Lomsargis v National Mutual Life Association of Australasia Ltd

PROCEDURE - SUPREME COURT PROCEDURE - QUEENSLAND - PRACTICE UNDER RULES OF COURT - PLEADING - STATEMENT OF CLAIM - where plaintiff took out insurance policy for weekly payments in the event of disability - where plaintiff claimed disability but defendant refused to pay the claim alleging fraud - where plaintiff claims breach of contract and entitlement to weekly payments - where plaintiff also claims damages for breach of implied contractual term to act in good faith under s 13 of the Insurance Contracts Act 1984 (Cth) and damages for breach of "tortious duty of good faith" - whether contractual claim is unnecessary, scandalous or has a tendency to prejudice or delay a fair trial - whether tort claim discloses reasonable cause of action

TORT - MISCELLANEOUS TORTS - OTHER CASES - where plaintiff claims exemplary or aggravated damages for breach of "tortious duty of good faith" - where Insurance Contracts Act 1984 (Cth) implies a term of good faith in insurance contracts - whether Australian law recognises additional and concurrent "tortious duty of good faith"

Insurance Contracts Act 1984 (Cth) s 13, s 14, s 57

Insurance Contracts Regulations 1985 (Cth) reg 32

Uniform Civil Procedure Rules 1999 (Qld), r 171(a),

Agar v Hyde [2001] HCA 41; (2000) 201 CLR 552, cited

Astley v Austrust Ltd (1999) 197 CLR 1, discussed

Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd ("The Good Luck") [1990] 1 QB 818, followed

Butler v Fairclough [1917] HCA 9; (1917) 23 CLR 78, cited

Cedenco Foods Limited v State Insurance Limited (1997) 6 NZ BLC [99-414], cited

Dey v Victoria Railway Commissioners (1949) 78 CLR 52, cited

Edwards Karwacki Smith & Co Pty Ltd v Jacka Nominees Pty Ltd (in liq) (1994) 15 ACSR 502, cited

General Steel Industries Inc v Commissioner for Railways (NSW) [1964] HCA 69; (1964) 112 CLR 125, applied

Gibson v Parkes District Hospital (1991) 26 NSWLR 9, distinguished

Gimson v Victorian WorkCover Authority [1995] VicRp 14; [1995] 1 VR 209, discussed

Gray v Motor Accident Commission [1998] HCA 70; (1998) 196 CLR 1, cited

Harris v Digital Pulse Pty Ltd [2003] NSWCA 10; (2003) 56 NSWLR 298, cited

HIH Casualty & General Insurance Ltd v Chase Manhattan Bank [2001] 2 Lloyd's Rep 483, cited

Hospitality Group Pty Ltd v Australian Rugby Union Ltd [2001] FCA 1040; (2001) 110 FCR 157, cited

Ilievska-Dieva v SGIO Insurance Ltd [2000] WASCA 161, discussed

La Banque Financière de la Cité SA v Westgate Insurance Co Ltd [1990] 1 QB 665, followed

March Cabaret Club and Casino Ltd v London Assurance [1975] 1 Lloyds Rep 169, cited

Moss v Sun Alliance Australia Ltd (1990) 93 ALR 592, discussed

National Australia Bank Ltd v Nemur Barity Pty Ltd [2002] VSCA 18; [2002] 4 VR 252, cited

Settlement Wine Co Pty Ltd v National and General Insurance Co Ltd (1990) 159 LSJS 84, discussed

Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1985] UKPC 22; [1986] 1 AC 80, cited

Whiten v Pilot Insurance Company (2002) 209 DLR (4th) 257, discussed

[1] McMURDO J: By a policy issued in 1997, the defendant agreed to insure the plaintiff against the event of his becoming totally disabled. It was agreed that in that event the defendant would pay a certain weekly sum until 30 June 2021. The plaintiff says that he has been disabled since August 2001, when he made his claim under the policy. In December 2001 the defendant refused to pay the claim, alleging that it was made fraudulently.

[2] The plaintiff commenced these proceedings in August 2004. He seeks declaratory relief to the effect that the contract of insurance remains on foot (the defendant having purported to cancel it in December 2001) and that the defendant is in breach of the contract in refusing to pay benefits. He claims the payment of the agreed weekly sum, and he makes two further claims which are the subject of the present application. They are claims for damages for breach of the contract of insurance and for what the prayer for relief describes as a tortious duty of good faith. The parts of the statement of claim which specifically relate to those two claims are paragraphs 29 through 36. This is an application by the defendant to have the contractual damages claim struck out as unnecessary or scandalous under the Uniform Civil Procedure Rules 1999 (Qld) ("UCPR"), r 171(c) and as having a tendency to prejudice or delay the fair trial of the proceeding: UCPR r 171(b), and the tort claim struck out as disclosing no reasonable cause of action: UCPR r 171(a), or as being frivolous or vexatious: UCPR r 171(d). The parties agree that for the application pursuant to r 171(a) the defendant must establish that the claim is "so clearly untenable that it cannot possibly succeed": General Steel Industries Inc v Commissioner for Railways (NSW) [1964] HCA 69; (1964) 112 CLR 125, 129-130, and the defendant argues that the tort which is alleged has no existence as a matter of law, which is manifest, although perhaps only after extensive argument.[1]

[3] The relevant express terms of the policy are pleaded in paragraphs 3 to 5. Certain implied terms are then pleaded as follows:

"6. Further or in the alternative, it was an implied term of the policy:-

6.1 arising from the nature of the policy, its surrounding circumstances and the need to give business efficacy, that the defendant in deciding whether or not to make a decision to accept a claim under the policy would:-

6.1.1 deal fairly with, and have due regard for the interests of the plaintiff;

6.1.2 act reasonably and not so as to unreasonably deprive the plaintiff from the benefit of the policy;

6.2 arising from Section 13 of the Insurance Contracts Act that the defendant would act towards the plaintiff, in respect of the policy, with the utmost good faith.

[4] According to the express terms which are pleaded, the plaintiff is entitled to be paid if in fact he is disabled. His right to payment is not dependent upon what the defendant thinks about that matter. In particular, it is not a policy under which he is to be paid if and when the insurer is satisfied that he is disabled. If he is disabled in the relevant sense, the defendant must pay him the agreed benefit regardless of whether in its view he is disabled, and regardless of whether any expressed view of the defendant has been reached in good faith.

[5] The statement of claim then pleads the fact of the alleged disability, before pleading the claim under the policy and the provision of information in support of it. In paragraph 20, it pleads that the defendant wrote a letter in December 2001, in which the defendant refused to pay the claim and purported to cancel the policy on the ground that the plaintiff had made a fraudulent claim. After pleading that the claim was not made fraudulently and that the defendant was not entitled to cancel the policy, the plaintiff pleads that if any information contained in his claim had been fraudulently false, it was insignificant and a reliance upon it to refuse any indemnity was a failure to act with the utmost good faith, and contrary to s 14 of the Insurance Contracts Act 1984 (Cth).

