Lambert Leasing Inc. v QBE Insurance Ltd

Supreme Court of NSW|2015-04-10|Before: Rein J

Judgment

On 12 June 2015 I handed down my reasons for judgment in this matter which arises out of the sale by the first named plaintiff of an aircraft to the second and third defendants and a policy of insurance effected by those defendants with the first defendant, QBE, in which both plaintiffs were named as insureds ([2015] NSWSC 75). I did not express any concluded view on what was described as 'the pay to be paid' issue.
I indicated that I had, in considering my judgment on the pay to be paid point, become aware of a Canadian Court of Appeal decision which contained wording very similar to the QBE wording and in which a view had been taken that supported QBE's contention and was antagonistic to Lambert's contentions. I also made reference to the case of Versicherungs und Transport A/G Daugava v Henderson (1934) 49 Ll L Rep 252 at p 254; [1934] All ER Rep 626 mentioned in Derrington's 'The Law of Liability Insurance' (3rd ed, DK Derrington and RS Ashton, LexisNexis Butterworths, 2013) at 8-52 p 845. I indicated that if the parties still required a determination on this point I would give them an opportunity to provide further submissions. On being informed that Lambert wished to have a determination on the pay to be paid point and that QBE did not oppose that course, and that the defendants would be seeking an order that costs be paid on the indemnity basis, I directed submissions to be exchanged on the 'pay to be paid' clause and on the question of costs. I have received submissions on behalf of Lambert and QBE in respect of the pay to be paid point and from all parties on the question of costs.
I shall in the balance of these reasons use the same definitions as were utilised in the judgment. These reasons should be read together with the reasons of 12 June 2015 but in an endeavour to make these reasons accessible I shall set out what I said at [130]- [138] on the pay to be paid point: "The pay to be paid issue (Issue 5) [130] The QBE Policy s 3.1 provides that QBE will indemnify Lambert "in respect of all sums which the Insured shall become legally liable to pay, and shall pay, as compensatory damages (including costs awarded against the Insured)" (emphasis added). [131] QBE contends that there are two preconditions required to be met before QBE is required by the policy to indemnify it: (1) that Lambert has been found liable to a claimant (or at least has settled the proceedings because of its liability) (2) that Lambert has paid the amount so determined or agreed to the claimant. [132] Although interesting questions arise as to whether an insurer is liable where the insured has settled proceedings and there has been no determination of liability by a court (see Edwards v Insurance Office of Australia Ltd (1933) 34 SR (NSW) 88) that is not the present focus of concern since no settlement has been reached with any of the claimants in the US. Nor of course has Lambert been adjudged liable for any amount. The dispute is whether QBE does not have to indemnify Lambert until Lambert has paid whatever amount (if any) it is adjudged to pay. Both Lambert and QBE seek an answer on the effect of the words "and shall pay" as a precondition. QBE relies on the decision of the House of Lords in Firma C-Trade SA v Newcastle Protection & Indemnity Association (The Fanti) [1991] 2 AC 1 ("Firma C"). QBE points to the fact that the wording adopted in the QBE Policy is commonly found in Aviation Insurance Contracts: see Margo on Aviation Insurance (4th ed, 2014) and that Mr Lake, Global's underwriter accepted the policy found in Margo is a standard one. Firma C was approved by the Full Court of Queensland in Re Dixon [1994] 1 Qd R 7. Lambert relies on Charter Reinsurance Co Ltd v Fagan [1997] AC 313 ("Charter Re"). Lambert says that the claim should not be construed as QBE contends. Lambert also submits that, if, contrary to its contention the clause does operate to require Lambert to pay the money to the claimant before QBE is required to indemnify, QBE is prevented by reason of the duty of utmost good faith from relying on it. [133] Attention was drawn to the fact that the UK has recently legislated to preclude the use of "pay to be paid" clauses. No such prohibition exists in Australia. [134] In Firma C, the House of Lords considered whether a clause by which the club would "Protect and indemnify members in respect of losses which they as owners of the entered vessel shall have become liable to pay and shall have in fact paid" was effective to bar a claim by cargo owners on the club whose member had been placed in liquidation. The House of Lords held that payment to a third party was a precondition of indemnity and that the equitable principle that an agreement to indemnify permitted the party to whom the indemnity was given to require the indemnifier to pay the amount to the claimant without the indemnified person having to pay it out first did not oust an express clause of the policy: see Johnston v Salvage Association (1887) 19 QBD 458 in contrast to the common law rule Collinge v Heywood (1839) 112 ER 1352 per Coleridge J and see CGU Insurance Ltd v Watson [2007] NSWCA 301 at [64]-[66]. [135] In Charter Re, reinsurance contracts provided that the reinsurer would be liable for the losses of the insurers in excess of ultimate net loss of a specified amount. The term "ultimate net loss" was defined as meaning "the sum actually paid by the reinsured in settlement of losses or liability after making deductions for all recoveries, all salvages" [and the like]. The House of Lords held that it was not necessary for the insurers (ie the insureds under the reinsurance policies) to first have made payment of the relevant claim by way of transfer of funds to its insured. The insurer was insolvent and had