National Australia Bank Limited v Nautilus Insurance Pte Ltd

Federal Court of Australia|2019-12-18|Before: Commission J, Lee J

es is an insurer bound by a judgment or settlement against its insured? (an Australian perspective)" (2015) 26 ILJ 209

Date of hearing: 12 November 2019

Date of last submissions: 15 November 2019

Division: General Division

National Practice Area: Commercial and Corporations

Sub-area: Commercial Contracts, Banking, Finance and Insurance - Insurance List

Category: Catchwords

Number of paragraphs: 60

Counsel for the Applicant: Ms W A Harris QC with Mr N De Young and Ms S Gory

Solicitor for the Applicant: Herbert Smith Freehills

Counsel for the First Respondent: Ms V Whittaker SC with Ms Williams

Solicitor for the First Respondent: King & Wood Mallesons

Counsel for the Second Respondent: Mr M Darke SC with Ms C Van Proctor

Solicitor for the Second Respondent: Kennedys

Counsel for the Third and Fourth Respondents: Mr G Rich SC with Mr G Ng and Mr R Jedrzejczyk

Solicitor for the Third and Fourth Respondents: YPOL Lawyers

BETWEEN: NATIONAL AUSTRALIA BANK LIMITED (ACN 004 044 937) Applicant

AND: NAUTILUS INSURANCE PTE LTD First Respondent

CERTAIN UNDERWRITERS AT LLOYD'S LONDON SUBSCRIBING TO POLICY NUMBER B0509QA009912 Second Respondent

CERTAIN UNDERWRITERS AT LLOYD'S LONDON SUBSCRIBING TO POLICY NUMBER B0509QA008613 Third Respondent CERTAIN UNDERWRITERS AT LLOYD'S LONDON SUBSCRIBING TO POLICY NUMBER B0509QA009914 Fourth Respondent

JUDGE: LEE J DATE OF ORDER: 18 DECEMber 2019

By 4pm on 23 December 2019 the parties provide to the Associate to Justice Lee agreed or competing minutes of order reflecting these reasons and including any order as to costs and, in the event of competing proposed orders, any submission (limited to two pages) in support of the contested orders for which that party contends. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

A RELEVANT BACKGROUND & SUMMARY OF DISPUTE 1 The present dispute between the applicant (NAB), the first respondent insurer (Nautilus or insurer), and the balance of the respondents, being three groups of Nautilus' reinsurers (reinsurers), does not require lengthy explication. To do so is unnecessary because in a detailed interlocutory judgment, National Australia Bank Limited v Nautilus Insurance Pte Ltd (No 2) [2019] FCA 1543 (IJ), the Chief Justice set out, at [1]-[2], [8], [10] - [15], and [18] -[75], an explanation of: (a) the aspects and nature of the dispute between the parties including as to the proper construction of critical provisions of the relevant policies of insurance; (b) the circumstances by which claims were submitted to Nautilus and the reinsurers for the 2012/2013 policy year, and later for the 2013/2014 and 2014/2015 policy years, asserting an entitlement to over £357 million referable to payments made by NAB (described as IRHP Redress Payments or Fixed Rate Redress Payments) pursuant to what was said to be "settlement agreements" with customers; (c) the contentions and counter-contentions made in correspondence between solicitors for NAB and the reinsurers that thereafter followed; and (d) the nature of the relief sought in this proceeding. 2 The parties expressly agreed that the factual matters detailed in the abovementioned paragraphs of the IJ were accurate and these reasons for judgment assume a familiarity with them. It was also accepted that because the terms of the 2012/2013 policy (Policy) are relevantly identical to the terms of the policies for the 2013/2014 and 2014/2015 policy years, the proper construction of the Policy is determinative of the same construction questions that arise in relation to the other two policies. 3 Nautilus did not take an active part in the hearing and the competing contentions were advanced by the NAB on the one hand, and the two sets of reinsurers on the other. As was explained in detail in the IJ, particularly at [36]-[68], the width and detail of the dispute travels well beyond the construction issues; indeed, if I was to have regard to a number of matters the subject of evidence and submissions before me (including post-contractual dealings between the parties and their subjective views of their obligations inter se) it would cause the construction task to miscarry. It is important to stress at the outset the limited scope of the task with which these reasons deal. The resolution of these important matters of construction is not determinative of whether the NAB is ultimately entitled to the amount it claims (or indeed any part of it). Bearing this in mind, the issues that presently fall for determination can be placed into two categories. 4 First, issues as to construction and, in particular, the definitions of "Civil Liability" under General Definition (GD)11(b) and "Loss" under GD40(B)(a). In short, NAB contends and the reinsurers deny, that there is: (a) a Civil Liability as defined, when an insured enters into an agreement with a third party which contains a legally enforceable obligation to pay a third party an amount in settlement of a "Claim" (as defined); and (b) a Loss (as defined), when an insured pays a third party an amount pursuant to an agreement with that third party entered into in settlement of a Claim. The reinsurers maintain that satisfaction of GD11(b) and GD40(B)(a) requires proof of an underlying liability in that the insured must establish a legal liability to pay damages or compensation independently of any settlement agreement (amounting to an anterior legally enforceable obligation to pay compensation or damages in settlement of a Claim). 5 Secondly, connected to the point made above that resolution of the construction dispute is not determinative of whether the NAB is entitled to indemnity, there is a dispute as to whether the Court should decline to grant relief on "discretionary" grounds. At previous stages of this litigation, including at the summary dismissal hearing the subject of the IJ, this argument went further. It was initially asserted that there was no "matter" (to use that word in its constitutional sense) within federal jurisdiction (and attracting the original jurisdiction of the Court). Relatedly, it was asserted the relief sought by NAB invited the Court to travel beyond the licit confines of Chapter III judicial power as it would produce no foreseeable consequences for the parties and would involve the Court being engaged in an impermissible hypothetical exercise. The narrower submission maintained in submissions at the final hearing is that some of the declaratory relief sought is inappropriately broad and moreover that any declaratory relief should be denied because the proposed declarations do not engage with or determine the issue of whether, in the events that have happened, there is any specific Civil Liability or Loss. 6 These issues will be addressed under the following headings: B THE CONSTRUCTION ISSUES B.1 Relevant Principles B.2 Relevant General Characteristics of Liability Insurance B.3 Further Matters Relevant to Construction of the Policy B.4 GD11 - Civil Liability B.5 The Bracketed Words and General Condition 7(c), and Special Exclusion 1 B.6 General Definition 40 - Loss C THE RELIEF ISSUES C.1 The Relief Sought C.2 The Issue of Relief Generally and Discretion C.3 Form of Relief D ORDER

