Murphy & Allen v SwinbankSwinbank v Cleary

THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION - COMMERCIAL LIST

50007/98 Murphy & Anor v Swinbank 50138/98 Swinbank & Ors v Cleary & Ors JUDGMENT 1 A reserved judgment in proceedings 50007 of 1998 ('the main proceedings'), was handed down on 24 September 1999. Proceedings 50138/98 ('the good faith proceedings') which were heard together with proceedings 50007/98 were only relevant should the Court find, contrary to the position of the insurers, that Cleary & Hoare were entitled to indemnity under their 1991/92 policy. As no such finding was made, the Court found it unnecessary to proceed to determine the good faith proceedings [see paragraphs 515 to 517 of the Judgment]. 2 As paragraph 517 of the Judgment makes plain, leave was granted to the parties having the benefit of the reasons for judgment to address submissions as to the need or utility in the Court, notwithstanding the findings, to proceed to determine the good faith proceedings. In addressing submissions to that matter, the Trustees submitted that the Court should determine the good faith proceedings as they were fully contested and fully argued. The Trustees' further submission is that it is necessary for the Court to determine the good faith proceedings in order to determine the appropriate order to be made with respect to costs of those proceedings. 3 The insurers on the other hand submitted that the Court need not determine the good faith proceedings which in the event were in substance defensive. As the insurers submitted, it was only a accident of history that the insurers had been the plaintiffs in relation to those proceedings. As the insurers submitted, the proceedings are properly to be regarded in terms of the final hearing as simply a further defence to the insurers' battery of defences to the main proceedings. 4 In complex commercial litigation, it is a question of judgment as to in what circumstances the Court should go further than to determine the proceedings. To my mind, the insurers having succeeded for the reasons set out in the reserved Judgment, it is clearly not strictly necessary for the good faith proceedings to be determined. I propose however to deal with the proceedings against the event that an Appeal in the main proceedings be successful.

The Good Faith Proceedings 5 The Judgment at paragraphs 45 through to 66 outlines the good faith proceedings and the respective claims made in those proceedings. As paragraphs 57 and following make clear, most of the background factual matters relating to the good faith proceedings were not in dispute. 6 The detailed evidence going to the commencement of the good faith proceedings is somewhat complex, involving as it does numerous communications passing between Messrs Baker & McKenzie, acting for the Trustees, Messrs Cleary & Hoare and Messrs Kemp Strang who were instructed to act on behalf of Mr Hoare and Messrs Cleary & Isles. Mr Hoare's position is summarised in paragraphs 6 and 7 of his statement in these terms: 'I have provided instructions to the solicitors who have represented: (a) Cleary & Hoare in the proceedings brought against Cleary & Hoare by John Murphy and Peter Allen ("the Trustees"), proceedings No 1802 of 1991 in the Supreme Court of Queensland which subsequently became proceedings No 5870 of 1994 in the Supreme Court of Victoria (the "Cleary & Hoare Proceedings"); and (b) Messrs Cleary and Isles and myself in the proceedings brought against us by Cleary & Hoare's insurers under the 1991/92 policies of professional indemnity insurance ("the Insurers"), which are these proceedings ("the Insurers' Proceedings"). In the course of settlement discussions in relation to the Cleary & Hoare Proceedings in mid-1997 I was asked by Messrs Cleary and Isles to provide instructions on their behalf to solicitors retained on behalf of Cleary & Hoare. I agreed to this request and have, since that time, provided instructions on their behalf in respect of both the Cleary & Hoare Proceedings and the Insurers' Proceedings. I have adopted the practice of keeping Messrs Cleary and Isles up to date with developments and inform them of any significant matters.' 7 The history of the good faith proceedings involves the circulation of draft pleadings from time to time and includes interlocutory applications. Also received into evidence were advices received by Mr Hoare from counsel and from Mr Baird of Kemp Strang. 8 On or about 12 November 1998, Mr Hoare received a telephone call from Mr Connor of Baker & McKenzie who, in referring to the settlement of the Cleary & Hoare proceedings on 29 October 1997, said words to the effect "Material has turned up indicating that there may be a claim under the 1991/92 policies. The Trustees want to take an assignment of these policies. However this will probably be resisted by the insurers. You will need to get your own legal advice on this issue". [Statement of Mr Hoare of 23 July 1999 at paragraph 8]. 9 Mr Hoare thereafter became involved and on 13 November 1998 wrote to Mr Connor referring, inter alia, to the difficulty in certain of Cleary & Hoare's files having been taken over 'by the Court' and agreeing, if the required assignment document was sent to him, to approach the parties. 10 On 20 November 1998, Mr Connor enclosed a draft Deed of Assignment under cover of his letter to Mr Hoare. 11 Mr Hoare forwarded the draft memorandum to Messrs Cleary & Isles on 23 November 1998. 12 On about 24 November 1998, Mr Hoare received from Ebsworths a letter putting Cleary & Hoare on notice that in the view of the insurers: (a) any purported assignment by Cleary & Hoare in respect of the year 3 policy year would be a breach of the duty of utmost good faith imposed on Cleary & Hoare by section 13 of the Insurance Contracts Act 1984 ; (b) by reason of clause 11 of the Deed of Settlement, there was no loss to which Cleary & Hoare were exposed in relation to the PMA1 and PMA2 judgment debts which could found any claim under the 1991/92 policies; (c) it followed that any purported assignment by Cleary & Hoare in respect of the 1991/92 policy year would cause prejudice to the insurers who may be joined to the existing proceedings and be required to deal with claims for in excess of $80million in circumstances where there was no legitimate interest of Cleary & Hoare to protect by such assignment. 