25.1 the plaintiff was totally disabled within the meaning of the policy;

25.2 alternatively, by reason of the defendant's refusal and cancellation, the defendant refrained from proceeding to form an opinion under the policy as to the plaintiff's injury, sickness or disability."

As already mentioned, any opinion of the defendant as to the plaintiff's injury, sickness or disability is irrelevant to the question of whether the plaintiff is entitled to be paid under this policy, so that the alternative allegation in paragraph 25.2 is apparently irrelevant to a claim for payment of the agreed benefits.

[7] Paragraph 26 pleads that no benefit has been paid, and paragraph 27 that certain amounts are payable under the policy, calculated by reference to certain weekly amounts from 1 October 2001 until a date close to that of the commencement of these proceedings. In paragraph 28 the plaintiff "claims the ongoing benefits payable until trial".

29

The plaintiff refers to and relies upon the matters pleaded in paragraphs 20, 23 and 24 hereof.

30.1

the defendant had a corporate policy or practice to arbitrarily reject or attempt to frustrate the processing and payment of about 30% of all claims on disability policies in order to obviate or diminish the need for it to pay benefits under such policies;

30.2

the claim under the policy was one of those to which the defendant applied such corporate policy or practice.

31 By reason of the matters pleaded in paragraphs 29 and 30 hereof, the defendant's conduct in failing to pay benefits, and in refusing the plaintiff's claim under the policy and cancelling the policy, constituted a breach of the policy implied terms.

32 By reason of the breach the plaintiff has suffered damages being:

32.1 the sums referred to in paragraph 27 and 28 hereof;

32.2 damage being interest as damages for being deprived of the said policy benefits, calculated at 5% over time of $250,845.42, and on any further sum which accrues over time to trial or earlier payment."

[9] The claim for damages in tort is pleaded as follows:

33 Arising from the nature of the policy as a disability policy, the defendant owed a duty to the plaintiff to act towards the plaintiff:-

33.1

in good faith;

33.2

so as to deal fairly with the plaintiff and have due regard to his interests.

34 By reason of the defendant's conduct pleaded in paragraphs 29 and 30 hereof, the defendant breached such duty.

35 By reason of such breach the plaintiff suffered damage referred to in paragraph 32 hereof.

36.1 the defendant's conduct was undertaken at a time when the defendant knew that the plaintiff was suffering from:-

36.1.1

a serious physical disability;

36.1.2

with the passage of time, a serious psychiatric disability.

36.2 the defendant knew, as was the fact, that the plaintiff's financial circumstances were becoming increasingly desperate with the reduction in the absence of income from employment;

36.3 the matters in paragraph 29 and 30 referred to and relied upon;

36.4 in the premises of this paragraph, an award of aggravated and or in the alternative exemplary damages ought be paid in a total sum not less than the gross amount of the benefits payable under the policy plus the amount of compensatory damages."

[10] The "policy implied terms" referred to in paragraph 31 are those pleaded in paragraph 6, of which one is that implied by s 13 of the Insurance Contracts Act as follows:

A contract of insurance is a contract based on the utmost good faith and there is implied in such a contract a provision requiring each party to it to act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good faith."

[11] The damage from the breach of the implied terms, including the term implied by

s 13, is pleaded to be "the sums referred to in paragraph[s] 27 and 28 hereof" together with "damage being interest as damages for being deprived of the said policy benefits". The sums in paragraphs 27 and 28 are the monies which, upon the plaintiff's case, are payable or will become payable under the policy. The plaintiff does not plead that he has terminated the contract, or that it is otherwise at an end. The claim in paragraph 27 is for an amount which has accrued due to him, and the claim in paragraph 28 is for such further sums which will accrue by the trial.

[12] If he is given judgment for the sums pleaded in paragraphs 27 and 28, his loss, if any, from the defendant's failure and refusal to pay those benefits is from not having the use of them from when they should have been paid. In that respect he claims by paragraph 32.2 that he has suffered damage in an amount equivalent to a five per cent return on those monies from the times at which they should have been paid. However, he is entitled to interest on those sums pursuant to s 57 of the Act and reg 32 of the Insurance Contracts Regulations 1985 (Cth) calculated at a rate well in excess of five per cent.[2] The right to interest under s 57 does not depend upon the exercise of a discretion in his favour.

[13] To recover damages for breach of these implied terms, the plaintiff must establish his entitlement to be paid the benefits, but in that event, he will recover the benefits then accrued due together with a further sum for interest under s 57. The statement of claim does not plead any facts from which he will have suffered some further damage in that event. It is submitted that a plaintiff is entitled to plead his case in the alternative. But the claim for damages for breach of contract is dependent upon proof of the plaintiff's entitlement to payment of the agreed weekly benefits; it is not an alternative to a claim to that entitlement. And, plainly, he cannot recover both the amounts in paragraphs 27 and 28, together with s 57 interest, and damages for the losses alleged in paragraph 32.

[14] Paragraphs 29 to 32 are unnecessary because they add nothing to the plaintiff's case. Subject to their relevance to what is pleaded in relation to the alleged breach of a tortious duty, they should be struck out.

[15] Two types of relief are claimed under this head. Paragraph 35 pleads that the plaintiff suffered damage by this breach of duty, being the damage referred to in paragraph 32. As I have just concluded, paragraph 32 does not plead facts by which the plaintiff is entitled to anything beyond that to which he is entitled under his policy and under the Act.

[16] The other relief claimed within this tortious basis is for what is described in paragraph 36.4 as:

"an award of aggravated and or in the alternative exemplary damages ... in a total sum not less than the gross amount of the benefits payable under the policy plus the amount of compensatory damages."

[17] In the prayer for relief, the plaintiff claims "damages, being compensatory, aggravated and exemplary damages, for breach of a tortious duty of good faith". The term "compensatory damages" both in paragraph 36 and in the prayer for relief seems a reference to the damage pleaded in paragraph 35 (and thereby that pleaded in paragraph 32). The plaintiff claims aggravated damages apparently upon the basis that the defendant's conduct is such that some higher compensatory award is warranted, on the unstated premise that the defendant's conduct caused some injury to feelings or mental distress.

[18] Exemplary damages are claimed only upon this tort claim, and the plaintiff's submissions accept that according to Australian law, exemplary damages cannot be recovered for breach of contract: Gray v Motor Accident Commission [1998] HCA 70; (1998) 196 CLR 1 at 6 citing Butler v Fairclough [1917] HCA 9; (1917) 23 CLR 78 at 89; Hospitality Group Pty Ltd v Australian Rugby Union Ltd [2001] FCA 1040; (2001) 110 FCR 157 at 191, 197; Harris v Digital Pulse Pty Ltd [2003] NSWCA 10; (2003) 56 NSWLR 298 at 307, 361.

[19] The duty as pleaded at paragraph 33, is a duty to act towards the plaintiff in good faith and "so as to deal fairly with the plaintiff and have due regard to his interests". Its alleged breach is by the conduct pleaded in paragraphs 29 and 30.

