties under the Superannuation Industry (Supervision) Act (SIS Act) and the Victorian and Queensland Trustee Acts. The breaches involved the purchase and sale of the Tottenham Parade and Fleet Street properties, the units in the Gardener Place Unit Trust, and the shares in Prison Realty. The breaches were pleaded in a number of ways, but in essence they amounted to allegations that CCAS failed to follow a proper investment policy in that there was insufficient diversification in the mix of assets held by the fund. For instance, the applicants alleged that in the period 1997 - 1999 the direct and indirect real estate component of the assets of the fund exceeded 80 per cent, and this was contrary to the advice of Aon. It was further alleged by the applicants that CCAS failed to take proper account of the liquidity needs of the fund. Particulars of these breaches were succinctly described in the Further Amended Statement of Claim dated 5 June 2003 as follows: 34 C Breaches Common to Each Investment (a) The Trustee failed to formulate and give effect to an investment strategy that had regard to all the circumstances of the CCA Fund, including in particular, the risk involved in making, holding and realising, and the likely return from, the CCA Fund's investments, having regard to its objectives and expected cash flow requirements and the composition of the entity's investments as a whole, including the extent to which they are diverse or involved exposure of the entity to risks from inadequate diversification. 64 Initially, the applicants claimed that the loss to the fund should be restored to the fund. When the loss was further particularised in Further and Better Particulars of the Amended Statement of Claim dated 8 July 2003, the applicants claimed individual losses calculated by comparing their payout received from the fund with the amount of the payout they would have received if the fund had been invested in any of three alternative diversified funds. Claims were also made against Twomey and Lawson as directors of CCAS for their part in the investment strategy of the fund. 65 The claims which the applicants made against CCAS, Lawson and Twomey were claims which a reasonable person knowing the circumstances of the fund referred to in [14]-[41] would conclude might be brought against CCAS, Lawson and Twomey. The claims are thus causatively connected with the objective situation of the fund which I have found, and fall within cl 4.9 if the objective construction is the correct construction. 66 On the evidence of Mr Conde which I have accepted, the claims made by the applicants were the same claims as Mr Conde thought the members might bring against CCAS, Lawson and Twomey. The claims therefore also satisfy the construction of cl 4.9 which would require a subjective awareness by the trustee of the very claims which were ultimately brought against the trustee and its directors.
Notification 67 The cross claimants argued that the 17 November 2000 letter from CCAS to CGU which accompanied the proposal amounted to a notice for the purpose of cl 4.9 of the policy. It alerted CGU to the circumstances out of which the claims arose. 68 CGU contended that the circumstances referred to in the letter did not suggest any breach of trust or wrongdoing by CCAS or the directors as claimed by the applicants, but rather pointed to the chance of claims resulting from delayed payment of entitlements due to members. 69 The letter discloses that the fund was selling all its properties to fund the payment of members' entitlements, that payments were frozen in the meantime, and that APRA had been advised of these matters. Further, the context in which the letter was sent concerned the potentiality of claims against CCAS and its directors. It is implicit in this context and from the contents of the letter that the author was directing attention to the chance that members would hold CCAS and its directors responsible for the situation described. The element missing from the notification was the identification of conduct which gave rise to the situation facing the fund, namely, the failure to have a proper investment strategy in place, and the failure to anticipate properly the liquidity requirements of the fund. 70 If it were necessary to do so, I would find that the letter constituted sufficient notice under cl 4.9. Whilst the missing element is important information for CGU, the terms of the letter were more than adequate to alert CGU to make enquiry of CCAS and the directors so that it could clarify the basis upon which it was suggested implicitly in the letter that claims might arise from the situation notified. 71 However, it is not necessary to determine finally whether the letter amounted to notice under cl 4.9 because s 54 of the Insurance Contracts Act 1984 (Cth) excuses a failure to give such notice. Section 54(1) provides: 54 Insurer may not refuse to pay claims in certain circumstances (1) Subject to this section, where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into but not being an act in respect of which subsection (2) applies, the insurer may not refuse to pay the claim by reason only of that act but the insurer's liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer's interests were prejudiced as a result of that act. 72 CGU did not suggest that it suffered any prejudice as a result of any failure to notify. It did contend that s 54 did not apply to this case because CCAS and the directors had not failed to notify CGU of any fact, situation or circumstance of which they were aware, but rather, CCAS and the directors were not aware of any relevant fact, situation or circumstance. 73 Earlier in these reasons, I have found that CCAS and Mr Conde had the requisite awareness for the purposes of cl 4.9 even on the construction argued by CGU. Consequently, s 54 was engaged. CGU was not entitled to refuse indemnity by reason only of the failure of CCAS to notify CGU of the fact, situation or circumstance which might have given rise to a claim under the policy. 74 It follows from the conclusion reached in this section that the requirements of cl 4.9 were met and CGU was, subject to the issues to be discussed in the following sections of these reasons, bound to indemnify the cross-claimants.
