Khoury v Government Insurance Office

Khoury v Government Insurance Office - [1984] HCA 55 - HCA 1980 case summary — Zoe

[20]

The appellants' attack on this finding of material non-disclosure involves both a technical point and matters of substance. The technical point takes the form of a submission that his Honour's finding of a failure to disclose a belief stands outside the pleadings for the reason that par. 9 of the amended defence alleged a failure to disclose the fact of actual thefts by a child or children of the appellants of money whereas what his Honour relied upon was a failure to disclose Mr. Khoury's belief of such thefts. This point is, however, not open to the appellants at this stage of the proceedings and must be rejected. It is true that par. 9 of the amended defence refers to the facts of thefts and to "knowledge" thereof as distinct from the facts of Mr. Khoury's belief that there were thefts. The concession made by counsel for the appellants, which was recorded and relied upon by Rogers J. and which has been set out above, demonstrates however, as does his Honour's judgment, that the case proceeded at first instance on the basis that the insurer was contending that the failure by the appellants to disclose Mr. Khoury's belief about the taking of money by one or more of his sons constituted, in itself, a material non-disclosure. Indeed, the transcript of Mr. Khoury's evidence makes clear that the fact of Mr. Khoury's belief was seen by both sides as one of the main matters in issue. That being so, the point which it is sought to raise involves no more than a claim that the defence failed adequately to raise a matter which was in issue between the parties and which was so treated and determined at the trial. It is a bare pleading point. If objection had been taken at the trial on the ground of this suggested defect in pleading, it would doubtless have been met by an appropriate further amendment. The suggested pleading defect was not, however, raised at the trial. Nor was it mentioned in the notice of appeal to the Court of Appeal or in argument before that Court. In these circumstances, it is too late for it to be relied upon for the first time on the appeal to this Court.

[45]

Nor is the "implied term" theory consistent with the ordinary common law principles governing the implication of a term in a contract. Under those principles, the courts are prepared to add a term to a formal contract which is not incomplete on its face only if particular criteria are satisfied. Those criteria (which may overlap) were summarized by the majority of the Privy Council in B.P. Refinery Pty. Ltd. v. Hastings Shire Council [20] in terms which have subsequently been adopted in this Court: see Secured Income Real Estate (Australia) Ltd. v. St. Martins Investments Pty. Ltd. [21] ; Codelfa Constructions Pty. Ltd. v. State Rail Authority of N.S.W. [22] . Their rationale lies in the identification of the "presumed intention" of the parties to the contract: see, per Bowen L.J., in The Moorcock [23] ; B.P. Refinery Pty. Ltd. v. Hastings Shire Council [24] . They include, among others, that the term must be something which is "so obvious that it goes without saying" (per Mackinnon L.J., in Shirlaw v. Southern Foundries Ltd. [25] and that the term "must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it". Neither of those two criteria could properly be seen as satisfied, in the ordinary case, by a term spelling out the strict duty to disclose material facts which must ordinarily be discharged by an insured. It is far from "obvious" that an insured would "testily" reply "of course" (see B.P. Refinery Pty. Ltd. v. Hastings Shire Council [26] ) to a suggested term to the effect of the ordinary duty to disclose, that is to say, to a term which would entitle the insurer to avoid the policy in the event of some non-disclosure which could be characterized as material by reference only to the standard of a prudent insurer and which may be quite unrelated to the particular claim on the policy: see Marene Knitting Mills Pty. Ltd. v. Greater Pacific General Insurance Ltd. [27] . It could scarcely be maintained, particularly in the light of the long experience of the American insurance industry where the duty of disclosure in non-marine cases is seen as resting upon mere honesty and good faith (see, Sebring v. Fidelity-Phenix Fire Insurance Co. of New York [28] ; Corpus Juris Secundum, vol. 45, "Insurance", par. 473(3)), that a term imposing such a strict duty of disclosure is necessary to give "business efficacy" to a contract of insurance. Indeed, putting to one side cases where both parties are involved in the same commercial area and are presumed to have intended that some established mercantile practice with which both are familiar should constitute an implied term of the contract, it would be a rare case in which it could be presumed that an insured intended that the contract of insurance should include an implied term imposing upon him the onerous duty of disclosure which the courts have held he is prima facie obliged to discharge.

[47]

As a matter of principle, the insured's duty to disclose material facts should be seen not as an implied term of the contract but as an obligation which the common law imposes as an incident of the relationship between the parties to the insurance transaction: see Jordan, Chapters on Equity in New South Wales, 6th ed. (1947), p. 114. The duty was so seen in the leading case on the question in this Court, Saunders v. Queensland Insurance Co. Ltd. [29] , where a clear distinction was drawn between breach of special provisions in an insurance contract relating to disclosure and a failure to discharge the ordinary common law duty to disclose material facts. In that case, Dixon J. [30] referred to suggested breaches of contractual provisions and made clear that it was a quite separate question whether non-disclosure was established avoiding the contract "at common law". Starke J. [31] expressly affirmed that the insured's duty to disclose "all facts within his knowledge material to the risk" is "an absolute duty at common law". That view, that the ordinary duty of an insured to disclose material facts should properly be seen as a duty which arises at common law as distinct from an implied term or condition of the contract of insurance, is also supported by the clear weight of authority: see, e.g., Joel v. Law Union and Crown Insurance Co. [32] ; per Lord Atkin, Bell v. Lever Brothers Ltd. [33] ; per Jordan C.J.,Southern Cross Assurance Co. Ltd. v. Australian Provincial Assurance Ltd. [34] ; Merchants and Manufacturers Insurance Co. v. Hunt [35] ; C. R. Ogden v. Reliance Fire Sprinkler Co. [36] ; March Cabaret Club v. The London Insurance [37] . Notwithstanding the contrary opinion of authors of the eminence of Arnould (Marine Insurance, 7th ed. (1901), vol. 1, pp. 621-622) and Anson (Law of Contract, 8th ed. (1898), p. 193) we consider that it is clearly correct and breach of that common law duty does not come within the literal scope of s. 18 of the Act which applies only to a failure "to observe or perform a term or condition of the contract".