[20] The defendant argues that there is no such tort under Australian law. It submits that the plaintiff's case has no arguable basis, in that any such duty or duties owed by an insurer to its insured can arise only from the insurance contract, and any breach can result only in a contractual liability. There is no Australian authority for the existence of such a tort. Recent decisions in England have rejected it.

[21] The plaintiff submits that this tortious liability is sufficiently arguable to survive a strike out application, upon the basis of recent Australian cases which have indicated some preparedness to import such a tort from American law. The plaintiff argues that a court at first instance should be alert to any prospect that the law will develop to allow for the relevant plea so that it should not grant peremptory relief if that prospect cannot be excluded.

[22] The plaintiff relies most heavily upon the judgment of Badgery-Parker J in Gibson v Parkes District Hospital (1991) 26 NSWLR 9. That was a claim for damages which was pleaded against the defendant hospital as the plaintiff's employer and the Government Insurance Office of NSW (GIO) as the hospital's insurer. The plaintiff pleaded, or proposed to plead, that each of the defendants was under a duty to deal fairly and in good faith in processing and paying her claim under the Workers' Compensation Act 1926 (NSW) as well as a duty "to use reasonable care and competence to avoid unnecessary financial hardship or personal distress being caused to the plaintiff by reason of unjustifiable denial, or delay in paying her appropriate compensation under [that Act]". His Honour concluded that the plaintiff's case was not so clearly untenable that it should be struck out according to the test in General Steel. He reasoned that there was a sufficient argument for such duties on the basis of some American case law in relation to the tortious liability of an insurer, although he did not go so far as to hold that such a tort forms part of the common law of Australia.

[23] At 17, Badgery-Parker J noted that there was then no case in Australia or the United Kingdom in which the cause of action pleaded had been acknowledged. He then discussed some American cases for the proposition that "in every contract there is an 'implied covenant' of good faith and fair dealing, the breach of which in some circumstances will give rise to an action of tort". He cited Californian authority to the effect that insurance contracts give rise to a "special relationship" between insurer and insured, which distinguishes them from "ordinary commercial contracts on the footing that persons taking out insurance cover do so not only for commercial advantage but to obtain peace of mind and security". He noted that in those cases, "the duty [of good faith and fair dealing]" was "seen not as contractual but as imposed by law once the parties had entered into the relationship created by the contract".[3] He set out[4] this passage from Seaman's Direct Buying Service Inc v Standard Oil Co of California 36 Cal 3d 752; 686 P 2d 1158; 206 Cal Rptr 354 (1984):

"While the proposition that the law implies a covenant of good faith and fair dealing in all contracts is well established, the proposition advanced by Seaman's - that breach of the covenant always gives rise to an action in tort - is not so clear. In holding that a tort action is available for breach of the covenant in an insurance contract, we have emphasized the 'special relationship' between insurer and insured, characterized by elements of public interest, adhesion, and fiduciary responsibility. (Egan v Mutual of Omaha Ins Co.) No doubt there are other relationships with similar characteristics and deserving of similar legal treatment."

[24] After discussing some other Americans cases, Badgery-Parker J said:[5]

"What is clear is that on a proper reading of the cases, the duty of good faith and fair dealing is imposed by contract, but it is only the breach of that duty in a case (at least) where a special relationship exists that it gives rise to tort liability [and that] whatever might ultimately be seen to be the relationships that will attract such a duty, the American courts that recognise it at all, clearly do so in respect of contracts of insurance and in respect of contracts of employment."

[25] His reference to contracts of insurance was relevant to the case pleaded against GIO as the statutory insurer, and his reference to employment contracts was relevant to the case pleaded against the hospital as the employer. The tort which his Honour was considering was one not confined to insurance contracts: he cited one Californian case in which it was applied to the relationship of banker and customer.[6] Because Gibson also involved a negligence claim, he then discussed Australian and English cases concerned with the requisite relationship for the imposition of a duty of care, particularly in the context of public officials or instrumentalities in the exercise of their functions. He said:[7]

"The case thus discussed dealt specifically with the imposition of a duty of care such as to found a cause of action in negligence; but it seems to me that the same approach is proper when one has to consider whether in the circumstances of a particular case there is imposed on one party or the other a duty of good faith, breach of which is actionable in tort.

There can be, in my view, no doubt that the relationship between an employer and its employee in relation to the latter's workers' compensation rights, and the relationship between the employer's workers' compensation insurer and an injured employee are both relationships of proximity involving elements of inequality and dependence apt to call for the recognition not only of a duty of care but of a duty of good faith upon the employer and the insurer respectively. Furthermore, the situation is such that should employer or insurer in bad faith reject, underestimate or delay payment of a worker's claim for workers' compensation, he or she may suffer consequences which are beyond being relieved by the ultimate successful enforcement of his rights by way of a determination of the Compensation Court, consequences in the nature of temporary hardship, anxiety and distress, but also in some cases, ongoing economic loss: as where during the period of delay the worker is unable to maintain mortgage or hire purchase payments and suffers forfeiture or is forced to sell assets."

"I am not persuaded that there are considerations of public interest which dictate that the suggested cause of action should not be recognised. Having regard to the nature of the relationship between an employer and its insurer on the one hand and an injured worker on the other with the aspects of dependence and vulnerability to which I have referred, and the inadequacy of the statutory scheme to provide a remedy for the kind of damage which the plaintiff alleges, being damage going beyond the losses for the compensation of which the workers' compensation scheme is devised, I am of opinion that it is just and reasonable to impose on a workers' compensation insurer and an employer a duty to act in good faith in the processing of a workers' compensation claim breach of which should attract liability for damages in tort.

It does not appear to me that the existence of such a duty should be seen to depend upon the implication of a term in the contract of employment or in the contract of workers' compensation insurance requiring good faith and fair dealing, which is the theory underlying the American cases."

His Honour then distinguished this duty from a contractual duty. He observed that prior to the enactment of the Insurance Contracts Act, "the mutual duties of good faith to which an insurer and an insured were subject were duties imposed by law as an incident of the existence of the contract of insurance but not as implied contractual terms."[8] He said that it was not open to him to hold that a contract of insurance, except by s 13 of the Act, contains an implied term that the parties will deal fairly and in good faith nor in Australia was there any general principle of contract law by which the duty of good faith is implied in every contract.[9] He continued:[10]

"However, the American insistence that although the duty exists as a contractual term in every contract, the tort arises from the breach of that duty only in the presence of a special relationship supports, in my view, the proposition that the tort may arise where the nature of the relationship brought about by the contract, as distinct from the terms of the contract, is such as to impose a duty to act in good faith. On that basis, the duty is a true tort duty, not a contractual duty and the existence of a contractual term is not a necessary foundation for it."

His ultimate conclusion was that the defendants had not shown the plaintiff's case to be so clearly untenable that it should not be allowed to go forward.