B.1 Relevant Principles 7 Unsurprisingly the relevant principles as to construction generally were not the subject of any dispute. Without being exhaustive, they can be summarised as follows: (1) the parties are assumed to have intended to produce a commercial result (Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640 at 656-657 [35]); and as such, the Policy ought to be given a business-like interpretation, being the construction which a reasonable business person would give to it: Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [2017] HCA 12; (2017) 261 CLR 544 at 551 [17]; Simic v New South Wales Land and Housing Corporation [2016] HCA 47; (2016) 260 CLR 85 at 111 [78]; (2) any policy of insurance is to be construed in accordance with general principles of contractual interpretation and it is appropriate to have regard to the contextual framework in which a contract is formed, to the extent to which it is known by both parties, to assist in identifying its purpose and commercial objective: McCann v Switzerland Insurance Australia Limited [2000] HCA 65; (2000) 203 CLR 579 at 589 [22] per Gleeson CJ; (3) in ascertaining meaning, close attention must be given to the contractual language, the commercial objects of the transaction and the circumstances then known to the parties: Pacific Carriers Ltd v BNP Paribas [2004] HCA 350; (2004) 218 CLR 451 at 461-462 [22]; Woodside Energy at 656-657 [35]; (4) regard should also be had to the structure of the insurance policy as a whole (Johnson v American Home Assurance Company [1998] HCA 14; (1998) 192 CLR 266 at 272 [19(1)]) and preference should be given to a construction supplying a congruent operation to the various components of the whole: Wilkie v Gordian Runoff Limited [2005] HCA 17; (2005) 221 CLR 522 at 529 [16]; and (5) a fair and reasonable construction of a policy should be adopted which takes into account, inter alia, the entitlement of an insured to know the bargain which it has secured: American Home Assurance Company at 274 [19(4)].

