Plaintiff v First Defendant [2019] VSC 645 | Case summary

Evidence Act 2008Plaintiff v First Defendant [2019] VSC 645 | Case summary | Zoe

[392]

(a) the EBITDA made from the Lion business exceeded the EBITDA of the Group as a whole with the result that if the Lion business were taken away and not replaced, there would be very serious profitability issues and probably no profits;

(b) the effect of the notice of termination of the Lion agreement was a three year period during which Lion was required to make purchases of declining volume;

(c) there was a risk that the income from the Lion agreement would disappear in its entirety after three years, and that a willing purchaser would say that there may be a very limited timeframe in which it could generate revenue from this customer;

(d) for any hypothetical buyer of the business, the discovery at the date of acquisition that the primary customer of the business had been systematically overcharged for three years by $11 or $12 million would be a very serious concern;

(e) while he had not considered the fact that the senior executives in the Company involved in the Lion overcharging were staying with the Company after sale, this would have an impact;

(f) another issue resulting from the Lion overcharging was that Lion would be lost as a customer altogether. This would fundamentally change the profile from a renegotiation with a customer who was likely to renegotiate to one where it was unknown whether the customer would renegotiate or just walk away. This was a major additional risk;

(g) the estimate of future maintainable earnings that was relied on was based on the terms that existed prior to the valuation date. The Lion overcharging heightened the risk that the terms that resulted from the overcharging would be worse than the previous terms resulting in lower or nil profit;

(h) the circumstance that Lion had been cheated out of $12 million over three years would shift the negotiation balance of the renegotiation towards Lion;

(i) the prospect of the overcharging becoming known to a broader market and therefore damaging the reputation of the Company, and its ability to deal with new customers, would affect the buyer's perception of risk, despite the fact that the overcharging happened under Mr Esposito, and not under the new owner; and

(j) the reputational risk was a very real risk, and might well attach to the Company rather than the individual, affecting the terms of trade with existing customers who would be concerned about being overcharged and looking to negotiate better terms, and new contracts.

[512]

(a) the underwriters' contention that there is no Loss unless and until all recovery processes against possible third parties are finalised is contrary to the policy, impracticable and lacks commerciality;

(b) clause 3.2 of the policy removes any requirement for the insured to claim against the Seller under the sale agreement before making a policy claim;

(c) the definition of Loss in cl 4 expressly states that an insured is not obliged to seek recovery of amounts from any third party prior to making a claim;

(d) under cl 7.5(a) of the policy, the underwriters are nonetheless required to respond to a claim within 20 business days;

(e) clause 9.5(a) of the policy provides for an insured to reimburse the underwriters in relation to Recovered Amounts 'as soon as practicable' and 'to the extent' not already taken into account in the calculation of 'Loss';

(f) these provisions of the policy show that the underwriters' obligation to indemnify and make payment under the policy is not dependent on the prior recovery or final ascertainment of Recovered Amounts;

(g) the adoption of the underwriters' position would result in the deferral of a response by underwriters for a long and indefinite period, and would defeat the claims determination process and time limits for claims handling set out in the policy;

(h) the commercial context is the purchase of an operating business trading in milk and milk products. The policy was accepted by UDP and the Seller as a cost and timely remedy for breach of the Insured Warranties in the sale agreement. The Court should construe the policy in a sensible and practical way;

(i) the cross-examination of Mr Shepard was concerned with possibilities of recovery. No positive facts were put to him to show that any of his assessments were wrong, or that there might be additional recoveries to those he identified;

(j) given that the size of the overall loss considerably exceeds the limit of liability, there is little possibility that any amount recovered will benefit the underwriters;

(k) the pursuit of recovery of loss from another source is not 'mitigation' in the sense described in Clark v Macourt.[104] Pursuing recovery from the Seller is not about avoiding a loss, it is about recovering a loss; and

(l) the 'duty to mitigate' does not oblige the injured party, even under an indemnity policy, to pursue complicated and difficult litigation against third parties.[105]

[515]

(a) clause 4.1 defines 'Loss' but makes no reference to 'all Recovered Amounts'. It does not require all recoverable amounts to be ascertained, and collected. Quite the contrary, it refers to 'any Recovered Amounts';

(b) there is nothing in the definition of 'Loss' in cl 4.1 that requires all recoveries from third parties to have been finalised before there can be a 'Loss';

(c) clause 4.1 specifically provides that an insured 'is not obliged to seek recovery of any amounts from any third party prior to making a Policy Claim in respect of any Insured Warranty.' This is a clear indication that there is no requirement for an insured to have completed recovery from third parties before making a claim for 'Loss';

(d) clause 3.2(c) of the policy is in equally clear terms providing that an insured is not required to claim for a breach against the Seller under the sale agreement before making a policy claim;