[27] An important element of the relationship in Gibson was the employee's susceptibility to damage, of both a pecuniary and non-pecuniary kind, from conduct of the employer and the statutory insurer which might be a deliberate disregard of their obligations under the relevant compensation scheme. The position of an insured under a contract of insurance, at least where the contract contains the term implied by s 13, appears to be less exposed.

[28] Although his Honour borrowed from the reasoning in American case law with respect to insurance contracts, he did not have to consider the present question, which is whether there is a tortious duty of good faith which is owed concurrently with the contractual duty implied in a contract of insurance under the Insurance Contracts Act. In no Australian case has that issue had to be decided.

[29] The question of whether an insurer which is in breach of a duty of good faith is liable in tort, or liable at all for damages, was the subject of two decisions of the English Court of Appeal decided shortly before Gibson. They are La Banque Financière de la Cité SA v Westgate Insurance Co Ltd [1990] 1 QB 665 and Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd ("The Good Luck") [1990] 1 QB 818. In each case it was alleged that the insurer had breached its duty of good faith, in the former case by a failure to disclose material facts prior to the conclusion of the contract of insurance and, in the latter, by an alleged breach of the good faith duty after the contract was concluded. In each the Court of Appeal held that damages could not be recovered for any such breach, and rejected an argument that a breach of the duty of good faith was compensable by damages in tort.

[30] In La Banque Financière at first instance (reported as Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd [1990] 1 QB 665), Steyn J awarded the plaintiff banks, who were the insured, damages for breach of the insurers' duty of good faith in these circumstances. The banks made loans to certain companies on the security of credit insurance policies covering a default in repayment. An employee of the broker was unable to procure all of the insurance required by the loan agreements, because he was unable to place with following insurers the full amount of the risk by the due date of the first loan. In order to enable the loan to proceed, he represented to the banks that the insurance was complete and he issued false cover notes to that effect although part of the cover was then missing. The relevant employee of the insurers became aware of the deception but did not inform the insurers or the banks. He continued to underwrite further loans by the plaintiffs knowing that the broker was providing incomplete cover for them. The banks therefore had incomplete insurance when the borrowers defaulted and a person who had controlled the borrowers had disappeared with the borrowed funds. The banks brought an action to recover the monies from the insurers but then conceded that they could not recover under the policies because the losses had been caused by that controller's fraud and the insurers were entitled to rely on a fraud exclusion clause. The banks then argued that the insurers were liable for damages, either in negligence or for breach of the insurers' duty of good faith and, specifically, the duty to disclose to the banks the deceit being practised upon them by their broker as soon as the insurers' employee had become aware of that deception. It was conceded that the banks would not have advanced the loans if they had known of that deception in the issuing of the false cover notes.

[31] Steyn J held that the duty of utmost good faith between an insurer and insured in relation to contracts of insurance was reciprocal and required the disclosure of all material circumstances which might affect the decision to conclude the contract of insurance. He found that the insurers had breached this duty by their employee's failure to disclose the broker's deception. He held that the duty of utmost good faith was a rule, or a set of rules, of positive law rather than an implied term, or set of terms, of the contract of insurance.[11] Applying what was said in March Cabaret Club and Casino Ltd v London Assurance [1975] 1 Lloyds Rep 169 at 175, he said:[12]

"In my respectful view the body of rules which are described as the uberrima fides principle are rules of law developed by the judges. The relevant duties apply before the contract comes into existence, and they apply to every contract of insurance. In my judgment it is incorrect to categorise them as implied terms, in the sense in which the banks seek to do so. I also reject the contention that these rules become applicable by way of a collateral contract."

Because the duty was not a contractual term, damages for its breach could not be awarded as damages for breach of contract. Steyn J then considered whether as a matter of principle, damages for breach of the duty could be awarded, observing that the usual remedy for breach of the duty was the avoidance of the contract. At 705-706, he reasoned as follows:

"The question whether an action for damages lies for breach of the obligation of the utmost good faith in an insurance context must be considered from the point of view of legal principle and policy. Once it is accepted that the principle of the utmost good faith imposes meaningful reciprocal duties, owed by the insured to the insurers and vice versa, it seems anomalous that there should be no claim for damages for breach of those duties in a case where that is the only effective remedy. The principle ubi jus ibi remedium succinctly expresses the policy of our law. Yet, if the insurers' submissions are correct, the rights of the banks arising from a breach of obligation of the utmost good faith in this case are inadequately protected, viz the only claim is for a return of the premium. That leads to an imbalance and unfairness in the relationship between the insured and insurer. Avoidance is almost invariably the only remedy an insurer needs in cases of non-disclosure. It is just conceivable that a case can arise where the insurer's interests ought to be protected by an action for damages, eg where an insurer incurs expense in the surveying of a rig which proves to be wasted because the insurer subsequently avoids the policy for non-disclosure. But such cases must be very rare. On the other hand, avoidance of a policy and a claim for return of the premium will be a wholly ineffective remedy if the breach of the duty of the utmost good faith by the insurer caused the insured to be unprotected and exposed to great loss. It is not necessary to go further than the facts of the present case, where it is the case of the banks that they lost the sums advanced, amounting in aggregate to 80m Swiss francs, as a result of the failure of the insurers to disclose to them Mr Lee's dishonesty. An order for return of the premiums, even if still available, is a derisory remedy in relation to the true loss if there has been a breach of duty by the insurers which caused the loss."

[32] After concluding that the insurers were also liable in negligence, Steyn J considered the insurers' arguments of contributory negligence. He held that that defence could not affect the insurers' liability for breach of the duty of good faith, because: "[t]hat is a form of liability which is not dependent on fault or negligence. A breach of that duty does not per se amount to a tort."[13]

[33] Slade LJ delivered the judgment of the Court of Appeal, which allowed the appeal upon the basis that the insurers were not in breach of a duty of care and that although the insurers were in breach of the duty of utmost good faith, damages were not recoverable for such a breach. Referring to the trial judge's reasoning on that second question, and in particular to the passage from his judgment which I have set out, Slade LJ said:[14]

"However, the principle ubi jus ibi remedium cannot, in our judgment, by itself justify a decision to give the remedy of damages in a novel situation not covered by previous authority unless this is preceded by an analysis of the origin and nature of the right in question. The question whether or not the remedy of damages is available may well depend on the nature of the right and of the corresponding duty of the other party. With all respect to the judge's very careful judgment, we do not think that it contained any such analysis. He clearly did not regard the right as being one which existed in tort, because he considered that any claim for damages for its breach would not fall to be reduced by virtue of the Law Reform (Contributory Negligence) Act 1945. However, he apparently did not regard it as a duty existing on contract. Earlier in his judgment he had summarised the arguments of the parties in this context as follows ([1987] 2 All ER 923 at 943, [1987] 2 WLR 1300 at 1329):

'... on behalf of the banks the utmost good faith principle was said to be an implied term of an insurance contract, while the insurers submitted that it was simply a rule, or more accurately a set of rules, of positive law.'