B.2 Relevant General Characteristics of Liability Insurance 8 Nor was there real disputation as to common characteristics of liability insurance policies including the following general propositions all of which, of course, are subject to the provisions of a particular policy: (1) that a judgment in a claim by a third party against the insured will usually be conclusive as a matter of contract to establish the insured's entitlement to indemnity from the insurer in accordance with the policy: see VACC Insurance Ltd v BP Australia Ltd [1999] NSWCA 427; (1999) 47 NSWLR 716; QBE Insurance Ltd v Nguyen [2008] SASC 138; (2008) 100 SASR 560; (2) that said, the usual insuring clause by which indemnity is provided is not limited in respect of the way in which the liability is imposed, that is, it generally may be imposed not only by reference to a judgment but also by an award of an arbitrator or a compromise settlement: Derrington, D K, and Ashton, R S, The Law of Liability Insurance (LexisNexis, 3rd ed, 2013) at 1451 [8-510]; Australasian Correction Services Pty Limited v AIG Australia Limited [2018] FCA 2043 at [15] (Allsop CJ); Penrith City Council v Government Insurance Office of New South Wales (1991) 24 NSWLR 564; (3) however, many liability policies contain a provision which provides that an insured must not compromise a claim by entering into a settlement agreement without the insurer's consent; but if consent is forthcoming, the settlement agreement reached will ordinarily prevent the insurer going behind it. 9 Although ultimately it was not determinative of the construction question, what was controversial was whether an insurer was usually bound in circumstances where, such as the present case, consent of the insurer was not obtained before entering into a settlement agreement. NAB pointed to the observations of Tobias JA in Vero Insurance v Baycorp Advantage Limited [2004] NSWCA 390; (2005) 13 ANZ Ins Cas 61-630 at 77,735 [48] to the effect that "divergent lines of authority" have developed as to what an insured must prove where there has been a settlement without the insurer's consent. The position (on what has been called the "Sutherland dichotomy", a term arising from an article by Ms K Sutherland, "An Uneasy Compromise: An Analysis of the Effect of a Settlement Reached by an Insured with a Third Party Claimant vis-a-vis his or her Insurer" (1998) 9 ILJ 1) was summarised by the NAB as follows: One line of authority favours the insured and establishes that provided the settlement is reasonable the insurer is liable to pay the settlement sum (and it is not necessary to prove actual liability by the insured to the claimant: Edwards v Insurance Office of Australia (1933) 34 SR (NSW) 88; General Omnibus Co v London General Insurance Co Ltd [1936] IR 596; Distillers Co (Bio-Chemicals) (Aust) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1, at 9, 25. The other line of authority favours the insurer and requires the actual liability of the insured to the claimant to be established before the insurer is liable to indemnify irrespective of any settlement reached: Broadlands Properties Ltd & Broadlands Estates Ltd v Guardian Assurance Co Ltd (1984) 3 ANZ Ins Cas 60-552; Royal Insurance Fire & General (NZ) Ltd v Mainfreight Transport Ltd (1993) 7 ANZ Ins Cas 61-172 at 77, 976; Drayton v Martin (1996) 137 ALR 145, at 157. 10 The first line of authority was called by Sutherland the "settlement is liability" approach; the second, the "settlement is irrelevant approach". As Mr R N Traves QC notes in his article, "In what circumstances is an insurer bound by a judgment or settlement against its insured? (an Australian perspective)" (2015) 26 ILJ 209 at 213: There remains some difference of view within the settlement is irrelevant line of authorities as to the extent to which the quantum of the settlement may be challenged. Gault J in Royal Insurance v Mainfreight treated a reasonable settlement as binding on an insurer where the insured had established that it was liable to the third party claimant. On the other hand, Sackville J in Drayton v Martin suggests to the contrary…. Thus, on the Sutherland dichotomy, where an insurer has not agreed to indemnify yet, by doing so, does not repudiate the policy, the application of the 'settlement is liability' authorities is doubtful. And it would not be unusual for a liability policy to provide that the obligation to indemnify does not arise until after establishment of the liability. (internal citations and footnotes omitted) 11 The current position in Australian law, as submitted by the reinsurers, does not admit of any doubt. The reinsurers contended that the first line of authority is only applicable in circumstances in which the insurer has breached the contract of insurance before the insured settles third party claims and this prior breach of contract either constitutes a waiver of any requirement to seek consent, or else entitles the insured to an award of damages, and so long as the settlement was reasonable, the amount paid to a third party under that settlement is the measure of the insured's loss. The insurer cannot complain that the settlement was made without its consent because it was the insurer's own breach of contract that compelled the insured to defend itself against third party claims, and in those circumstances, the insured was entitled to act reasonably to resolve them. Unsurprisingly, the reinsurers point to Distillers Co Bio-Chemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1 where a clause in a policy provided: The Insured shall not without the consent in writing of the Company make any admission, offer, promise or payment in connection with any accident or claim, and the Company if it so desires shall be entitled to take over and conduct in the name of the Insured the defence or settlement of any claim. 12 The relevant insuring clause did not require indemnity until there was a legal liability on the part of the insured; and the policy did not oblige the insurer to take over the conduct of the action, although it could elect to do so. Menzies and Stephen JJ held (Gibbs J dissenting), that any admission, offer, promise or payment by the insured in an action would amount to a breach of the policy, notwithstanding that the insurer had elected not to take over and conduct the defence or settlement of the actions. 13 An insured in such circumstances was left in the position that if the action was settled, the insurer could rely upon the unauthorised settlement as a breach of condition excusing it from liability to indemnify. In some cases, this could occasion an unfairness and operate as a fetter upon sensible resolution of claims. Section 41 of the Insurance Contracts Act 1984 (Cth) ameliorates the effect of the decision in Distillers if the section is engaged. The operation of that section is irrelevant here, but what was said to be relevant is that Distillers is binding High Court authority against the general proposition advanced in writing by NAB that provided a "settlement is reasonable the insurer is liable to pay the settlement sum". The NAB's submission, if expressed at this level of generality, is inaccurate, and I accept that the current state of authority is as the reinsurers contend. But for reasons I will come to, it is unnecessary to dwell further on this aspect of the controversy (including the comments of Derrington and Ashton at [8-519] to which I made reference during the hearing), because it is not determinative of the construction issues with which I am concerned.