not made such payments. The principal judgment is that of Lord Mustill (with whom Lords Goff, Griffiths, Browne-Wilkinson agreed). He explained that initially he had thought the words "actually paid" were clear and that they imposed a condition precedent to liability of the reinsurer however at p 384-386 his Lordship explained why as a matter of contractual interpretation the words in question, adopting the approach of Mance J at first instance "did not have the purpose of introducing a temporal precondition to recovery in the form of disbursement or other satisfaction of the precise net commitment between Charter and its reinsured, but were there "for the purpose of measurement." His Lordship in approaching the question said that the words of the policy "must be set in the landscape of the instrument as a whole." Lord Mustill then said: "Whilst I have come to this conclusion simply from a study of the document I ought to comment on a number of other matters which are said to bear upon it. In the first place, there is an argument ad absurdum to the effect that the parties cannot have intended Charter to retain such liquidity as would enable it to answer claims under the incoming policies without recourse to the reinsurance. At a time when the use of money was a vital element in the profitability of insurance business it is impossible to suppose (the argument runs) that Charter should have agreed to finance its own outlays, the more so since, if the syndicates' interpretation of clause 2 is right, Charter would have to find, not only the funds required to disburse the sum due under this particular layer, but also the total of the underlying reinsurances. This would be a wholly impracticable arrangement, and would bear especially hard on Charter if it fell into financial trouble and lacked the means to make the payments necessary to unlock the reimbursements due under its contracts with the syndicates. This argument draws strength from the shape of the policy. As I have already suggested, under this form of words, although perhaps not under all forms, the policy covers not, as might be thought, the suffering of loss by the reinsured in the shape of a claim against him under the inward policies, but the occurrence of a casualty suffered by the subject-matter insured through the operation of an insured peril. The inward policies and the reinsurance are wholly distinct. It follows that in principle the liability of the reinsurer is wholly unaffected by whether the reinsured has satisfied the claim under the inward insurance: see, amongst several authorities, Re Eddystone Marine Insurance Co.; Ex parte Western Insurance Co. [1892] Ch 423 . This result can undoubtedly be changed by express provision, but clear words would be required; and it would to my mind be strange if a term changing so fundamentally the financial structure of the relationship were to be buried in a provision such as clause 2, concerned essentially with the measure of indemnity, rather than being given a prominent position on its own." [136] Firma C was a case involving a protection and indemnity club where members were both insurers and insureds and the notion that there was some purpose in members being sufficiently solvent to meet liabilities was discussed at p 36 D-G per Lord Goff and p 42 C-E per Lord Jauncey: see Sutton at para 15680 fn 487 in which the learned authors treat such clauses as operating in the field of protection and indemnity liability covers. [137] Lambert also contended in the alternative that QBE should be precluded from relying on the clause, by reason of an asserted breach of the duty of utmost good faith. Mr Williams pointed to Mr Beach-Nash's evidence that QBE has never required any insured to pay out a judgment or settlement amount as a precondition of indemnity notwithstanding QBE's frequent use of the clause: see T193-194. Mr Sullivan submitted that the duty cannot extend to precluding an insurer from relying on a contractual term of the policy: see per Macdougall J in Prepaid Services Pty Ltd v Atradius [2012] NSWSC 608 at [88]-[91]. Lambert's response is that s 14 of the ICA specifically extends the duty to prevent reliance on such a provision of a contract in appropriate circumstances. [138] Lambert contends that the broad approach taken in Charter Re both in the House of Lords and by Mance J at first instance in which many cases relating to the construction of contracts and insurance contracts in particular should be applied here and see the further cases relied on by Lambert: Eddystone Marine Insurance Co, Re Ex parte Western Insurance Co [1892] 2 Ch 423 per Stirling J, Horsell International Pty Ltd v Divetwo Pty Ltd [2013] NSWCA 368[151]-[153], F G Strang Pty Ltd v N Z I Insurance Australia Ltd [1990] VR 1016 at 101, Pioneer Concrete (UK) Ltd v National Employers Mutual General Insurance Association [1985] 1 Lloyd's Rep 274, p 278, Raiffeisen Zentralbank Oesterreich AG v Five Star Trading LLC [2001] 3 All ER 257, Teal Assurance Company Ltd v W R Berkley Insurance (Europe) Ltd [2013] UKSC 57 and Calliden Insurance Ltd v Chisholm [2009] NSWCA 398 [27]-[28] per Allsop P and cases on construction of contracts generally such as Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd [2014] WASCA 164, Penn v Simmons [1971] 1 WLR 1381, Tovir Investments Pty Ltd v Waverley Council [2014] NSWCA 379, Maintek Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184 and Duffy v Da Rin [2014] NSWCA 270. It submits that the QBE clause does not say "shall have been paid" but uses the different phrase "shall pay", and that the approach taken in Firma C should be confined to P & I club policies. QBE contends that the words mean what they say and that when words in a policy are clear they should be given that meaning citing Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd [2008] NSWCA 243."