Steyn J also rejected an argument (not repeated in this court) based on alleged fiduciary duties owed by the insurers to the banks (see [1987] 2 All ER 923 at 954, [1987] 2 WLR 1300 at 1342). If the banks' right to full disclosure of material facts is founded neither on tort nor on contract nor on the existence of a fiduciary duty nor on statute, we find it difficult to see how as a matter of legal analysis it can be said to found a claim for damages."

[34] In an extensive discussion in which it was held, as had Steyn J, that the duty of utmost good faith was not a term of the contract but had existence as a separate rule of law, Slade LJ considered whether a breach of the duty could itself constitute a tort so as to give rise to a claim for damages. He said:[15]

"There is no authority whatever to support the existence of such a tort and, quite apart from such lack of authority, there are in our judgment at least four reasons why this court should not by its present decision create a novel tort of this nature. First, we have already concluded that the powers of the court to grant relief where there has been non-disclosure of material facts in the case of a contract uberrimae fidei stems from the jurisdiction originally exercised by the courts of equity to prevent imposition. The powers of the court to grant relief by way of rescission of a contract where there has been undue influence or duress stem from the same jurisdiction. Since duress and undue influence as such give rise to no claim for damages, we see no reason in principle why non-disclosure as such should do so.

Secondly, the decision in Container Transport International Inc v Oceanus Mutual Underwriting Association (Bermuda) Ltd [1984] 1 Lloyd's Rep. 476 establishes that where an underwriter is seeking the conventional remedy of avoidance of the policy, the actual effect of the non-disclosure on his mind is irrelevant. The effect of the non-disclosure on the mind of a notional prudent underwriter, judged objectively, is the relevant criterion. The same approach must, in our judgment, apply in a case where an insured is seeking avoidance of the policy. The court will be concerned not so much with the effect of the non-disclosure on his mind as that of the mind of a prudent notional insured in his position. Steyn J rightly recognised the difficulties involved in translating this approach to a case where the insured is seeking damages. He said ([1987] 2 All ER 923 at 947, [1987] 2 WLR 1300 at 1333):

'Assuming therefore that . . . the test is the effect on the notional insured only, it could legitimately be asked how damages could be awarded if the non-disclosure had no effect on the insured. In my judgment the only conceivable answer is that the requirements for avoidance are less than for an action for damages.'

We agree that this is the only conceivable answer, but think that the problem posed by the Judge is another illustration of the conceptual difficulties involved in a decision that a remedy by way of damages lies in this class of case.

Thirdly, section 17 of the Act of 1906, which imposes reciprocal obligations of good faith on both parties to such a contract, specifically gives the injured party the remedy of avoidance of the contract (and no other remedy). Likewise, section 18(1), which specifically defines the duty of disclosure, falling upon the assured, concludes by stating the insurer's remedy as follows: 'If the assured fails to make such disclosure, the insurer may avoid the contract.' There is not a suggestion in any of the succeeding provisions of the Act of 1906 that a breach of the obligation of good faith will, as such, give rise to a claim for damages. Section 91(2), it is true, provides:

'The rules of the common law including the law merchant, save in so far as they are inconsistent with the provisions of this Act, shall continue to apply to contracts of marine insurance.' Nevertheless, we think the clear inference from the Act of 1906 is that Parliament did not contemplate that a breach of the obligation would give rise to a claim for damages in the case of such contracts. Otherwise it would surely have said so. It is not suggested that a remedy is available in the case of non-marine policies which would not be available in the case of marine policies.

Fourthly, as we have already stated, in the case of a contract uberrimae fidei, the obligation to disclose a known material fact is an absolute one. It attaches with equal force whether the failure is attributable to 'fraud, carelessness, inadvertence, indifference, mistake, error of judgment or even [the] failure to appreciate its materiality': see E R Hardy Ivamy General Principles of Insurance Law, 5th ed (1986), p. 156 and the cases there cited A decision that the breach of such an obligation in every case and by itself constituted a tort if it caused damage could give rise to great potential hardship to insurers and even more, perhaps, to insured persons. An insured who had in complete innocence failed to disclose a material fact when making an insurance proposal might find himself subsequently faced with a claim by the insurer for a substantially increased premium by way of damages before any event had occurred which gave rise to a claim. In many cases warranties given by the insured in the proposal form as to the truth of the statements made by him might afford the insurers the same remedy, but by no means in all cases. In our judgment, it would not be right for this court by way of judicial legislation to create a new tort, effectively of absolute liability, which could expose either party to an insurance contract to a claim for substantial damages in the absence of any blameworthy conduct."

[35] An appeal to the House of Lords was dismissed: [1991] 2 AC 249. It was held that there was no breach of the insurers' duty of good faith because their employee was not obliged to disclose to the banks what he knew of the broker's fraud. So it was unnecessary for the House to consider whether a breach of the duty of good faith was compensable by damages, whether in tort or otherwise. But Lord Templeman[16] observed that he agreed with the Court of Appeal that breach of the obligation did not sound in damages and that the only remedy open was rescission of the policy. Lord Jauncey of Tullichettle made a similar observation, agreeing with what he described as the compelling reasons of the Court of Appeal on the point.[17]

[36] In Gibson Badgery-Parker J cited the judgment of Slade LJ in La Banque Financière at 34-35 as authority for the proposition, which he endorsed, that the duty of good faith in the relationship of insurer and insured was not a duty imposed by the terms of the contract of insurance. But his Honour did not discuss the reasoning of the Court of Appeal as to why a breach of the duty could not result in a liability in tort.

[37] In the second of these English cases, the ship "Good Luck" was insured by the defendant on terms that it was entitled to reject a claim arising out of an event occurring while the vessel was in an area specified by it as an additional premium area, which included an area of the Persian Gulf. The ship was mortgaged to the plaintiff bank and the defendant insurer was given notice of the mortgage and gave an undertaking to the bank to inform it if the insurance ceased. The insurer became aware that the ship was undertaking voyages to the relevant area in the Gulf but took no steps to inform the bank before it renegotiated a loan to the owner. Shortly afterwards, whilst in the Gulf the ship was struck by a missile and was ultimately declared a constructive total loss. The insurer rejected the claim on the ground that the ship was in the relevant area. The bank sued for damages on the basis that it had made loans in ignorance of the true state of affairs as to the insurance. It argued that there was a breach of the express terms of the insurer's written undertaking. Alternatively it argued that the insurer was liable in tort. The trial judge held that the insurer's failure to inform the bank had been a breach of obligations under the letter of undertaking and of a duty of care which it owed to the bank. But he held that the insurer did not owe the bank a duty of utmost good faith, reasoning that under the relevant insurance contracts there were mutual duties of utmost good faith between the insurer and the bank's mortgagor but that the insurer had not broken any duty to the mortgagor and owed no separate duty of good faith to the bank: [1987] 1 Lloyd's Rep 513.