B.3 Further Matters Relevant to Construction of the Policy 14 The Policy must be understood in its commercial context. It is basal that liability insurance compensates the insured for liability for damage which the insured must pay to others because of the insured's actions, or actions of those for whom the insured is responsible. As Derrington and Ashton explained at [8.1]: The risk is the formal establishment of his liability to a third party rather than the harm that is done to that party, which is only an element of his liability…. The purpose of insurance is to provide against the consequences of uncertain future events, and in the context the formal establishment of the insured's liability to a third party is the peril which constitutes the uncertain future… The "peril", then, is his exposure to loss through established liability to a third party in accordance with the meaning of that term … Essentially, his "loss" which is the risk insured against is the attachment to the insured of enforceable liability to another through the conduct of the insured … leading to financial detriment. 15 As was noted in the IJ at [27]-[28], it is Section III of the Policy, entitled "Professional Indemnity", which is the section in respect of which the claim and dispute as to indemnity arises. The insuring clause is set out at the beginning of the section and relevantly states: (A) Civil Liability arising out of: (a) The provision by or on behalf of the Assured (or failure to provide) Financial or Professional Services to third parties; … (B) the incurring of Defence Costs in relation to any actual or alleged Civil Liability as described in (A) above… 16 In order to obtain coverage, the NAB needs to prove, in summary: (a) a Loss, (b) resulting from Civil Liability, (c) arising out of the provision of Financial or Professional Services, (d) resulting in a Claim, and (e) being a claim First Made against the Insured during the policy period (as it happens, as was noted in the IJ at [39], elements (a), (b) and (d) were denied; and rights were reserved as to (c) and (e)). 17 What is evident from a review of the Policy and the nature of the indemnity given for liabilities arising out of the provision of Financial or Professional Services (including the sale of derivative products and loans to customers), is that this type of activity is at the heart of what a trading bank, such as NAB, does. Further, what could be accurately described as a natural and ordinary risk arising from such activities includes a trading bank becoming liable to pay compensation to customers (or incurring loss arising from regulatory conduct), when financial services have been, for some reason or another, provided maladroitly. Individual losses to customers could be trivial or very substantial. There is substance in the notion that a liability to customers and/or incurring a loss arising from regulatory conduct in such circumstances, is wholly typical of the type of loss that a trading bank could incur when providing Financial or Professional Services (being the relevant "peril" addressed by entry into the Policy). 18 With these matters of legal principle, commercial context and purpose in mind, it is appropriate to turn to the specific construction issues that arise.