[49]

It was argued on behalf of the appellants that the provisions of s. 18, which are remedial in character, should be given an extended meaning so as to enable the court to excuse a failure to discharge an insured's common law duty to disclose material facts to the insurer. There is undoubtedly some force in that argument. Section 18 is remedial in character and its language should be construed so as to give the most complete remedy which is consistent "with the actual language employed" and to which its words "are fairly open": Kebby v. Waldron [38] ; Butler v. Fife Coal Co. Ltd. [39] . There is an element of at least superficial incongruity in a legislative provision which enables the court to excuse a breach of a contractual representation but does not enable such relief in the case of a non-disclosure which does not involve any breach of the express or implied terms of the contract. The argument does not however bear closer examination in that there are two major objections which preclude its acceptance. First, the rule that remedial provisions are to be beneficially construed so as to provide the most complete remedy of the situation with which they are intended to deal must, as has been said, be restrained within the confines of "the actual language employed" and what is "fairly open" on the words used. Once the conclusion is reached that the common law duty of disclosure cannot properly be regarded as a term or condition of the contract of insurance, the language employed in s. 18 simply does not extend to a breach of that duty. Secondly, and perhaps more importantly, there is no proper basis for concluding that it was ever intended that the remedial function served by s. 18 should extend to the case of a breach of the ordinary common law duty. It may well be that s. 18 was intended, in answer to a call made by R. L. Taylor J. in Kazacos v. Fire and All Risks Insurance Co. Ltd. [40] , merely to provide legislative relief in those cases where the correctness of the information provided was actually made a term or condition of the contract with the consequence that the contract could be avoided "on the incorrectness of matters where there has been no fraud and where the misrepresentation is on a matter quite immaterial to the risk" [41] , that is to say, where the misrepresentation would not involve any breach of the common law duty to disclose material facts: see also the comments made some sixty years earlier by Fletcher Moulton L.J. in Joel's Case [42] . In that regard, while one cannot construe the terms of a 1974 legislative provision by reference to the terms of a non-retrospective 1983 provision, the Insurance (Amendment) Act 1983 N.S.W. illustrates that it cannot be assumed that, if the New South Wales Parliament had intended in the 1974 amendments to the Act to provide relief in cases of a failure to discharge the long-established common law duty of disclosure, it would have done so in the broad terms adopted in s. 18 for cases involving a non-prejudicial breach of a term or condition of the contract. When, by that 1983 Act (s. 3), the New South Wales Parliament introduced new provisions in the Act (s. 18A) to provide general relief in cases of omission or non-disclosure, it adopted a quite different approach to that of s. 18 and subjected the relief to conditions which would appear not to be satisfied in the present case.

[51]

The appellants' final submission on s. 18 was that the combined effect of the provisions of the proposal and the policy was that any breach of the duty to disclose material facts constituted, in any event, a failure to observe or perform a term or condition of the contract. The basis of that submission was what was said to be the combined effect of the form of proposal completed by the appellants and the actual policy. The proposal, which contained answers to a number of specific questions relating to the risk, contained a declaration that "no matter has been withheld" and a provision that the appellants agreed that the proposal, including the declaration, "shall be the basis of the contract with the office whose policy [we] agree to accept". The policy, when it finally issued, recited that " the Insured has made to [the insurer] a written Proposal which it is hereby agreed shall be the basis of this contract and be considered as incorporated herein ". This submission is, however, confronted by difficulty at every step. As a matter of construction, it would seem that the statement in the proposal that "no matter has been withheld" should be read as referring to the answers to the specific questions which the form of proposal contained. None of those questions called for disclosure of Mr. Khoury's belief as to past thefts by a son from his business. Again, the reference to no matter being "withheld" is not appropriate to refer to a mere breach of the common law duty of disclosure in that the "word "withheld" means more than "omitted to communicate". It means "refrained from disclosing" and would not be satisfied by an omission through failure to advert to the subject": per Dixon J., with whom Rich J. agreed, Saunders [43] and see, to the same effect, per Starke J. [44] and Evatt J. [45] . There has been neither suggestion nor finding that the failure to disclose material facts in the present case was other than inadvertent. The real answer to the submission is, however, that the insurer in the present case relies upon breach of the common law duty of disclosure and it is not to the point that, if the non-disclosure also involved a breach of a term or condition of the contract, relief could be granted under s. 18 against the consequences of that breach. In that regard, as the decision in Saunders demonstrates, it is clear that the fact that the contract contained a provision in relation to withholding information would not, in the circumstances of the present case, warrant a conclusion that the ordinary common law duty to disclose material facts had been displaced. Indeed, as we followed the argument, it was not suggested that it would.

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Before

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Judgment (56 paragraphs)

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