[38] The insurer's appeal was allowed. In the judgment of the Court of Appeal, delivered by May LJ, the defendant was not in breach of the express or implied terms of its letter of undertaking by not informing the bank, and nor was it liable in negligence for it owed the bank no duty of care. Relevantly for the present case, it was held that if an obligation of good faith had been owed to the bank, its breach would not have been compensable by an award of damages. After referring to the reasons given by Slade LJ in La Banque Financière for rejecting a liability in tort for breach of the insurer's duty of faith[18] May LJ said:[19]

"Those reasons seem to us to be equally persuasive against regarding breach of the obligation of utmost good faith, in a contract of insurance, so far as concerns a breach of the obligation occurring after the contract has been made and in the course of the contract, as constituting a breach of an implied term of the contract and as therefore capable of supporting a claim to damages. We do not think it is necessary to question the decision of Hirst J in The Litsion Pride [1985] 1 Lloyd's Rep. 437 so far as concerns his decision that the obligation of utmost good faith could continue after the contract was made with reference to such a matter as the fixing of the rate of additional premiums. Assuming that the obligation can continue, we see no reason why the source in law of the obligation, or the remedy for its breach, should be different after the contract is made from what it is at the pre-contract stage. We would, therefore, hold that, if the obligation of utmost good faith could be said to have arisen, either in the contract of insurance as a separate obligation owed to the bank as assignee, or in the contract contained in the letter of undertaking, the bank could not establish a claim to damages in respect of any breach of it."

In this case, which was not cited in Gibson, a differently constituted Court of Appeal not only confirmed the correctness of La Banque Financière in relevant respects, but applied the reasoning in that case to a suggested breach of a duty of good faith occurring after the conclusion of a contract of insurance.

[39] The English Court of Appeal has recently confirmed the correctness of those judgments. In HIH Casualty & General Insurance Ltd v Chase Manhattan Bank [2001] 2 Lloyd's Rep 483, 494, Rix LJ, with whom the other members of the court agreed, said:

"There is no doubt, however, that the duty of good faith, standing alone, does not give rise to a cause of action in damages. The only remedy for its breach is the remedy of avoidance, the right to avoid. ... It is ... what was decided in Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd [1990] 1 QB 665 at 773-781, La Banque Financière de la Citè SA (formerly Banque Keyser Ullmann SA) v Westgate Insurance Co Ltd (formerly Hodge General & Mercantile Co Ltd) [1991] 2 AC 249. By itself, the duty of good faith gives rise to neither contractual nor tortious obligations, but exist sui generis as a matter of law."

[40] The position then in England is that, as is stated in the current edition of MacGillivray On Insurance Law (10th ed, 2003) at 19-71, the only remedy for breach of the duty of good faith is avoidance of the insurance contract. Significantly, none of the judges involved in these English cases was persuaded that a breach of the insurer's duty of good faith results in a tortious liability. The trial judges in La Banque Financière and the "Good Luck" were persuaded to award damages but upon other bases. Steyn J was especially concerned that damage from a breach of the duty should go uncompensated but he rejected the recognition of a new tort as the basis for compensation.

[41] Apart from one matter, there is no apparent difference between the nature of the relationship of insurer and insured according to whether it is in England or in Australia, and the unanimous rejection of a liability in tort does not appear to have come from any other difference between the tort law of England and that of this country. That matter, of course, is that in this country s 13 implies the duty of good faith as a term of all insurance contracts. A breach of the duty can result in a liability for damages, as damages for breach of contract. The availability of that remedy would appear to fill the gap which concerned Steyn J in La Banque Financière and which persuaded him to hold that damages should be awarded for a breach of the duty of good faith. Yet the availability of a remedy in damages, although in contract, could appear to make much of the reasoning of Slade LJ, set out above at [34] of less relevance in this country. Because of s 13, a breach of the duty of good faith no longer allows only the remedy of avoidance.

[42] The possibility of a tortious liability has been raised but not extensively considered in some other Australian cases. One such case, which was cited in Gibson[20] is Settlement Wine Co Pty Ltd v National and General Insurance Co Ltd (1990) 159 LSJS 84, a decision of the Full Court of the Supreme Court of South Australia. The procedural context of that case was unusual in that the plaintiff was looking to plead a cause of action in tort notwithstanding a declaration already made in the proceedings, the terms of which appeared to preclude it. The plaintiff's complaint was that its insurer had, in breach of its duty of good faith, wrongfully denied indemnity. The plaintiff had obtained a summary judgment against the insurer but subsequently wished to claim in tort in the hope of obtaining a larger amount. The Full Court held that the plaintiff's rights had merged in his judgment so that the tort claim could not be agitated. What was said as to the prospects of such a tort action does not provide significant support for the plaintiff's case in the present matter. Jacobs J said that he was "not persuaded that a cause of action in tort was ever really open on the original pleadings or available to the plaintiff". Matheson J referred to the alleged claim in tort and the potential for reliance upon American authorities but noted that there was no Australian authority to support such a claim.

[43] In Gimson v Victorian WorkCover Authority [1995] VicRp 14; [1995] 1 VR 209, the plaintiff brought proceedings for damages alleging that, following his application for compensation for psychiatric injuries alleged to have arisen in the course of his employment, he had suffered further injury from the very process of administration and investigation of his claim for compensation. He alleged that the defendant Authority and its appointed agent owed him a duty to deal fairly and in good faith with him in considering and responding to his claim. A Master struck out the proceedings against each defendant, and the plaintiff appealed, applying at the same time to amend his statement of claim to allege that the defendants owed him a duty of care and that they inflicted intentional physical harm and mental distress upon him. McDonald J allowed the appeal, but only because of the claims raised by the proposed amendments. He held that there was no basis which could give rise to a duty to act in good faith, the breach of which would give rise to a remedy for damages in tort. After discussing Gibson, McDonald J said at 221:

"Although Gibson is authority which supports the proposition that a contractual relationship may give rise to such a relationship of proximity which imposes on one of the parties to the same a duty to act in good faith to the other which in some circumstances the breach of which may give rise to an action in tort, I am not persuaded by the decision of Badgery-Parker J to reach that conclusion."

[44] In Ilievska-Dieva v SGIO Insurance Ltd [2000] WASCA 161, the appellants claimed that they were entitled to damages for loss (including economic loss) brought about as a result of the respondent's delay in authorising payments to them of workers' compensation. The delay was said to have constituted contraventions of the provisions of the relevant statute and to have been in breach of a duty of care. The defendants successfully applied to have the proceedings struck out, and the plaintiffs appealed to the Full Court. In the judgment of Wallwork J, reference is made to the reasoning of the primary judge that: "[T]he law in Australia did not recognise a duty of care owed by the respondent to the appellants in the circumstances of their cases or in the alternative a duty of good faith". But the matter which appears to have been pressed, because that is the matter which was considered in the judgements on appeal, was the alleged duty of care and not the duty of good faith. In the judgment of Murray J[21] it appears that the pleaded case did not include a breach of a duty of good faith, but that such a duty may have received some mention in the arguments. He said:

"For the appellants it is said that it would be open to allege, although that has not yet been done, that the respondent owed each appellant a duty to deal fairly and in good faith with the appellant in processing his or her claim for weekly payments and the insurance cover of the employer's liability in that regard. It would be alleged that the respondent would incur tortious liability if it acted in bad faith in causing the weekly payments to be delayed. However, the principal claim is said to lie in negligence."