(e) clause 7.5 requires the underwriters to respond to a claim 'as soon as possible' and to accept liability or deny liability giving reasons in writing within specified time limits. There is nothing in cl 7.5 that qualifies the underwriters' obligations to respond 'as soon as practicable' and within the specified time limits, whether or not Recovered Amounts have not been received;

(f) while cl 9.1(a)-(c) of the policy require an insured to 'act at all times as if uninsured' and to 'take all reasonable steps to preserve all rights against any other person in respect of any Loss', and 'not to do anything or omit to do anything which is likely to prejudice the position of the underwriters', there is nothing in cl 9.1 which requires an insured to have actually recovered any or all amounts which may be due to the insured before making a claim; and

(g) clause 9.5 is a reimbursement provision, and is expressed in ambulatory form. It is just as effective after a claim is paid by the underwriters, as it is before. There is nothing in cl 9.5 which requires 'Loss' to be calculated only after all Recovered Amounts are received. Rather, cl 9.5(a)(iii) permits Recovered Amounts received by the insured to be deducted from the amount of Loss, and also provides for the insured to reimburse later Recovered Amounts to the underwriters if not taken into account at the time when Loss was calculated.

[548]

The principle is that the parties to insurance contracts in Australia, unlike most other contracts known to the law, owe each other, in equal reciprocity, an affirmative duty of the utmost good faith. This is so now by s 13 of the [IC Act]. In the context of that section, emphasis must be placed on the word 'utmost'. The exhibition of good faith alone is not sufficient. It must be good faith in its utmost quality.

The resulting duty is one that pervades the dealings of the parties to an insurance contract with each other. In consequence of the [IC Act], and of the reform that it introduced in s 13, the duty of good faith as between insurer and insured now takes on a true quality of mutuality. It governs the conduct of insurers whereas, previously, as a practical matter, the duty of good faith was confined to a duty cast upon insureds because the remedies for proof of the absence of good faith were usually of no real use to the insured.

The duty is more important than a term implied in the insurance contract, giving rise to remedies for a breach, although, by the express provision of s 13, it is certainly that. The duty imposes obligations of a stringent kind in respect of the conduct of insurer and insured with each other, wherever that conduct has legal consequences.

Prompt indemnity decisions ... An insurer cannot agree with its insured in principle to a protocol for handling relevant claims against the insured, tell the insured to act as a 'prudent uninsured' and then allow the processing of such claims (which necessarily had, as it knew, to be dealt with efficiently and fairly) to proceed to successive settlements over nearly two years without indicating one way or the other whether it admitted or denied indemnity. It cannot repeatedly receive large amounts of material from the insured and fail to give relevant and timely responses to that material. It cannot ignore numerous invitations to seek further information if it needed it or to ask for further materials. It cannot leave a frank disclosure of any concerns until nearly eighteen months after notification of the claims and, even then, decline a candid identification of those concerns.[116]

[644]

(a) the assessment whether it is reasonable to withhold payment is made by reference to the true factual position as determined by the Court. The factual position determined by the Court is that UDP had suffered loss exceeding $30 million, and sought payment of $25 million, being the limit of liability under the policy;

(b) the discovery of the Lion overcharges and the misleading accounts provided by the Seller were the underlying basis of the policy claim from the very beginning and at all times;

(c) the underwriters were provided early with a comprehensive expert report and were promptly given the documents they requested;

(d) with the benefit of a comprehensive report and the requested documents, four months is a more than reasonable time for completion of the underwriters' investigation of the claim;

(e) clause 7.5 of the policy provided for the acknowledgement or denial of liability within 20 business days of the receipt of a claim notice, or if more information was needed by the underwriters, within 20 business days of the receipt of the requested information;

(f) the underwriters' duty in cl 7.5 to respond to a claim notice 'as soon as reasonably practicable' supports the view that interest should be awarded from the date when it was reasonably practicable for the underwriters to respond to UDP's claim. This duty is not discharged by requests for more documents;

(g) clause 4.1 of the policy provides that an insured is not obligated to seek recovery of any amounts from any third party prior to making a claim in respect of any Insured Warranty;

(h) the underwriters had specialist legal assistance from an international legal firm and expert loss accounting advice readily available to them;

(i) during the stay application, it was the position of the underwriters and accepted by the Court, that interest was running, and would be payable in respect of the period of the stay assuming that UDP's claim against the underwriters was successful;

(j) while arbitration proceedings were ongoing, there were prospects of recovery against the Seller, this however was not a reason why the underwriters should not have addressed their obligation under the policy to respond to and decide the claim; and

(k) their position in relation to Recovered Amounts was well protected by the policy conditions and in practice by the receivers' acceptance of the need to reimburse the underwriters under the policy if need be.

Plaintiff v First Defendant

At a glance

Court

Decision date

Before

Source

Judgment (795 paragraphs)

Parties

Legislation Cited (6)

Cases Cited (38)