B.4 GD11 - Civil Liability 19 The definition of "Civil Liability" is defined in GD11 as follows: "Civil Liability" shall mean: (a) a legally enforceable obligation to a third party for compensation, damages, legal costs or a Restitutionary Order in accordance with an award of a court or tribunal by whose jurisdiction the Assured is bound; (b) a legally enforceable obligation to a third party for compensation, damages, legal costs or a Restitutionary Order acknowledged (subject always to the provisions of General Condition 2, Notification of Losses or Third Party Claims and General Condition 7, Defence and Defence Costs, clause (c) 2)) by an agreement made between the Assured and a third party in settlement of a Claim; (c) any liability pursuant to any award, directive, order or similar act of a Authority or self regulating organisation, the result of which is binding upon the Assured; (d) any liability pursuant to arbitration or other alternative dispute resolution process the result of which is binding upon the Assured; (e) liability under Section 95 (1) of the Cheques and Payments Orders Act in Australia or similar legislation elsewhere for conversion; (f) any liability to retail clients due to breaches of obligations under Chapter 7 of the Corporations Act 2001 (Cth) but only as required to be covered under ASIC Regulatory Guide 126; (g) any liability to consumers due to breaches of obligations under the National Consumer Protection Act 2009 (Cth) but only as required to be covered under ASIC Regulatory Guide 210… (underlining added) 20 The argument is a relatively narrow one. 21 As is evident from the underlined text of GD11(b), the engagement of a Civil Liability involves identifying the presence of a number of matters: first, there must be a legally enforceable obligation to a third party; secondly, this legally enforceable obligation must be "acknowledged" by an agreement between the insured and the third party; thirdly, it must be in settlement of a Claim; and fourthly, it must be for compensation, damages or legal costs to the third party. I will return to the words in brackets below. 22 Save for an argument as to the meaning to be given to the word "acknowledged", the literal terms of the text do not require proof of an underlying legally enforceable obligation to a third party independently of an agreement with the third party in settlement of the Claim. But the words "acknowledged by… an agreement" are said by the reinsurers to demonstrate that the relevant Civil Liability cannot be created by a settlement agreement. In effect, the acknowledgment to which the clause makes reference is said to be an acknowledgment of a liability existing separately from, and anterior to, the agreement referred to in the clause. 23 This argument is unpersuasive. The agreement referred to in the clause is an agreement of a particular character; it is an agreement "in settlement of a Claim". This immediately directs attention to the definition of a Claim. Importantly, this term is defined (in GD12(a)) as meaning any: (a) demand, suit or proceeding, including any civil proceeding, third party proceeding, counterclaim, arbitration or alternative dispute resolution process, regulatory or administrative proceeding (and any appeal therefrom) brought by any party against the Assured either for or which could reasonably result in the payment of compensation, damages, or a Restitutionary Order; or (b) hearing, examination, investigation or inquiry into the affairs of the Assured. (emphasis added) 24 Given a Claim encompasses a demand which could reasonably result in the payment of compensation, then GD11(b) contemplates the settlement of such a demand (that is, one that could reasonably result in such a consequence but for the settlement). This is hardly intuitively surprising. GD11(b) operates congruently with GD11(a). GD11(a) deals with a "legally enforceable obligation to a third party for compensation, damages, legal costs or a Restitutionary Order" arising upon a binding "award of a court or tribunal"; GD11(b) deals with the situation where it is perceived to be appropriate to resolve the third party demand prior to a court or tribunal determining the question of underlying liability (and hence replacing the prior liability with a judgment or an award). GD11(b) is an alternative to the scenario provided for in GD11(a); a demand by a third party of a particular type (that is, one which could have a particular result) is replaced by a new set of rights and obligations in the agreement between the insured and the third party who was (until the time of the agreement) asserting a reasonable but as yet undetermined demand. 25 There is nothing about this construction which jars with the clause or the balance of the Policy read as a whole; indeed the contrary is the case. Like GD11(b), GD11(a), GD11(c) and GD11(d) all provide for a Civil Liability coming into existence upon the happening of an identified event: a settlement, a binding award of judgment, a directive or order made by a relevant Authority, or a binding arbitration or ADR process. In each case there is first a Claim (of a particular character as defined); and secondly, the happening of an event which changes the rights of the insured and the third party which gives rise to a liability. 26 As to the word "acknowledge", as used in the phrase "legally enforceable obligation … acknowledged… by an agreement made between the Assured and a third party in settlement of a Claim", I do not consider that its use undermines NAB's argument as to the proper construction of GD11(b). In Re Cotton Crops Pty Ltd [1986] 2 Qd R 328, Ambrose J had cause (at 338) "to look at some of the meanings attributed to the words 'acknowledge' and 'acknowledgement' in a number of dictionaries". His Honour conveniently noted: In the Oxford English Dictionary the verb "acknowledge" is defined to mean inter alia, "to own as genuine, or of legal force or validity; to own, avow or assent in legal form, [to a document] so as to give it validity". The noun "acknowledgement" is defined in the same dictionary to mean inter alia, "a formal declaration or avowal of an act or document so as to give it legal validity". In Webster's Third New International Dictionary, "to acknowledge" is defined to mean inter alia, "to show by word or act that one has knowledge of and regard for" and "to recognize as genuine assent to so as to give validity, avow or admit in legal form". In the same dictionary acknowledgement is defined to mean inter alia, "a declaration or avowal of ones act or a fact to give it legal validity: a declaration before a duly qualified public officer by one who has executed an instrument that the execution was his free act and deed". 27 To this can be added the Macquarie Dictionary, which defines the verb as relevantly including: "to admit to be real or true; recognise the existence, truth, or fact of" and "to own as binding or of legal force". Read in the present context, it seems to me tolerably clear that the "legally enforceable obligation … acknowledged… by an agreement" is a reference to an obligation, the assent to which has arisen upon entry into, and been given legal force in, an agreement. This acknowledgment by entry into the agreement replaced what (to that point) had been an undetermined demand made by a third party. 28 Remaining with the text, I do not consider the words in brackets ("subject always to the provisions of General Condition 2, Notification of Losses or Third Party Claims and General Condition 7, Defence and Defence Costs, clause (c) 2)") change this conclusion although described as a "threshold issue" by the reinsurers. The words in brackets need to be considered, of course, in the context of construing the provision as a whole, and I have done so, notwithstanding that it is convenient to deal with them separately below. 29 Contextually, NAB's construction is supported by other provisions. GD40(B)(a)(i) provides that Loss expressly includes "damages, judgements and settlements" (emphasis added), a provision consistent with the notion of a dichotomy between Claims which proceed to determination and those settled absent determination (as recognised in GD11(a) and GD11(b) referred to above). 30 In summary, it seems to me that NAB's construction is consistent with the text of GD11(b) when read together with GD11(a) (and GD11(c) and (d)); moreover, it is harmonious with the definition of Loss (in its reference to settlements) and is not inconsistent with the terms of General Condition 7(c)(2) and General Condition 2(d). 31 On the other hand, the reinsurers' construction seems to me to place an acontextual meaning of the word "acknowledge" and exhibits some tension with the foundational notion that this is a policy of indemnity for liability actually incurred by the insured. If the Civil Liability has as its focus the antecedent legal liability to the third party claimant, the quantum of this liability would, very often, differ from the compromise amount payable under the settlement agreement. Operating in the context of a settlement, the liability to be indemnified is that which arises upon entry into the settlement as explained above. On the NAB's construction, the Loss suffered is co-extensive with, and arises by reason of, its Civil Liability. On the reinsurers' construction of GD11(b) there is an apparent disconnect between the circumstance which constitutes or gives rise to Civil Liability and the event giving rise to the Loss (that is, entry into the settlement agreement). 32 Additionally, on the reinsurers' construction, even when the Claim has resolved by settlement, the insured remains obliged to prove the anterior legal liability to obtain indemnity under GD11(b) without, of course, the benefit of a determination to that effect. In other words, it requires the insured to undertake the very exercise which a resolution by compromise is entered to avoid. 33 The NAB's construction is to be preferred.