His reasons, like those of Wallwork J, largely addressed the potential for the negligence claim and not whether there was an arguable basis for a claim for breach of a duty of good faith. But he added that:

"I need not in the circumstances discuss further the proposed allegation of a duty to act in good faith, except to say that it seems to me that if that is to be pursued, it may not be said not to be arguably available having regard to the confused state of the decisions bearing upon the point."

That comment was made apparently without the benefit of extensive argument upon the presently relevant matter and, it appears, without reference to the recent and unanimous judicial opinion in England on the question. In that case, as in Gibson, there was an expressed concern that the statutory scheme might not compensate a worker for losses from the late payment of compensation: see Wallwork J at paragraph 20. In cases governed by the Insurance Contracts Act, that concern does not arise because the Act requires the payment of interest and because in an appropriate case damages can be awarded for breach of the implied term to compensate for a loss of the use of money.[22]

[45] In Moss v Sun Alliance Australia Ltd (1990) 93 ALR 592, a decision of the Supreme Court of South Australia, the plaintiffs claimed exemplary damages against their insurer which was in breach of its contract. They recovered indemnity and interest under s 57 but not exemplary damages. The trial judge was unconvinced that the defendant had been guilty of contumelious disregard for the rights of the plaintiffs and said that accordingly it was unnecessary to consider whether exemplary damages could be awarded.[23] The plaintiffs' argument was that exemplary damages could be awarded in contract; there was no contention that the defendant was concurrently liable in tort.

[46] In Canada, the Supreme Court has recently held that an insurer was liable for exemplary damages for denying, in bad faith, an insured's claim to indemnity under a fire policy: Whiten v Pilot Insurance Company (2002) 209 DLR (4th) 257. But those damages were awarded in contract, not in tort. The majority judgment was given by Binnie J[24] who rejected the notion of a tortious liability for breach of the duty, saying:

"... the requirement of an independent tort would unnecessarily complicate the pleadings, without in most cases adding anything of substance. Central Trust Co v Rafuse [1986] 2 S.C.R 147, 31 D.L.R. (4th) 481, held that a common law duty of care sufficient to found an action in tort can arise within a contractual relationship, and in that case proceeded with the analysis in tort instead of contract to deprive an allegedly negligent solicitor of the benefit of a limitation defence. To require a plaintiff to formulate a tort in a case such as the present is pure formalism. An independent actionable wrong is required, but it can be found in a breach of a distinct and separate contractual provision or other duty such as a fiduciary obligation."

The decision provides a basis for argument that in Australia the relatively new contractual obligation of good faith, according to s 13, should be recognised as a further exception to the general rule in this country that exemplary damages are not awarded for breach of contract. But rather than supporting the recognition of a tortious duty, the judgment of Binnie J provides reasons for rejecting it.

[47] In New Zealand, exemplary damages have been awarded against an insurer for breach of the duty of good faith, but again, on the basis that they could be awarded for breach of a contractual duty: Cedenco Foods Limited v State Insurance Limited (1997) 6 NZBLC [99-414] at 102, 235.

[48] The plaintiff's case for the recognition of such a tort is then unsupported by any authority outside the line of American cases, which were analysed in Gibson. Gibson was concerned with the existence of a duty and remedies for its breach in a particular statutory context, rather in the context of an insurance contract governed by the Insurance Contracts Act.

[49] As mentioned, the application to strike out the claim in tort is made pursuant to UCPR r 171(a) and r 171(d). This is not a trial of a distinct question to be separately determined.[25] The defendant accepts that it must establish the absence of such a cause of action with the requisite "high degree of certainty about the ultimate outcome of the proceeding if it were allowed to go to trial in the ordinary way": Agar v Hyde [2001] HCA 41; (2000) 201 CLR 552 at 576.

[50] In Edwards Karwacki Smith & Co Pty Ltd v Jacka Nominees Pty Ltd (in liq) (1994) 15 ACSR 502, Nicholson J (with whom Pidgeon J agreed) cautioned that:

"a court at first instance should be careful not to risk stifling the development of the law by summarily rejecting a claim where there is a reasonable possibility that, as the law develops, it will be found that a cause of action will lie: Hospitals Contribution Fund of Australia v Hunt (1982) 44 ALR 365"[26].

One submission made by the plaintiff is that a pleading should not be struck out unless it is "so manifestly faulty that it does not admit of argument", that being one of the expressions cited by Barwick CJ in General Steel.[27] However, Barwick CJ held that the exercise of this jurisdiction need not be:

"reserved for those cases where argument is unnecessary to evoke the futility of the plaintiff's claim. Argument, perhaps even of an extensive kind, may be necessary to demonstrate that the case of the plaintiff is so clearly untenable that it cannot possibly succeed."

In Dey v Victorian Railway Commissioners (1949) 78 CLR 62, the majority saw fit to resolve on a strike out application a question of law which required some debate.

[51] In some cases, a consideration of a debatable legal question should await a determination of the facts. The present case is not of that kind. The question of law, which is whether under Australian law there is a liability in tort on the premises of the pleaded facts, is one which can be considered now without the expense of a considerable factual inquiry. There are several recent examples of the use of this procedure to determine some debatable question of the development of the common law: Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241; Saman v State of Queensland; Rich v State of Queensland [2003] HCA 4; (2003) 212 CLR 511 and Agar v Hyde.

[52] As I have mentioned, in Gibson and in Ilievska-Dieva, a case for a tortious liability was substantially attributed to what would otherwise be the absence of a compensatory remedy for the handling of a claim in bad faith. The absence of that consideration in the present context, in which by reason of the Act there are contractual remedies, makes the present context quite different. To the extent that there is some gap in the available remedies, the case for the recognition of a tortious liability is that there is a need for the non-compensatory remedy of exemplary damages. There is no submission to the effect that in an appropriate case, the compensatory damages awarded for an insurer's breach of the contractual duty of good faith might not include a component for non-pecuniary loss and in particular for emotional trauma or distress: cf Baltic Shipping Co v Dillon [1993] HCA 4; (1993) 176 CLR 344.