13 The letter further advised that the insurers proposed to seek orders without further notice restraining Messrs Murphy & Allen from entering into the proposed assignment in respect of the year 3 policy year. 14 On 25 November 1998 these proceedings were commenced by the filing of a summons and on the same day by the granting of interlocutory relief. The insurers were the plaintiffs. The first defendants were Messrs Cleary, Hoare and Isles. The second defendants were the Trustees. The summons identified the nature of the dispute in the following terms: 'In proceedings no 50007 of 1998 . . . [the Trustees] as assignees of [the solicitor's] rights under primary and excess professional indemnity policies for the [years 1 and 2], sue the primary and excess insurers for those years. The assignment of those rights occurred pursuant to a settlement of the Estate Mortgage litigation. As part of the settlement [the solicitors] consented to judgments in favour of [the Trustees]. [The Trustees] agreed to take an assignment of [the solicitors] insurance rights for the [year 1 and 2] policy years in full and final satisfaction of the judgment debt. [The Trustees] now wish to take a further assignment of [the solicitors] rights under the [year 3 policy]. [The Insurers] seek to restrain the defendants from entering into any such assignment. [The Insurers] contend that in the circumstances any such assignment would be a breach of [the solicitors] obligations of utmost good faith implied into contracts of insurance by section 13 of the Insurance Contracts Act 1984. They further contend that there is no loss suffered by [the solicitors] within the meaning of those policies now that the Estate Mortgage litigation has been settled on the terms referred to above.' [Summons - Nature of dispute section A] 15 In addition to interlocutory relief, the summons sought damages for breach of the implied term of utmost good faith and for inducing of breach of contract. 16 The injunctions which restrained the proposed assignment were later replaced by undertakings given to the Court by the Trustees and the solicitors not to enter into any agreement having the effect of the subject assignment until further order. 17 Paragraph 20 of the notice of contentions section of the summons was in the following terms: '20. The defendants threaten unless restrained to enter into such an assignment.' 18 The proceedings then progressed through two cross-claims filed by the Trustees. The first cross-claim was filed on 10 December 1998 and joined the Insurers as cross-defendants. The cross-claim was later amended on 23 April 1999. 19 The first cross-claim sought a declaration that an assignment by Cleary & Hoare to the Trustees of their right, title and interest in and to the obligation of the Insurers under the year 3 policies of professional indemnity insurance would not breach the term of utmost good faith implied in those policies. The summons also sought a declaration that the Insurers were guilty of misleading and deceptive conduct and a further declaration that the Trustees and Cleary & Hoare were at liberty to negotiate an assignment by Cleary & Hoare to the Trustees of their right, title and interest in and to the obligations of the Insurers under the year 3 policy. The summons also sought damages. 20 A defence to the first cross-claim was filed on 11 May 1999. 21 The Trustees' second cross-claim was filed on 15 December 1998. The cross-defendants were Messrs Cleary, Hoare and Isles. In this second cross-claim, the Trustees claimed a declaration that they were entitled to rectification of the First Settlement Agreement by the inclusion of the year 3 policy. Alternatively, a declaration was sought that the Trustees were entitled to rescind the Settlement Agreement. A declaration was sought that the Trustees and Messrs Cleary, Hoare and Isles were at liberty to negotiate an assignment by Messrs Cleary, Hoare and Isles to the Trustees of their right, title and interest in and to the obligations of the Insurers under the year 3 policy. Damages were also sought. 22 An allegation in the contentions section of the second cross-claim read as follows: '7. The Trustees and Cleary & Hoare entered into the Settlement Agreement with the corresponding contractual intention that the Trustees would have recourse to all policies of professional indemnity insurance that might indemnify Cleary & Hoare against or respond to the Trustees' claims including but not limited to the [year 1 and 2 policies].' 23 The contentions also claimed alternatively that the Trustees and Cleary & Hoare had entered into the Settlement Agreement under a common mistake as to the subject matter of the Settlement Agreement and in the further alternative that the Trustees had entered into the Settlement Agreement under a unilateral mistake as to the subject matter of the Settlement Agreement and that Cleary & Hoare knew or ought to have known of the Trustees' mistake and did not draw the Trustees' attention to that mistake. 24 Again in the alternative, the Trustees sought relief by way of an entitlement to rescind the Settlement Agreement. 25 Paragraphs 12 and following of the notice of contentions section of the second cross-claim pleaded that prior to the Settlement Agreement, Cleary & Hoare had represented to the Trustees that the only policies responding to the Trustees' claim against them were the year 1 and 2 policies and that the only claims made by Cleary & Hoare were claims made under the year 1 and 2 policies. The pleading asserted that those representations were also made by silence in circumstances where Cleary & Hoare had supplied the Trustees with information as to the policies that responded to the Trustees' claims against them, knew that the Trustees would rely or would likely rely on the information provided and where Cleary & Hoare accordingly were said to have a duty to disclose the true position to the Trustees. 