B.5 The Bracketed Words and General Condition 7(c) and Special Exclusion 1 34 I noted above that I do not consider the words in brackets ("subject always to the provisions of General Condition 2, Notification of Losses or Third Party Claims and General Condition 7, Defence and Defence Costs, clause (c) (2)") have the effect of undermining the construction advanced by NAB or advancing that of the reinsurers. Before explaining why, it is important to keep an important distinction steadily in mind. With an atomic clock regularity, the reinsurers made reference to the fact that it is common ground that as Exhibit A (Statement of Agreed Facts) records at [34], none of the settlements NAB says it made were entered into with Nautilus' prior consent and indeed neither Nautilus nor the reinsurers were ever asked to consent. This was said to be critical because General Condition 7(c) provides: The Assured or their legal representatives shall not: (1) take any action which is prejudicial to Underwriters' interests; or (2) without the prior consent of the Underwriters (such consent not to be unreasonably withheld, denied or delayed), admit liability for or settle any third party Claim in excess of the Retention specified in the Schedule. (emphasis added) 35 But although any construction of what amounts to a Civil Liability must take account of the whole of cl 11 and the Policy generally (encompassing the terms of the General Definitions and the General Conditions, including the emphasised part of General Condition 7(c)), I am required to resolve a construction suit, not determine the entitlement or otherwise of NAB to indemnity for an amount representing the Loss said to have been occasioned by the Fixed Rate Redress Payments and the IRHP Redress Payments. It is important not to elide this distinction. 36 In effect, the reinsurers argued that the effect of the bracketed words in GD11(b) is that there is no Civil Liability as defined in GD11(b) unless General Condition 7(c) is the subject of compliance. By parity of reasoning, it must follow that compliance with the provisions of General Condition 2 (which relevantly requires Notification of Losses) is also required. 37 It seems to me, however, that the bracketed words in GD11(b) do no more than to make it clear that the provision does not somehow negate or override the requirements of General Condition 2 and General Condition 7 in cases where the insured enters into a settlement agreement. Put another way, a Civil Liability can include a legally enforceable obligation to pay a third party by way of a settlement agreement, but this does not affect (is "subject always" to) the operation of General Conditions 2 and 7. 38 A construction which provides that it is sufficient, in order to establish Civil Liability under GD 11(b) (and Loss within the meaning of GD 40), to show that in settlement of a Claim, the insured entered into a settlement agreement without requiring proof of an anterior independent liability makes sense when one considers it must operate in circumstances (unlike the facts of this case) when the prior consent of the insurer was obtained. 39 Before leaving this aspect of the case, for completeness, I should deal with a further argument advanced by the reinsurers that Special Exclusion 1 supports their construction of GD11(b). This exclusion relevantly provides that the insured is not indemnified in respect of: Any Loss arising out of a contract but only to the extent that the legal liability giving rise to the Loss arises from a breach of a duty, warranty, guarantee or term that exists solely under contract and which would not have attached to the Assured in the absence of such contract. 40 The reinsurers submit that if GD11(b) were to be interpreted as the NAB contends, then that limb of the Civil Liability definition, in light of Special Exclusion 1, would be pointless. This is said to be the case because any Loss resulting from the Civil Liability would be one "arising out of a contract" and "would not have attached to the Assured in the absence of such contract". Thus, the Loss would be excluded from cover by Special Exclusion 1. 41 But, as the NAB submitted, the contract referred to in Special Exclusion 1 is not the settlement agreement. If it were otherwise it would render GD11(b), General Condition 2 and General Condition 7 irrelevant in circumstances where those provisions contemplate that settlement agreements might occur. Rather, the contract being referred to is an earlier contract between the insured and the third party, regulating their dealings. This is made clear by the reference to liability arising from a "breach of duty, warranty guarantee or term". The effect of the clause is that in circumstances where an insured is contractually liable for breach to a third party, but that liability arises solely from the contract and there is no parallel liability that arises under tort or some other regulation, then the insured is not covered by the Policy. 42 Although I have already made the point above, it is worth re-emphasising that questions as to whether: (a) there was in fact a breach of GD11(b); (b) Nautilus and/or the reinsurers can rely upon any breach; and (c) NAB can rely on s 54 of the Insurance Contracts Act 1984 (Cth) to support an argument that failure to obtain consent is not fatal to indemnity, are all matters for another day.