[53] Of course there are many situations in which the common law now imposes concurrent contractual and tortious duties. In at least some of those, the recognition of the tortious duty has occurred against an already well established contractual duty. An example is a solicitor's duty of care. Although the existence of a contractual duty does not preclude the recognition of a concurrent tortious duty, it can provide substantial reasons for not recognising a tortious duty. In Astley v Austrust Ltd (1999) 197 CLR 1, discussing the concurrent liability of professionals, Gleeson CJ, McHugh, Gummow and Hayne JJ said at 22-23:

"47 History and legal principle combine to indicate that the conclusion of the House of Lords in Henderson is the correct view. The implied term of reasonable care in a contract of professional services arises by operation of law. It is one of those terms that the law attaches as an incident of contracts of that class. It is part of the consideration that the promisor pays in return for the express or implied agreement of the promisee to pay for the services of the person giving the promise. Unlike the duty of care arising under the law of tort, the promisee in contract always gives consideration for the implied term. And it is a term that the parties can, and often do, bargain away or limit as they choose. Rather than ask why the law should imply such a term in a contract for professional services, it might be more appropriate to ask why should the law of negligence have any say at all in regulating the relationship of the parties to the contract? The contract defines the relationship of the parties. Statute, criminal law and public policy apart, there is no reason why the contract should not declare completely and exclusively what are the legal rights and obligations of the parties in relation to their contractual dealings. The proposition that, in the absence of express agreement, tort and not contract regulates the duty of care owed by a professional person to a person hiring the professional services is inconsistent with the historical evolution of professional duties of care which, until recently, could be the subject of action only in contract. Moreover, the conceptual and practical differences between the two causes of action remain of 'considerable importance'http://www.austlii.edu.au/au/cases/cth/HCA/1999/6.html - fn49#fn49. The two causes of action have different elements, different limitation periods, different tests for remoteness of damage and, as will appear, different apportionment rules.

48 The theoretical foundations for actions in tort and contract are quite separate."

[54] Similarly, in Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1985] UKPC 22; [1986] 1 AC 80, Lord Scarman, delivering the judgment of the Privy Council, said:[28]

"Their Lordships do not believe that there is anything to the advantage of the law's development in searching for a liability in tort where the parties are in a contractual relationship. This is particularly so in a commercial relationship. Though it is possible as a matter of legal semantics to conduct an analysis of the rights and duties inherent in some contractual relationships including that of banker and customer either as a matter of contract law when the question will be what, if any, terms are to be implied or as a matter of tort law when the task will be to identify a duty arising from the proximity and character of the relationship between the parties, their Lordships believe it to be correct in principle and necessary for the avoidance of confusion in the law to adhere to the contractual analysis: on principle because it is a relationship in which the parties have, subject to a few exceptions, the right to determine their obligations to each other, and for the avoidance of confusion because different consequences do follow according to whether liability arises from contract or tort, eg in the limitation of action."

[55] Those cases were cited by Batt JA (with whom the other members of the Court agreed) in National Australia Bank Ltd v Nemur Barity Pty Ltd [2002] VSCA 18; [2002] 4 VR 252 who said[29] that there has been "a deliberate trend in courts of final appeal, of which Tai Hing Cotton Mill is a specific example, to arrest on grounds of policy the expansion of the law of negligence into areas governed by contract, equity or statute".

[56] The obligations imposed by s 13 (and s 14) are, by legislative design, ones of contractual effect. Parties contract upon the premise that conduct which is in breach of these obligations has consequences according to the law of contract. As a matter of principle and policy, there seem to be good reasons for not recognising a concurrent liability in tort for their breach. A tortious liability could have different consequences because of different rules for the assessment of damages as well as differences in limitation periods. It would also bring into operation legislation by which claims can be made between tortfeasors.[30]

[57] The Insurance Contracts Act in relevant respects implemented the recommendations of the Australian Law Reform Commission in its Report No 20, "Insurance Contracts", 1982. The Commission was concerned to resolve a doubt as to whether the duty of utmost good faith, at least as a contractual term, applied to the payment of claims. It said that that doubt should be resolved by the implication of a term in all insurance contracts with a consequent remedy of damages for breach: hence s 13. At paragraph 328 of its Report, the Commission gave consideration to whether a breach should also give rise to a tortious remedy and referring to some American case law, the Commission said:

"It appears that the main reason for American Courts introducing a tort of bad faith was to enable an insured to recover punitive damages and damages for mental distress. Punitive or exemplary damages are awarded only rarely by Australian Courts. An insured is already entitled to damages in the highly unlikely case of an insurer intentionally causing an insured nervous shock. The mere introduction of a tort of bad faith in Australia would not add substantially to the remedies available to an insured. To achieve the position reached by some American Courts, it would also be necessary to extend the remedies available for a breach of tortious duty. It is doubtful whether such an extension would be desirable. Assessment of damages for a breach of the duty of good faith by the insurer should be based on ordinary contractual principles." (Footnotes omitted)

[58] The absence of any authority for the existence of this tort in any court in Australia, England, Canada or New Zealand, is not fatal to its recognition if, as a matter of principle and policy, there is a proper basis for it. But as to principle, the plaintiff advanced no argument as to how the imposition of such a tortious liability would represent an extension of established principle to a particular context. As to policy, it is significant that the Australian Law Reform Commission, after its consultations and consideration, saw fit to recommend the introduction of a contractual obligation but to reject the importation of this tort of bad faith and there was no argument to the effect that any changing commercial or social conditions now present different policy considerations. Any proper basis for the imposition of this tortious liability must lie, if at all, in the nature and content of the relationship between the parties affected by it, and a perceived need in that context for a punitive remedy. The American authorities cited in Gibson characterised as a "special relationship" that between insurer and insured, having "elements of public interest, adhesion and fiduciary responsibility".[31] Because the case for this tort is ultimately the suggested need for the remedy of exemplary damages, the basis for its recognition must be the need to punish the wrongdoer and deter others from like conduct[32] because of the particular characteristics of that relationship. But there was no argument by the plaintiff along those lines. Nor was it said that the statutory regimes under which insurers carry on their businesses do not provide the means of such punishment and deterrence. The plaintiff's argument heavily relied on Gibson and Ilievska-Dieva as showing that there was at least a sufficient prospect of the development of such a tort. As I have said they were not cases involving the present context in which there is already a contractual liability for breach of the duty of good faith, which is imposed by statute. No reason of principle or policy warrants the recognition of such a tort, and as discussed, there are good reasons for not doing so.

[59] In my conclusion the tort claim should be struck out as disclosing no reasonable cause of action. The contractual claim in paragraphs 29 through 32 should be struck out as unnecessary. Paragraphs 29 through 36 will be struck out and the plaintiff should be ordered to pay the costs of this application.

[2] The rate prescribed is three per cent plus the 10 year Treasury Bond yield, which as at 30 June 2004 was 5.8 per cent

[18] Which I have set out above at [34]

[22] Hungerfords v Walker [1989] HCA 8; (1990) 171 CLR 125

[30] Law Reform Act 1995 (Qld), s 6; Law Reform (Miscellaneous Provisions) Act 1965 (NSW), s 15; Wrongs Act 1954 (Tas), s 3; Law Reform (Contributory Negligence and Tortfeasors' Contribution) Act 1947, (WA), s 7; Law Reform (Miscellaneous Provisions) Act (NT), s 12; Civil Law (Wrongs) Act 2002 (ACT), s 21

[31] Seaman's Direct Buying Service in the passage set out in Gibson at 18

[32] cf Grey v Motor Accident Commission at 7