26 The Trustees then pleaded that in reliance upon those representations, the Trustees had entered into the Settlement Agreement and had not included a term in the Assignment by which Cleary & Hoare assigned to the Trustees their right, title and interest in and to the obligations of the Insurers under the year 3 policy. 27 A claim was made that the representations breached section 52 of the Trade Practices Act and equivalent sections in the Fair Trading Acts by way of conduct said to have been misleading or deceptive or likely to mislead or deceive. 28 Paragraphs 16 and 17 of the second cross-claim were in the following terms: '16. By reason of the matters in paragraphs 12, 13, 14 and 15, the Trustees are entitled to rescind the Settlement Agreement and/or are entitled to damages. 17. If the Trustees are unable to obtain rectification of the Settlement Agreement the Trustees will suffer loss and damage . Particulars The difference between the amount that the Trustees are able to recover from the Insurers under the year 1 and 2 policies and the PMA 1 judgment debt of $61,212,845 and the PMA 2 judgment debt of $22,355,706 .' [emphasis added] 29 The defence to the second cross-claim filed by Messrs Cleary, Hoare and Isles on 15 December 1998, admitted the allegations contained in paragraphs 7 and 8 of the contentions. 30 The proceedings came before Hunter J on 15 February 1999 as an application under Part 18 Rule 3 on the basis of admissions made by the solicitors, admitting the requisite common intention of the parties to the agreement and admitting the entitlement of the Trustees to rectification. 31 Hunter J released the Trustees from the undertakings which had been given to the Court so as to permit the proposed assignment to go forward and granted leave to have general amendments to pleadings so as to permit all issues to be properly raised at the one time, on the final hearing of the main proceedings and of the good faith proceedings. 32 The summons was later amended on 8 June 1999 and a number of defences and further amended defences were filed by the solicitors and the Trustees in relation to the summons. 33 The Second Settlement Agreement effectively comprised a compromise of the second cross-claim which it is common ground no longer requires to be determined. The first cross-claim remains on foot and was amended in April 1999, the Insurers filing an amended defence on 11 May 1999. 34 The central focus of the insurers' position taken in the good faith proceedings was clearly notified in the contentions paragraph A of the draft summons forwarded by Ebsworths to Cleary & Hoare on 24 November 1998 [part of JJH 7 to Mr Hoare's statement]. Those paragraphs were in close to identical terms to the terms set out in paragraph 14 of this Judgment. 35 Following service of the summons, Baker & McKenzie wrote to Kemp, Strang & Chippindall on 2 December 1998 [JJH 9]. A copy of this letter is appended to this Judgment. The letter set the scene for the claims made by the Trustees against the solicitors. 36 It is important to note that in their defence to the summons dated 10 December 1998, the solicitors in answer to paragraph 20 of the plaintiffs' contentions, said as follows: 'The first defendants: (a) say, and it is a fact, that it was the intention of the first defendants to assign to the second defendants their right, title and interest, whether at law or in equity from time to time in and to the obligations of the insurers under any policy of professional indemnity insurance available to the first defendants in respect of the PMA 1 and PMA 2 judgment debts including the 1991/92 policies; (b) say, and it is the fact, that such intention was shared by the second defendants at the time of entering into the settlement; (c) say, and it is the fact, that the settlement does not accurately record the intentions of the first defendants and the second defendants; (d) say, and it is the fact, that the first defendants and the second defendants are entitled to rectify the settlement such that it properly records the mutual intentions of the first defendants and the second defendants and/or enter into a further assignment. 37 Following the decision of Justice Hunter, Baker & McKenzie wrote to Kemp Strang, a letter of 22 April 1999, a copy of which is also annexed to this Judgment [JJH 13]. That letter clearly stated that the Insurers' belief in October 1997 as to the relevant policies and their consequent mistake was based on statements made by solicitors acting on behalf of Cleary & Hoare as well as the insurers under the year 1 and year 2 policies. 38 By memorandum dated 29 April 1999, Mr Hoare advised Messrs Cleary and Isles in relation to the Baker & McKenzie letter of 22 April, inter alia, as follows: 'I have instructed Kemp Strang to . . . brief counsel to confirm that on the facts known as to whether their claim for rescission has reasonable prospects of success. The matter is complex, and more than anything else, I am concerned to avoid a situation where I am caught with a legal bill of a couple of hundred thousand dollars. . . .' [JJH 14] 39 An Advice was then given by Mr Simon White of counsel to the solicitors. A copy of that Advice is appended to this Judgment and is dated 4 May 1999 [JJH 16]. 