reasonableness of the settlement between the applicants and the respondents 75 This section deals with the reasonableness of the settlement between the applicants and the respondents other than AIMS. The first part of the discussion addresses the reasonableness of the settlement aside from the impact of the agreement by CCAS to pay the applicant's costs of AIMS. The issues concerning that part of the agreement are dealt with at the end of this section. Thus, the first part of the discussion must be read subject to what follows on that issue. 76 The cross-claimants contended that the settlement was reasonable for them to conclude, and that the amount agreed with the applicants was also reasonable. CGU denied that the settlement was reasonable for the cross-claimants to conclude, but led no evidence of its own on the question. Rather, it put the cross-claimants to their proof on this aspect. CGU did not seriously contest that, if it was reasonable for the cross-claimants to conclude the settlement, then the quantum of the payment was reasonable. 77 In a case like the present it is open to the cross-claimants to prove their loss arising from the failure of CGU to indemnify them by reference to the amount of the settlement, provided that the settlement sum was reasonable: Unity Insurance Brokers Pty Limited v Rocco Pezzano Pty Limited (1998) 192 CLR 603 per Brennan CJ, McHugh and Hayne JJ (Rocco Pezzano). 78 On 11 March 2003, the applicants made an offer to compromise their claims. Mr Conde, on behalf of CCAS, obtained legal advice from Mr Wells of Allens on the question whether CCAS should make a counter offer. Mr Wells summarised his advice as follows: We consider that the Trustee will have difficulty refuting the Applicants' allegations of breach of duty at general law and breach of statutory duty, in particular pursuant to the Superannuation Industry (Supervision) Act (the SIS Act), in relation to the Trustee's failure to invest members' funds in a properly diversified investment portfolio which had regard to requirements for liquidity to account for foreseeable circumstances. Accordingly, our preliminary view, subject to the qualification set out in paragraph 2 below, is that the Trustee is likely to be found to have an exposure for the amount of any loss suffered by its members. We confirm you have not asked for our advice in relation to the reasonableness of the calculations of loss suffered by the Applicants, estimated to be approximately $250,000, prepared by yourself and reviewed by Mr Cahill for the purposes of the mediation in this matter. In light of our preliminary view in relation to the potential liability of the Trustee for members' losses and the certainly significant costs of defending these proceedings as discussed in paragraph 5 below, we consider that it is not unreasonable for the Trustee to seek to settle these proceedings on the basis of an amount up to the amount in the Offer. 79 The first qualification referred to in the advice was that Mr Wells had not obtained statements from potential witnesses including all of the relevant directors and other advisors. It is clear from the reasons given for the advice that Mr Wells had a significant amount of information at that stage. Mr Conde thought that Allens had obtained statements from at least Twomey and Lawson who were respondents to the claim. After raising the possibility that there may be a valid explanation for the investment strategy adopted, Mr Wells continued: However, from our preliminary discussions with you to date and with the directors in preparation for the mediation and our review of the Trustee's discovered documents, we have not been advised of any facts nor reviewed material which suggests any particular rationale which we consider would be sufficiently compelling to absolve the Trustee of exposure. It is important to remember that a court will approach the issue with a conservative mindset that traditional guidelines for trust investments are likely to be treated as being significant. 80 The second qualification referred to in the advice was that the calculations of the potential exposure had not been verified by Allens. However, Mr Conde had done calculations with a Mr Cahill, a superannuation expert. The advice noted that Mr Conde had satisfied himself on the question of the quantum of the claim. 81 Mr Wells also examined the likely costs of a trial and estimated that the defence costs of CCAS could be close to $1 million given the number of applicants and the possible need for expert evidence. 82 Mr Conde had prepared calculations in November 2002 with Mr Cahill which estimated the original 63 applicants' losses at $258,000. The additional applicants' losses were calculated at $16,000. These amounts did not include interest. Particulars of Loss filed on 8 July 2003 in respect of the original 63 applicants claimed a total of between $277,603.70 and $302,271.63 plus interest of $75,178.05. When Mr Conde and Mr Cahill calculated the loss of all the applicants in late August 2003 they arrived at the figure of $285,000 before interest. 83 After mediation of the proceeding by Mr Marks QC, Mr Conde sought further advice from Allens as to whether a settlement of $275,000 plus taxed costs would be reasonable. On 10 September 2003, Mr Wells repeated his view that : … there is a significant risk that the Trustee will be found liable to the Applicants on the basis that it failed to invest members' funds in an appropriately balanced and diversified fund which was sufficiently liquid to enable it to meet its obligations to members. 