Costs

QBE and the Partnership seek indemnity costs orders against Lambert. There does not seem to be any contest by Lambert that it is liable to pay costs on the ordinary basis but it does dispute that an order for indemnity costs should be made.
The claim for indemnity costs by QBE and the Partnership is based on two separate offers. The first was made on 5 June 2014 and was in the form of a Calderbank letter. The second was made on 15 January 2015 and was an offer expressed to be made under the Uniform Civil Procedure Rules ("UCPR").
The difference in approach to the two species of offer has been explained in Leichhardt Municipal Council v Green [2004] NSWCA 341 and Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344. In the case of unaccepted offers of compromise made in accordance with the UCPR the consequence is normally that indemnity costs will be ordered unless the offeree establishes some special basis that the normal rule should not apply, but in the case of Calderbank offers the offeror must establish that the offer was genuine and that the offeree acted unreasonably in not accepting the offer. Lack of genuineness of an offer is relevant to offers of compromise but the onus is on the offeree to establish that the offer made was not a genuine compromise or alternatively that the Court should exercise its discretion not to make an order for indemnity costs.

The Offer of 5 June 2014

In relation to the offer of 5 June 2014 (see Annexure A to the affidavit of Mr Henry Holland of 21 July 2015) the offer was that all previous costs orders would be vacated and each party was to pay its own costs, that the proceedings would be dismissed as against all defendants and Lambert would covenant not to bring any further proceedings arising out of the circumstances pleaded. No evidence was tendered of what costs orders had been made against whom or what costs had been incurred by QBE as at the date of that offer but there is evidence that by 13 January 2015 QBE had incurred costs of approximately $307,000 exclusive of GST (see para 5 of Mr Holland's affidavit).
The letter by which the offer was made pointed out what QBE contended were significant problems in the plaintiffs' case: "Everything about this case is unsatisfactory. It is not a proceeding brought by the Plaintiffs. There is not a jot of evidence from the Plaintiffs. It is a proceeding by the Global Aerospace insurers brought on an entirely false premise and the case will fail for reasons which include: (a) it is for an indemnity when the Plaintiffs have already been indemnified; (b) it is a claim under a reimbursement or "pay to be paid" policy where there has been no finding of liability and no payment by the Plaintiffs; and (c) until completion of the Missouri proceedings it is premature for QBE to make a final decision upon whether its policy responds."
The letter pointed out that QBE's solicitors "anticipated" that the Partnership would agree and that QBE would obtain the Partnerships' agreement. That confidence may well have been connected to the fact that the Partnership was an insured under the QBE Policy.
Lambert attacks the Calderbank letter on two bases. The first basis is that the offer was really a "walk away" offer and did not involve any genuine compromise on the part of QBE or the Partnership. The second basis is that it was not unreasonable for Lambert not to accept the offer.
It is relevant in viewing these questions to consider what the offeree would gain by accepting the offer. The less that it would receive the more difficult it is to establish that failure to accept the offer was not reasonable. All that Lambert would receive was relief from a costs order that QBE and the Partnership might obtain against it for costs incurred by the defendants up to that point in time.
Whilst I have found against Lambert in those latter claims, Lambert had a claim against the Partnership that was not frivolous or ridiculous. I do not think it was unreasonable for Lambert to reject the offer from QBE that required Lambert to drop all of its claims including the claims against the Partnership, nor do I think that the offer was a genuine compromise of the claims against all defendants.
In my view it is not appropriate to make an indemnity costs order against Lambert based on the offer of 5 June 2014.