40 Ultimately, the Second Settlement Agreement was entered into. 41 The central witness in relation to the good faith proceedings was Mr Hoare. A close attempt was made in his cross-examination to establish that the Second Settlement Agreement was not negotiated at arm's length and in particular to establish that Mr Hoare was prepared from the outset to transfer or assign whatever rights he had to the Cleary & Hoare year 3 policies to the Trustees so long as they gave him an appropriate indemnity. The purport of these questions was to seek to establish that the firm was so prepared. The insurers sought to establish that whilst Cleary & Hoare were notionally obtaining independent legal advice, that was apparently controlled by the Trustees. The insurers sought to undermine Mr Hoare's evidence to the effect that he and his partners acted on the basis of legal advice which they received. The insurers sought to establish that it was misleading for Mr Hoare to assert that he intended to assign anything more than the rights under the years 1 and 2 policies. The insurers sought to establish that Mr White's advice of 4 May 1999 to the effect that the Trustees had reasonable to good prospects of obtaining an order for rescission based upon common mistake, became a self fulfilling piece of advice which was not based upon proper instructions. On the insurers' submissions this advice, unsurprisingly, produced the expected answer. The insurers sought to suggest that the initial instructions given to Mr White were that there was a mutual mistake, so that it was unsurprising to find a legal adviser giving advice that the chances of rescission were good. 42 There was no dispute that there was implied into the contract of insurance relationship a term requiring Cleary & Hoare to act towards the insurers in respect of any matter arising under or in relation to the policies of insurance with the utmost good faith (section 15 Insurance Contracts Act 1984). 43 I accept that the expression 'utmost good faith' would readily extend to a case where an insured who was already protected from suit by a release would act so as to potentially put his insurers at risk. The obligation is of course not merely one of good faith but one of utmost good faith. 44 The question which arises is as to whether by reason of the rescission of the First Settlement and the entry into the Second Settlement, Cleary & Hoare in exposing the Insurers to a substantial potential judgment, did so in circumstances where they had genuine concern as to their exposure in a suit by the Trustees against them to set aside the first settlement. 45 Prior to the First Settlement Agreement, the Trustees had been informed by solicitors acting for both the insurers and Cleary & Hoare that the relevant policy year was year 2, because of a notification of circumstances which ultimately became the Trustees' claim having been given by Cleary & Hoare on 7 August 1990 - facsimile from Coltmans to Baker & McKenzie of 8 August 1994 which stated "this matter was notified in August 1990". A further facsimile from Coltmans to Baker and McKenzie of 12 December 1994 was to the same effect. 46 In my view, the evidence establishes that had the Trustees known of the terms of the August 1990 notification and that Cleary & Hoare had made a claim or notification during the currency of the year 3 policies, they would not have entered into the First Settlement Agreement unless the year 3 policies were included in the assignment. I accept as reliable, Mr Connor's evidence which was in the following terms: 'If I had seen or been informed of the substance of the notifications of 7 August 1990 and 21 November 1991 and if I had been informed or otherwise made aware that Cleary & Hoare had notified their insurers of the trustees' claim on 5 May 1992, or that they had otherwise made a claim or notification in respect of the subject matter of the trustees' claim during the currency of the 1991/92 policy year, I would not have advised the trustees to enter into a settlement which incorporated assignments as against the insurers for the 1989/90 and 1990/91 policy years only. At the very least, I would have included an assignment of all and any rights against the 1991/92 insurers in addition to the earlier years. Alternatively, I may have recommended to the trustees that the assignment be worded more generally to cover all possible claims for all possible years.' [Paragraph 75 of Mr Connor's statement] 47 In my view, the evidence establishes that Cleary & Hoare acted on the basis of advice from their counsel and solicitors in entering into the Second Settlement Agreement. In this regard, I accept the evidence of Mr Hoare as reliable. That advice, I accept, was to the effect that the Trustees had reasonable to good prospects of obtaining rescission of the First Settlement Agreement. [See the advice given by Mr White on 4 May 1999.] Such a rescission would, in my view, have left Cleary & Hoare potentially exposed to claims in excess of $80million. 48 Focus is then squarely to be addressed to the evidence given by Mr Hoare and to his cross-examination. 49 Mr Hoare accepted at transcript 272 that in 1997 it became apparent that there were problems in relation to representation for Cleary & Hoare because of potential actual or potential conflicts of interest on the part of the solicitors, so that the solicitors Maddock Lonie & Chisholm ultimately represented Cleary & Hoare in the settlement negotiations. 50 At transcript 273, Mr Hoare gave evidence which I accept as reliable, that at the time when the proceedings were settled, he did not direct his mind to the question as to what policies of insurance were relevant to the proposed assignment. He was quite certain about this matter. He was equally certain that as far as he was aware, no other person directed their mind to that matter and that it was not the case that at the time of the first settlement, he was intending to transfer his indemnity rights in relation to year 3. This was simply not a question - transcript 274. 51 At transcript 276, he gave the following evidence : 'Q. You never had any intention about assigning polices other than the 1989/90 and 1990/91 policies, did you? A. I assigned what I was asked to assign. Q. Precisely, and you weren't asked to assign the policies for the 1991/92 policy year? A. I was not and I did not. Q. And you have told us earlier that it was simply a non issue and it didn't enter into your mind, the question of the third policy year, correct? A. It didn't enter into my mind.' 52 At transcript 282, Mr Hoare gave the following evidence when cross-examined in relation to the defence to the second cross-claim: 'Q. . . . You knew that there was no contractual intention on the part of Cleary & Hoare to transfer any policies in 1997, other than those for years 1 and 2. You have agreed with me about that, haven't you? A. I have agreed certainly that is the effect of the contract. Q. I am not asking about the effect of the contract, I am asking about your intention? A. Okay. I have found this a difficult matter and - my intention was to assign whatever rights I had against my insurance. Q. Your intention - you had no such intention in 1997, did you Mr Hoare? A. Yes I did. Q. You would have assigned year 3 if you had been asked to? A. Yes I would. Q. But you never were asked? A. I was not. Q. And it did not occur to you to even think about any year other than year 1 or year 2, did it? A. A little bit more than that. It didn't even occur to me to think about year 1 or year 2.' 