B.6 General Definition 40 - Loss 43 The second construction question is informed by the above analysis. 44 The word "Loss" is defined for the purposes of Section III of the policy in GD40 as follows: "Loss" means: … (B) In respect of Section III only: (a) The total amounts which the Assured becomes or may become legally liable to pay, including but not limited to: (i) damages, judgments and settlements, including legal costs; (ii) payments to third parties (including civil penalties) in restitution which are of a compensatory nature, in compliance with the directions of any body or Authority empowered to govern the conduct of the business of the Assured between the Assured and such third parties (not to include for the avoidance of doubt any such payment to or for the benefit of such body or Authority); (iii) any award of costs made against the Assured; (iv) the cost (including the acquisition cost of securities) of restoring a person to a register or record where the Assured is legally liable for the wrongful removal or non-appearance of that person from or on the register or record; (v) all other costs and expenses, incurred with the written consent of Underwriters; (b) Defence Costs. There is a qualification to this definition of Loss immediately following, as follows: "Loss" under (B) (a) and (C) (a) above only does not, include: … (d) fees, commissions, or other charges paid or due to the Assured… 45 As the NAB submits, once the meaning of GD11(b) is understood, the reinsurers' arguments with respect to GD40(B)(a) fall away. 46 Under GD40(B)(a), Loss includes the "total amounts which the Assured becomes or may become legally liable to pay, including but not limited to… damages, judgments and settlements, including legal costs". 47 The reinsurers submit that the words "legally liable to pay" in GD 40(B)(a) can only be satisfied by a legal liability imposed by law and not a legal liability to pay provided for in a settlement agreement. However, there is no reason why GD 40(B)(a) ought to be construed as reflecting anything other than encompassing a legal liability to pay acknowledged by, and arising upon, entry into a settlement agreement. As explained above, if a Claim is compromised, the only amount which the insured "becomes or may become legally liable to pay" is the amount provided for in the settlement paction (not an amount calculated by reference to any pre-existing liability to the third party).

C.1 The Relief Sought 48 Relevantly identical relief is sought by NAB in relation to the three policies. Dealing with the substantive relief sought in relation to the Policy, it is in the following terms: 1. A declaration that on the proper construction of the definition of Civil Liability in [GD]11(b) of the policy of insurance issued to NAB by Nautilus for the [Policy], there is a Civil Liability when an Assured (as defined in the [Policy]) enters into an agreement with a third party which contains a legally enforceable obligation to pay a third party damages or compensation in settlement of a Claim (as defined in the [Policy]). 2. A declaration that on the proper construction of the definition of Loss in [GD]40(B)(a) of the [Policy], there is a Loss when an Assured pays a third party damages or compensation pursuant to a settlement agreement with a third party entered into in settlement of a Claim (as defined in the [Policy]). 3. A declaration that on the proper construction of the [Policy], it is unnecessary for the purposes of: a. satisfying the definition of Civil Liability in [GD]11(b); or b. satisfying the definition of Loss in [GD]40(B)(a); or c. satisfying the Assured's entitlement to indemnity in respect of Defence Costs (as defined in the [Policy]) in General Condition 7(a), for the Assured to establish that it was legally liable to the third party independently of the legally enforceable obligation to pay arising under the settlement agreement relied on to establish Civil Liability under [GD]11(b). 49 Apart from the arguments as to construction dealt with above, the objections to the relief sought by the reinsurers fall into two categories. First, the question of whether any relief should be granted on discretionary grounds given that, even if declaratory relief was granted, a large number of critical questions would be left unresolved (see [5] above); and secondly, the proposed declarations are, in any event, expressed far too broadly in their current form. It is convenient to deal with these two objections to the proposed relief separately.