84 Mr Wells repeated his previous two qualifications, and added a further qualification as follows: The qualification to the above advice is that the Trustee has no assets. The Employer is paying the legal costs incurred by the Trustee in defending the Applicants' claim, and the only practical benefit to the Trustee in settling the claim by the Applicants is that this would bring the Trustee's involvement in that litigation to an end. This would be beneficial only if the current litigation is preventing the Trustee from engaging in other appropriate activities or if there is any prospect that the Employer will cease to fund the Trustee's defence costs. As the Trustee has no assets, it may not even be concerned at the prospect of incurring further, unfunded, defence costs. In effect, given the Trustee's financial position, the reasonableness of the offer is of limited relevance. 85 Mr Conde considered this advice. He thought that the financial position of CCAS was not a significant factor because the applicants made claims against Twomey and Lawson also, and AIMS was funding the defence costs of all the respondents. He was concerned that other fund members may join the action and an even larger claim may be successful against the directors. Further, Allens assessed the defence costs of CCAS at $1 million. He estimated that the costs of the other respondents could bring that figure to $2 million. The defence costs by August 2003 had already reached $700,000. 86 CGU argued that the cross-claimants had not proved that the applicants would have succeeded and, hence, it was not reasonable for them to conclude the settlement. However, in establishing their loss as a result of CGU's failure to indemnify them, the cross-claimants are not bound to prove that they would have succeeded against the applicants, but rather that it was reasonable for them to settle on the terms which they did: Rocco Pezzano. 87 CCAS acted on legal advice. That advice was reasoned and the reasons were cogent. The cross-claimants tendered a witness statement from Mr Wells in this proceeding. CGU did not cross-examine him on his reasons for the advice. Further, before the settlement was finalised CGU was given notice of the settlement amount and asked to agree that it was reasonable. The solicitors for CGU did not accept that the amount was reasonable and said that they needed more information to assess the reasonableness of the figure. These factors alone justified the cross-claimants entering into the settlement. 88 But, quite apart from the justified reliance on the advice of Allens, the circumstances of the claim demonstrated a significant risk that the respondents would fail in their defence of the claim. There was no question that the fund lacked diversity. Over 80 per cent of its assets were real estate or, in substance, real estate. The fund had been warned by Aon and Arthur Andersen in the recent past that the investment strategy was deficient, and the directors had agreed that this was so. Against this, CGU relied on the evidence on Lawson to establish that the investment strategy was honestly formulated and rationally based. Mr Lawson was a foundation trustee of the fund. He had been the managing director of AIMS since January 1990 and a director of CCAS until October 2000. He left in the middle of the crisis which had developed in the fund, and after the loss of the Borallon and MWCC contracts. In both his witness statement and oral evidence he strongly defended the investment strategy of the fund. He pointed to the previous strong earning history of the fund. He rejected any criticism of lack of diversification of the investments of the funds. Mr Lawson seems to have been the dominating influence on the board of CCAS. He is a man of strong views and definite opinions. I am sure that his evidence was honestly given. He saw no basis to criticise the investment decisions made by the fund. However, the objective circumstances inevitably lead to the conclusion that the investment strategy of the fund was flawed. It may have been an appropriate strategy for an entrepreneurial enterprise, but it was ill advised for a fund designed to provide security for employees in their retirement and for which risk minimisation should have been a primary concern. Thus, Mr Lawson's views do not represent a good guide to the likely outcome of the claims brought by the applicants. They were heavily influenced by an attempt to justify his own conduct. Mr Conde's view of the deficiency in the investment strategy of the fund and the consequent likely success of the applicants represented a more realistic assessment of the situation. 