53 At transcript 284, Mr Hoare gave evidence under cross-examination as follows: 'Q. Is it the case that you believed that the correct policy year for this claim was year 2? A. I did not direct my mind to it. I had no belief. Q. So you had no belief one way or another as to which was the correct policy year? A. Correct.' 54 At transcript 286, Mr Hoare gave evidence that the intention of Cleary & Hoare was 'to assign whatever it was asked to assign'. 55 In the result, I accept Mr Hoare's evidence as reliable when he said that in the First Settlement Agreement he assigned what he was asked to assign, that he didn't think of any policy year in 1997 and had no belief one way or the other as to which was the correct policy year. I accept his evidence to the effect that the assertion in paragraph 20(a) of the defence to cross-claim was that Cleary & Hoare would have assigned any rights they had against the insurers under any policy. Although in cross-examination Mr Hoare agreed that the common mistake pleaded in paragraph 8 of the cross-claim was inappropriate, he did not accept that there was no common mistake. His evidence was that the intention of Cleary & Hoare was to assign whatever it was asked to assign. The cross-examination did not establish the proposition that the factual basis of Mr White's advice was not made out nor the conclusion that it was inappropriate for Cleary & Hoare to rely on that advice. 56 On my findings, Mr Hoare's belief was that he was assigning the relevant policies of insurance and that he believed he was assigning the right policies and the appropriate policies but that he never directed his mind to what those policies were. On my findings, Mr Hoare believed that there had been a common mistake and the basis of that belief was his preparedness and the preparedness of Cleary & Isles to assign whatever rights they had against their professional indemnity insurers in order to settle the matter. In my view, none of this evidence was undermined by Mr Hoare's cross-examination. 57 In my view, it was clearly appropriate in the circumstances for Cleary & Hoare, in reliance on their legal advice, to enter into the Second Settlement Agreement. Further, the unchallenged evidence of Ms FitzHenry shows that the Second Settlement Agreement was negotiated at arms length. 58 To my mind, it is again strictly not necessary to go further and to deal with the Trustees' additional and alternative estoppel and representational cases. The estoppel case put by the Trustees was that the insurers' breached their duty of utmost good faith to Cleary & Hoare in that the insurers represented to Cleary & Hoare that the year 3 policies would not respond to their claim for indemnity even though Cleary & Hoare are said to have notified the insurers of the Trustees' claims during year 3. Accordingly, on the Trustees' case, the Insurers are estopped from asserting that the subsequent assignment was in breach of Cleary & Hoare's duty of utmost good faith. 59 The representational case put by the Trustees is only pressed should the Trustees fail to receive the benefit of the assignment by reason of the insurers' good faith claims being upheld. That representational case was to the effect that the insurers represented to the Trustees that the Trustees' claims against Cleary & Hoare (or circumstances likely to give rise to the Trustees' claims) were notified by Cleary & Hoare to its insurers in August 1990 and that the year 3 policies could not respond to the Trustees' claims. The Trustees then say that in fact, the insurers knew that the August 1990 notification related to criminal charges brought against Messrs Scanlan and Cleary and did not disclose the Trustees' claims or circumstances likely to give rise to the Trustees' claims. The case is that it was not until November 1991 that Cleary & Hoare notified the insurers of a civil claim against them and that it was not until 5 May 1992 that Cleary & Hoare notified the insurers of the Trustees' claims. The insurers, on the Trustees' submissions, did not at any time prior to the making of the First Settlement Agreement, correct their representation or inform the Trustees of the notification - claim - of 5 May 1992. 60 The Trustees claim that in reliance upon these representations which are said to have been misleading and deceptive, they entered into the First Settlement Agreement. Hence, the Trustees claim that if as a result they are unable to obtain the benefit of Cleary & Hoare's interest in the obligations of the insurers under the year 3 policies, the Trustees will suffer loss and damage and are entitled to succeed in their cross-claim against the Insurers. 61 In this regard, cross-examination of Mr Connor and Mr Murphy took place. To my mind, Mr Connor and Mr Murphy are shown to have been witnesses whose evidence was reliable in this area. 62 I note that it was put to Mr Connor in cross-examination that it was imprudent of him in late 1994 to assume that the 7 August 1990 notification necessarily was of the same circumstances which ultimately gave rise to the claim. Mr Connor did not agree with this. The proposition involves Mr Connor being expected to disbelieve the unequivocal statements in Coltman's letters of 8 August 1994 and 12 December 1994 in circumstances where nothing was said thereafter to negate or qualify those statements. 