The Offer of 15 January 2015

It is not disputed by Lambert that the January 2015 offer, in the same terms as the June 2014 offer, was one made in accordance with the procedural requirements of UCPR Rule 26. What is disputed is that the offer was genuine.
UCPR Rule 42 requires the offeror to have obtained a result equal to or better than the offer of compromise. In one sense QBE has not done better because Lambert obtained a decision in its favour on the wording of the policy both in respect of the pay to be paid and the nervous shock issue and also a conclusion that QBE could not insist on the provision to it of privileged reports as a precondition for providing a response on the issue of indemnity: see [169]- [171]. The problem with these conclusions however is that they do not as a practical matter assist Lambert because of my conclusion that Lambert will not have to pay money to the claimants because Global has agreed to do so and that these proceedings were really proceedings brought at the behest of Global: see [193]- [199].
Once again Lambert attacks the genuineness of the defendant's offer. The position in relation to offers of compromise is explained in Dean v Stockland Property Management Pty Ltd (No 2) [2010] NSWCA 141 per Giles JA, Handley AJA and Whealy J: "[14] An offer of compromise will only justify costs on an indemnity basis if it has a real element of compromise (Leichhardt Municipal Council v Green [2004] NSWCA 341; Herning v GWS Machinery Pty Ltd (No 2) [2005] NSWCA 375). An offer which does not involve a real and genuine element of compromise will not be taken into account in relation to costs under the Rules (The Anderson Group Pty Ltd v Tynan Motors Pty Ltd (No 2) [2006] NSWCA 120 ; (2006) 67 NSWLR 706). It has been said that indemnity costs will not be granted where the offer of compromise is designed simply to trigger the entitlement: for example, Tickell v Trifleska Pty Ltd (1990) 25 NSWLR 353 at 355 per Rogers CJ Comm D. An offer of compromise will always be intended to trigger the entitlement. The force of "simply" is the need for a real element of compromise."
It appears that walk away offers are more likely to be viewed as not involving any real element of compromise (see Robb Evans of Robb Evans & Associates v European Bank Ltd (No 2) [2009] NSWCA 170 and Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 368) but this is not always the case as is demonstrated by Roads and Traffic Authority of New South Wales v Refrigerated Roadways Pty Ltd (No 2) [2009] NSWCA 336 and Bennette v Cohen (No 2) [2009] NSWCA 162.
I readily accept this the case was one in which it was difficult for QBE to fashion an offer that involved some genuine compromise with Lambert having regard to QBE's contentions, but what was in fact offered to Lambert by QBE was of very limited benefit and required Lambert to completely abandon not only its claim against QBE but also its claim against the Partnership which involved a question of construction of the Sale Agreements' indemnity clause and application to the facts of the case. Although Lambert was unsuccessful in that claim against the Partnership its claim was not frivolous or vexatious, a relevant matter when all that is offered is a walk away offer: see Evans.
I do not think that there was any compromise even disregarding the issues surrounding Lambert's claims against QBE and regarding those as problematic and it appears to me that the offer was one sent simply in order to trigger a costs outcome.
It follows that the order that should be made in respect of costs is that the plaintiffs pay the costs of the defendant on the ordinary basis.

Amendments 25 August 2015 - Typographical error DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 25 August 2015

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