89 CGU did not challenge the quantum of the settlement of the claim. The figure of $275,000 was reasonable. Further there is no basis upon which to criticise the quantum of the costs paid by CCAS. Detailed bills of costs were submitted to Registrar Bardsley for taxation. The first bill claimed $566,629.96 and the second bill claimed $103,509.77. The registrar estimated that the first bill would tax at $440,906 and the second bill would tax at $89,009. CCAS agreed to orders in relation to the estimate of the first bill and did not object to orders in relation to the estimate of the second bill. The quantum of the costs orders were thus accepted by CCAS after the applicant had submitted detailed bills of costs, and an officer of the Court had given a written estimate of the likely outcome of the taxations. Given the costs penalties associated with a taxation which fails to achieve a reduction of 15 per cent or more, it was reasonable for CCAS to accept these figures for costs. 90 The issue concerning AIMS is now addressed. CGU argued that CCAS should not have agreed to pay the applicants their costs of suing AIMS as part of the settlement because the policy did not cover AIMS for its own wrongdoing, but only for the wrongdoing of the trustee as defined. CGU contended that AIMS was sued for its own wrongdoing. As the cross-claimants did not lead any evidence of the applicant's separate costs attributable to suing AIMS they had not shown, so it was contended, that the settlement was reasonable. 91 The policy only provides indemnity in respect of wrongful acts committed by the trustee (cl 1.1 and cl 1.2). AIMS was not within the definition of trustee. There is no warrant in the policy for construing 'officer' in cl 5 by reference to s 9 of the Corporations Law as contended for by the cross-claimants. Further, the claims made against AIMS, even where they involve vicarious or accessorial liability, cannot properly be described as claims arising from acts committed by the trustee. The allegations concerned conduct of AIMS itself. Finally, the cross-claimants did not lead evidence as to the amount of the costs paid to the applicants which were attributable to the claim against AIMS. I accept each of CGU's arguments save for the final step, namely, that as a consequence, the settlement should be found not to have been reasonable. 92 In a written submission in reply, the cross-claimants contended that the Court should assume that the costs incurred by the applicants in suing AIMS were insignificant especially given that the factual basis of the claims against all the respondents were generally common to all of them. On this assumption, the cross-claimants argued, the settlement should be found to have been reasonable. However, it would not be proper to make such an assumption without evidence to support it. There is no such evidence. On the other hand, it may be unjust to determine that the entire settlement was unreasonable by reason of this gap in the evidence. In the written submissions in reply the cross-claimants argued that the Court should order that the applicant's costs of suing AIMS should be taxed or otherwise determined and then deducted from the settlement figure. CGU did not have liberty to respond to the submissions in reply and thus has not been heard on this proposal. Unless the parties can agree on this issue, the case will be re-listed to hear submissions on the appropriate orders which should be made consequent upon the conclusions reached above.
THE apportionment agreement 93 It will be recalled that the apportionment agreement provided that the costs of AIMS in defending the applicants' claims would be paid from the Chubb monies before any other defence costs. 94 CGU contended that this term of the apportionment agreement should not be taken into account to reduce the amount of the Chubb monies available to reduce any amount payable by CGU because AIMS was not entitled to indemnity under the Chubb policies. CGU argued that AIMS was sued by the applicants for accessorial and vicarious liability, that is to say for its own liability, and not the liability of others, and such liability was not covered by the Chubb policies. 95 The cross claimants submitted that AIMS was a named insured in the Chubb policy and was covered, at least, in respect of vicarious liability. Vicarious liability holds AIMS responsible for the actions of Twomey and Lawson, and their conduct is directly covered under the policies. 96 The two Chubb policies are relevantly in the same form. Section 2 provides the insuring contracts for the trustees' liability coverage as follows: 2.1 The Company shall pay on behalf of the Insured all Loss for which the Insured is not indemnified by the Participating Employer or the Trustees of the Superannuation Fund and which the Insured becomes legally obligated to pay on account of any Claim first made against the Insured during the Policy Period or, if exercised, during the Extended Reporting Period, for a Wrongful Act committed, attempted, or allegedly committed or attempted, by such Insured before or during the Policy Period. 