63 I note further that Mr Murphy in cross-examination was shown a letter from Law Claims to Cleary & Hoare of 29 November 1991. That letter included the following: 'I refer to your letter of notification of 21 November 1991 of a possible claim and advise that I have notified the Insurers accordingly. You will appreciate that, until the Insurers receive and consider a full report from me, all investigations and enquiries by Law Claims must be without prejudice to the rights of the Insurers.' 64 Mr Murphy's evidence was that had he known of the matters set out in that letter prior to 1998, he would have insisted upon an assignment of the rights in relation to the year 3 policies. 65 I accept as correct the Trustees' submission that on the evidence there was no compelling reason for Baker & McKenzie to provide a copy of that letter to the Trustees, because in the light of the Coltman's letters of 8 August 1994 and 8 December 1994 (the latter enclosing the 29 November 1991 letter), the solicitors for the insurers were stating as an unqualified fact that the claims the subject of the Trustees' proceedings were notified in August 1990. To my mind, the Trustees' submission which should be accepted, is that the fact that the Trustees were also notified in November 1991, could not alter the position if in fact the claims had already been notified in August 1990. 66 I deal with the question of costs of the good faith proceedings below.

Costs 67 Both parties have addressed detailed submissions in relation to costs. 68 The insurers seek an order for costs in the main proceedings and an order that those costs be on an indemnity basis in respect of the various defendants from various dates between 2 March 1999 and 29 July 1999, being dates fixed by reference to Schedule 1 to the insurers' written submissions, which in turn identifies a number of Calderbank letters and details a number of settlements. Annexure 'A' to the affidavit of Ms T.M. Hobson provides details. On the basis that the Court would not be disposed to proceed to determine the good faith proceedings, the insurers seek an order for costs in relation to the good faith proceedings and an order that those costs be on an indemnity basis, either from their inception or from 15 February 1999. 69 The Trustees assert that the appropriate orders are that the Trustees pay the insurers' costs of the main proceedings on a party/party basis and that the insurers as cross-claimants in those proceedings, pay to the Trustees as cross-defendants in those proceedings, costs of the cross-claim on a party/party basis. As to the good faith proceedings, the Trustees claim that if the Court be not disposed to proceed to determine the good faith proceedings, the appropriate order is for the insurers who were the plaintiffs in those proceedings to pay to the Trustees who were the defendants in those proceedings, their costs on a party/party basis. The Trustees submit that if the Court is disposed to proceed to determine the good faith proceedings, then the costs of these proceedings should abide the result. 70 It is clearly unnecessary in a judgment relating to costs to repeat matters to be found in the reserved judgment. That judgment serves to identify the issues and the findings and the reasons for those findings. 71 Both parties addressed detailed submissions in relation to the reasons which caused the good faith proceedings to be commenced and in relation to their respective approaches to the appropriate costs orders. To my mind, it is first appropriate to look at the main proceedings. Before turning to those proceedings, it is appropriate to recall the general principles which obtain in relation to costs. 72 Costs are dealt with in section 76 of the Supreme Court Act. Costs are in the discretion of the Court (section 76(1)(a)). The Court has full power to determine by whom and to what extent costs are to be paid (section 76(1)(b)). Costs follow the event except where it appears to the Court that some other order should be made (Part 52A Rule 11). 73 The Court may order costs to be assessed on the basis set out in Division 6 of Part 11 of the Legal Profession Act 1987 or on an indemnity basis (section 76(1)(c)). The former basis is defined in Part 52A Rule 2 as being the 'party and party basis'. 74 Since the amendments to the costs rules contained in Part 52A, indemnity costs have been circumscribed by the 'reasonableness' concept. Part 52A Rule 37(b) provides that where costs are payable on an indemnity basis all costs shall be allowed (except to the extent that it appears that they are of an unreasonable amount or have been unreasonably incurred). 75 As such, the new rules which only provide for costs on a party and party basis or on an indemnity basis do not recognise the concept of costs on a solicitor/client basis but the old concept of reasonableness formerly imported into such solicitor/client costs is now imported into the concept of indemnity costs. 76 The general principles which inform the Court's discretion to order costs which must be exercised judicially, were referred to in detail by the High Court of Australia in Oshlack v Richmond River Council (1997) 152 ALR 83. As McHugh J pointed out at paragraph 67 (page 101): 'The expression the "usual order as to costs" embodies the important principle that, subject to certain limited exceptions, a successful party in litigation is entitled to an award of costs in its favour. The principle is grounded in reasons of fairness and policy and operates whether the successful party is the plaintiff or the defendant. Costs are not awarded to punish an unsuccessful party. The primary purpose of an award of costs is to indemnify the successful party. If the litigation had not been brought, or defended, by the unsuccessful party the successful party would not have incurred the expense which it did. As between the parties, fairness dictates that the unsuccessful party typically bears the liability for the costs of the unsuccessful litigation. As a matter of policy, one beneficial by-product of this compensatory purpose may well be to instil in a party contemplating commencing, or defending, litigation a sober realisation of the potential financial expense involved. . . .' 