C.2 The Issue of Relief Generally and Discretion 50 The IJ dealt with questions as to whether the originating application should be set aside or summarily dismissed on a number of bases, including that the Court on a final hearing could not be satisfied that the questions to be resolved were real and not theoretical. As was noted in the IJ at [100], the reinsurers submitted that there was no "matter" because the making of the declarations would produce no foreseeable consequences, would be divorced from the facts, and hence be hypothetical. Although the argument that relief would be merely advisory (and thus beyond the proper bounds of Chapter III judicial power) is no longer pressed, it is obviously connected to the related discretionary argument as to the utility of the grant of relief. 51 In the IJ at [125]-[164], the Chief Justice dealt, in some detail, with what might be described as the issue of so-called "incomplete adjudication" with his Honour (at [142]): (a) noting that the fact that a declaration might not conclude an entire dispute will hardly ever be a bar on its own; and (b) expressing agreement that the proper approach to the grant of declaratory relief is that as explained by Street CJ in Lohar Corporation Pty Ltd v Dibu Pty Ltd (1976) 1 BPR 97,014. 52 At [165] the Chief Justice noted that he was satisfied, in rejecting summary disposal, that the judge hearing the application for declaratory relief on a final basis could reasonably take the view that there was sufficient utility in making the declarations, as on a construction suit, and that there may be utility in making declarations. 53 I respectfully agree with the Chief Justice's survey of the applicable authorities and the principles to be drawn from them and, at the risk of surplusage, would only make one further point: that is, once it is accepted (as it now is) that it is a legitimate exercise of judicial power to make a declaration, then the discretion as to whether one should be made must (or at least should) be exercised conformably with the case management imperatives identified in Pt VB of Federal Court of Australia Act 1976 (Cth) (Act). Although s 21 of the Act gives the Court the discretionary power to make declarations of right, it is a discretion which should be exercised not only in accordance with the established principles as to the grant of declaratory relief, but also in a way consistent with the facilitation of the just resolution of disputes according to law and as quickly, inexpensively and efficiently as possible. It seems to me that some of the reticence evident in some earlier cases about the grant of declaratory relief on discretionary grounds on the basis of "incomplete adjudication" jar somewhat with the necessity to facilitate the overarching purpose (an objective foreshadowed by the commercial pragmatism evident in Street CJ's approach and reflected in Heydon J's comments in Edwards v Santos Limited [2011] HCA 8; (2011) 242 CLR 421 at 435-436 [37]). 54 I am satisfied that subject to being properly framed, if NAB obtained declaratory relief clarifying the construction issues identified, it would produce foreseeable consequences for the NAB, Nautilus and the reinsurers by allowing them to proceed to consider the balance of the issues relating to indemnity armed with knowledge of the correct legal position in relation to the construction issues identified.

C.3 Form of Relief 55 In Warramunda Village Inc v Pryde [2001] FCA 61; (2001) 105 FCR 437 at 440 [8], the Full Court (Gray, Branson and North JJ) explained: The remedy of a declaration of right is ordinarily granted as final relief in a proceeding. It is intended to state the rights of the parties with respect to a particular matter with precision, and in a binding way. The remedy of a declaration is not an appropriate way of recording in a summary form, conclusions reached by the Court in reasons for judgment. This is even more strongly the case when the conclusion is not one from which any right or liability necessarily flows. (emphasis added) 56 Hence any declaration made must not only be utile (Ainsworth v Criminal Justice Commission (1992) 175 CLR 564 at 582 (Mason CJ, Dawson, Toohey and Gaudron JJ)) but also be precise; a fortiori in the present case where the relief sought is necessarily limited and will not resolve the entire justiciable controversy. 57 Prayer 2 and its cognates have self-evident difficulties. It does not necessarily follow that there is a Loss just because an insured pays pursuant to a settlement agreement: among other things, as GD40 makes clear, Loss does not include payments that are fines, payments for matters uninsurable under Australian law, fees, commissions or other charges due to the insured. Prayer 1 and its equivalents are again expressed very broadly, the definition includes exceptions and, most importantly, the declarations seem to me unnecessary. 58 The omphalos of the construction dispute, as explained at [4] above, is whether, as the reinsurers assert, satisfaction of GD11(b) and GD40(B)(a) require proof of an underlying liability independently of any settlement agreement (amounting to an anterior legally enforceable obligation). 59 In the circumstances, the only declarations that should be made are along the lines of prayer 3, that is (as framed in relation to the Policy), a declaration that on the proper construction of the Policy, it is unnecessary for the purpose of satisfying: (a) the definition of Civil Liability in GD11(b); or (b) the definition of Loss in GD40(B)(a), for the Assured (as defined) to establish that it was legally liable to the third party independently of the legally enforceable obligation to pay arising under the settlement agreement relied on to establish Civil Liability under GD11(b).

D ORDER 60 By 4pm on 23 December 2019, the parties should provide to my Chambers a minute of order providing a form of declaration for each of the three policies along the lines I have indicated. The originating application filed in the proceeding does not seek any order as to costs of the proceeding. Notwithstanding this, I will hear from the parties in writing as to the order for costs for which they contend and determine any dispute as to the proposed orders on the papers. I certify that the preceding sixty (60) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lee.

National Consumer Protection Act 2009(Cth)

Pt VB of Federal Court of Australia Act 1976(Cth)

At a glance

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Judgment (34 paragraphs)

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Legislation Cited (5)

Cases Cited (29)

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