2.2 The Company shall pay: (a) on behalf of any Participating Employer, all Loss for which an Insured is indemnified by the Participating Employer, as permitted or required by law; (b) on behalf of the Superannuation Fund, all Loss for which an Insured (other than the Superannuation Fund) is indemnified by or out of the assets of the Superannuation Fund, as permitted or required by law; (c) on behalf of the Trustee which is a body corporate, all Loss for which an Insured is indemnified by such Trustee, as permitted or required by law; and for which the Insured becomes legally obligated to pay on account of any Claim first made against the Insured during the Policy Period or, if exercised, during the Extended Reporting Period, for a Wrongful Act committed, attempted, or allegedly committed or attempted, by such insured before or during the Policy Period. Certain terms are defined in cl 2.18, relevantly, as follows: 2.18 When used in this coverage section: Claim means: (a) a written demand for monetary damages, (b) a civil proceeding commenced by the service of a complaint, summons, statement of claim or similar pleading, (c) a criminal proceeding commenced by the service of a summons or charge, (d) a proceeding commenced by the service of a notice of receipt of a complaint by the Superannuation Complaints Tribunal; or (e) a formal administrative or regulatory proceeding commenced by the filing of a notice of charges, formal investigative order or similar document, against any Insured for a Wrongful Act, including any appeal therefrom. Insured, either in the singular or plural, means: (a) any Trustee; (b) any past, present or future director or officer of a corporate Trustee; (c) any past, present or future employee of any Trustee in the management of the Superannuation Fund; (d) any past, present or future member of a Policy Committee of the Superannuation Fund; (e) any past, present or future Participating Employer; (f) any past, present or future director or officer of a Participating Employer; (g) any past, present or future employee of a Participating Employer in the management of the Superannuation Fund; (h) any past director, officer or employee of the Participating Employer who is retained by the Participating Employer to assist in the management of the Superannuation Fund for a fee pursuant to a written contract; or (i) the Superannuation Fund. Loss means the total amount which any Insured becomes legally obligated to pay on account of each Claim and for all Claims in each Policy Period and the Extended Reporting Period, if exercised, made against them for Wrongful Acts for which coverage applies, including, but not limited to, damages, judgments, settlements, costs and Defence Costs. … Superannuation Fund means the funds designated in Item 2(b) of the Schedule of this coverage section. Trustee, either in the singular or plural, means any past, present or future person or body corporate, duly appointed as a trustee of the Superannuation Fund in accordance with the governing rules of the Superannuation Fund or by a court or pursuant to a statute. Wrongful Act means any error, misstatement, misleading statement, act, omission, neglect, breach of trust or breach of duty committed, attempted, or allegedly committed or attempted, by an Insured, individually or otherwise, in the management of a Superannuation Fund. 97 AIMS was named in the schedule to the policies as a participating employer. The cover provided to the participating employer under the Chubb policies was to pay on behalf of the participating employer all loss for which an insured was indemnified by the participating employer and which the insured became obliged to pay on account of a claim for a wrongful act committed, attempted, or allegedly committed or attempted by such insured (cl 2.2 (a)). Thus, the cover is in respect of the liability of the insured. But, in this context, the reference to the insured does not mean the participating employer. The definition of insured provides for a series of alternative meanings. This is indicated by the use of the conjunctive "or" between cl 2.18 (h) and (i) in the definition of insured. Where the word insured appears in section 2 of the policies, therefore, it bears one of the defined meanings, not all of them. Cl 2.2 (a) would make no sense if the reference to the insured was a reference to participating employer because the clause is concerned with a loss for which the insured was indemnified by the participating employer. The cover is thus provided in respect of the liability of the trustee, its directors, officers, or employees, or the liability of the fund. It does not provide cover for the liability of the participating employer. 98 The claims made by the applicants against AIMS alleged a liability on the part of AIMS itself, whether accessorial or vicarious. This liability is not within the cover provided by the Chubb policies. 99 It follows from the way the case was argued that the agreement to provide for payment of AIMS defence costs from the Chubb monies cannot operate to reduce the amount of the Chubb monies to be brought into account against the amount of the indemnity to be met by CGU.
conclusion 100 Unless the parties agree on orders disposing of the cross claims in the light of these reasons, the case will be re-listed directions to program argument on the appropriate form of orders. This will require a resolution of the issue left unresolved in paragraph [90]-[92] of these reasons. I certify that the preceding one hundred (100) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice North.
Associate: Dated: 6 January 2006 Counsel for the Cross-Claimants: Mr J B Davis
Solicitor for the Cross-Claimant: Norton Gledhill
Counsel for the First Cross-Respondent: Mr P Murdoch QC and Ms P Brimer
Date of Hearing: 8, 9,12-16 inclusive, 19, 20, 21 September 2005
Date of last Written Submissions: 28 September 2005
Date of Judgment: 6 January 2006
Kernaghan
Corrections Corporation of Australia Staff Superannuation Pty Ltd
(1998) 192 CLR 603