77 In the joint judgment of Gaudron and Gummow JJ their Honours stated at paragraph 44 (page 95) : 'It may be true in a general sense that costs orders are not made to punish an unsuccessful party. However, in the particular circumstance of a case involving some relevant delinquency on the part of the unsuccessful party, an order is made not for party and party costs but for costs on a "solicitor and client" basis or on an indemnity basis.' 78 Turning to the main proceedings, the insurers rely upon their Calderbank offers which were not accepted. As I have said, the offers are set out in Schedule 1 appended to the insurers' written submissions, although I accept the Trustees' submission that the initial letters of 2 March 1999 did not include offers of compromise. The Court has, of course, power to order costs on an indemnity basis in the exercise of its discretion and irrespective of whether an Offer of Compromise or a Calderbank letter has been furnished. 79 The insurers further rely in support of their claim for indemnity costs upon the submission that the claim under the third policy year is said to have had no real prospects of success. The insurers further rely in relation to their claim to indemnity costs upon the fact that the year 3 insurers clearly stated their position in relation to indemnity costs following the discharge of injunctions in their favour by Hunter J on 15 February 1999. 80 The judgment of Hunter J on 15 February 1999 was an interlocutory judgment handed down in a fairly unusual situation, outlined by his Honour where his Honour dismissed the Trustees' claims for declaratory relief as to their alleged entitlement to rectification, released the Trustees and Messrs Cleary & Hoare from their undertakings to the Court not to enter into any agreement having the effect of assigning rights under the 1991 policies of insurance and granted the Trustees leave to amend the main proceedings to add claims under the 1991 insurance policies. His Honour stated at page 9 of the judgment: 'As I have earlier stated, if in relation to the other matter raised by Senior Counsel it proves that there is no substance when the facts are adduced in the proposed claim by the trustees under the third policy then that is a matter that may be addressed in terms of indemnity costs, an application which would be fortified by the application by Senior Counsel today seeking, in advance, such an order. At least that has the effect of recording a claim for indemnity costs at this early stage.' 81 Clearly enough, counsel appearing for the insurers before Hunter J, claimed that the claim under the third policy was doomed on that occasion and Hunter J recognised this as an early warning to be ultimately taken into account should the insurers succeed and the Trustees fail in relation to the Trustees' claim under the third policy year. This has now occurred. It has occurred in my view, in circumstances in which the claim in respect of the third policy year was commenced and continued in disregard of known facts. I accept as correct the Insurers submission that the facts which gave rise to the successful known claims circumstances defence and to the successful prior notification defence were known to the Trustees prior to their decision to amend the proceedings and to make a claim in respect of the third policy year. Those facts were that Mr Scanlan 'clearly became aware during his examination on 19 June 1990 of circumstances which were capable of giving rise to a claim of the nature of that later pursued by the Trustees in the Cleary & Hoare proceedings no. 5870 of 1994 [reserved judgment page 152 paragraph 439). Further, the Court found "The Trustees' recording of the essence of the charge and the pleadings is essentially misleading in this context. The 7 August 1990 notification was, in my view, a notification of the circumstances which gave rise in due course to the civil proceedings" [judgment page 158 paragraph 454]. 82 The judgment of Hunter J handed down on 15 February 1999, includes the following: 'Senior Counsel for the insurers has frankly informed the Court that the real basis for his clients' opposition to the course being followed by the trustees is twofold, namely, that any claim under the third policy is misconceived as under the terms of earlier policies notice of circumstances giving rise to the very claim that is sought to be made in respect of the third policy was given and, under the terms of those policies in respect of which the notice was given, any claim thereafter made is deemed to be made from the time that such notice was given.' [page 5] 83 The insurers make the point, as I accept, that this was a very substantial case requiring considerable preparation. They point out that the offer of most of the defendants was to pay money as well as foregoing costs. They point out that whilst the offer of those year 3 insurers who were not otherwise sued was for a dismissal with no order as to costs that did involve a significant compromise in litigation of this scale. They point out that the offer to forego all pre-offer costs was a significant compromise on the end result, that is that the Trustees pay both the pre and post-offer costs and cite in this regard Wilkinson & Ors v Feldworth Financial Services Pty Ltd [unreported, Rolfe J, Supreme Court of New South Wales, 17 December 1998 at page 22]. 84 The Trustees point our that the Calderbank letters were written from 23 July 1999 (17 days before the hearing) to 6 August 1999 (3 days before the hearing). The Trustees point out that the offers were open for very limited periods of time ranging from 7 days (including week-ends) to parts of a day. A convenient table setting out these periods of time is set out in paragraph 4 of the Trustees' written submissions which records the duration of relevant offers from particular insurers as running from one day duration of offer to a seven day duration of offer. This table must however be reconciled with Annexure 'A' to Ms Hobson's affidavit which details the first and second rounds of counter offer. 85 The Trustees also submit that no offer of compromise was made under the Supreme Court Rules as an offer made under Part 22 must remain open for at least 28 days [Part 22 Rule 3(2)]. 86 The Trustees submit that the evident purpose of this requirement is to give the party to whom the offer is addressed, sufficient time to consider it. The Trustees submit that this is of particular significance where, as is said to have been the case in these proceedings, the offers, with one possible exception, were made within 14 days preceding the commencement of the hearing on 9 August 1999. 87 The Trustees submit that the insurers, having not availed themselves of the statutory regime laid down by Part 22, have failed to explain why they did not do so. The Trustees' submission is that given that the insurers Calderbank offers gave less - in fact, in all cases, much less - than the 28 days required to be given under Part 22, and in circumstances where the Calderbank offers were made at a time when the Trustees must have been known to be preparing for hearing, the Court should be slow, absent some proper explanation, to give the insurers an outcome that they could not have obtained by following the statutory procedure. This is said to be particularly so where most of the insurers who made offers were involved as insurers for at least two and in many cases three of the insurance years in question. The Trustees' submission which I accept, is that where this was the case, analysis and consideration of any offer of compromise involved not just the year 3 issues but all issues in the proceedings. 88 The Trustees accept in their submissions that the Court may take into account a Calderbank offer when considering whether or not a special order should be made in relation to costs but that a special order for costs does not follow automatically. They point out that in Multicon Engineering Pty Ltd v Federal Airports Corporation (1996) 138 ALR 425, Rolfe J at 451 stated that' an order would usually be made in favour of the successful offer or from the date of the making of the offer'. The Trustees submit that that would only be where, in all the circumstances, the offer allowed a reasonable time - prima facie 28 days is suggested as a reasonable time - for its acceptance. The Trustees submit that where, as they suggest, this did not occur, then either no special order for costs should be made or if a special order is contemplated, it should date only from the expiry of the reasonable period - the Trustees submit that in this case the statutory analogue suggests 28 days from the making of the offers. The submission is then that this is such a small period of time that it does not justify making any special order. 89 To my mind, the Trustees' submissions do not take into account the strength of the insurers' position with regard to the strength of the insurers' claim in relation to Year 3 as outlined to Hunter J on 15 February 1999. That statement of the insurers did relate to the suggested misconceived claim under the third year policy and was accepted as such by Hunter J. The Trustees then submit that, to the extent that the insurers rely on the alleged hopelessness of the claim against the year 3 policies as a ground supporting a special costs order, that could at the most support such an order only in relation to the year 3 claims. The alleged hopelessness - even if found - is said not to have any possibility of infecting the rest of the claims. The Trustees also claim that there was a relatively minor amount of time and work devoted exclusively to year 3 issues and refer to the difficulty of isolating purely year 3 work and quantifying purely 3 costs and refer to the commonality of issues across the whole of the claim. 90 To my mind, the circumstances which obtain in terms of a combination of the insurers' submissions to Hunter J and his Honour's comments in relation to the possibility of indemnity costs in the main proceedings should the year 3 policy claim fail, the sending of the Calderbank letters although late and the circumstance that the facts which gave rise to the successful known claim circumstances defence and to the successful prior notification defence, were known to the Trustees prior to their decision to seek to amend the proceedings and make a claim in respect of the third policy year, together do warrant the making of an order for indemnity costs in respect of the various defendants from various dates between 2 March 1999 and 29 July 1999 but the appropriate order is to award only thirty percent of such costs. In short, I accede to the application by the insurers summarised in paragraph 1(b) of their written submissions (as corrected in oral submissions) but only to the extent of thirty percent of the costs which had been claimed on an indemnity basis over the relevant dates identified in that paragraph of the insurers' submissions. The balance of the insurers' costs of the main proceedings are to be ordered as payable on a party party basis. 91 The Court has now proceeded to determine the good faith proceedings. The Trustees have effectively succeeded in terms of the substance of the good faith proceedings. They had no alternative but to defend those proceedings. But for the fact that the good faith proceedings were essentially defensive in character, the appropriate order would be for the insurers to pay the Trustees' costs of the good faith proceedings. Some recognition requires to be given to the fact that the insurers succeeded in the main proceedings. Some recognition requires to be given to the reasonably discrete nature of the factual and legal issues litigated in the good faith proceedings. In my view, the appropriate order is for the insurers to pay two thirds of the Trustees' costs of the good faith proceedings. 92 As to the cross-claim in the main proceedings, the parties are agreed that as the insurers failed on their cross-claim to recover the $500,000 paid in October 1997, the appropriate order is that the insurers should pay the Trustees' costs of that cross-claim. 93 Short minutes of order should be brought in to reflect these reasons and to record the formal change in parties.

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