The reasonableness of the settlement between RailCorp and SRA
97 The first point to be addressed is whether it was necessary for RailCorp to establish that it was in fact liable to SRA, that is, that the settlement amount was paid in discharge of an actual liability.
98 In support of its submission that it was necessary for RailCorp to do this, Alpcross (whose submissions on this issue were also for the benefit of Fluor) relied upon the decision of the High Court in Florida Hotels Pty Ltd v Mayo [1965] HCA 26; (1965) 113 CLR 588 where a building owner sought to recover from architects an amount paid by the building owner to an employee. The amount had been paid by way of compromise of a claim made by the employee arising out of an injury suffered by him. The High Court found that the architects had breached their retainer, with the consequence that they were liable to the building owner for loss suffered by it. Barwick CJ (with whom Kitto, Taylor and Menzies JJ agreed) said that "[u]ndoubtedly, it was essential to the success of the [building owner's] cause of action against the [architects] under the [contract] count that its liability to the [worker] should be established as against the [architects]" (at 597). He said also that "[a] judgment by consent, or for that matter, a judgment after a contested trial between the [worker] and the [building owner], would not provide" proof of this liability. His Honour went on to find that the relevant liability had in fact been established.
99 I do not consider that this decision can be regarded as authority for the proposition that a payment made in reasonable settlement of an arguable claim cannot be recovered from a third party tortfeasor or contract breaker without proof that the liability in fact existed, even if usual principles as to remoteness of damage and causation are satisfied. The proposition was not the subject of specific analysis in Florida v Mayo and is contrary to the later decision of the High Court in Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd [1998] HCA 38; (1998) 192 CLR 603.
100 In Unity Insurance, an insured asserted that if its broker had not acted negligently it would have been entitled to a greater sum under its fire insurance policy than the insurer was prepared to accept was payable. The insured claimed from the broker the sum which the insured contended would have been payable under the policy if the negligence had not occurred, less credit for an amount which the insurer had paid pursuant to a settlement entered into between the insured and the insurer. The majority of the Court found that the insured's claim succeeded because the settlement had been shown to be reasonable. Gummow and Kirby JJ, in dissent, did not agree that the insured had discharged its onus of showing that the settlement was reasonable. However none of the Justices suggested that, to succeed, it was insufficient for the insured to prove that it had made a reasonable settlement with the insurer without proving that the insurer was not in fact liable under the insurance for the full amount claimed from it by the insured.
101 It was suggested by Kirby J in Unity Insurance that claims on contractual indemnities might be in a special position ([100]; and see per Gummow J at [59-64]). Giles JA (with the agreement of Sheller JA) expressed the view in this Court in BNP Paribas v Pacific Carriers Ltd [2005] NSWCA 72 that "[a]t least where the insurer has breached the contract by denying liability, the weight of authority in the indemnity cases is that the insured can recover the amount of a reasonable settlement from the insurer … this reasoning is consistent with the reasoning in Unity Insurance Brokers …" (at [187] and see per Handley JA to similar effect at [13]). Whilst the claim in contract made by RailCorp against Fluor is one for indemnity under Clause 10.2 of the Alliance Contract (see [37]), the indemnity in question is not expressed to be one in respect of a "legal liability" (such as the insurance policy in Edwards v Insurance Office of Australia Ltd (1934) 34 SR (NSW) 88) but, relevantly, one as to "damage, expense, loss or liability in respect of loss of or damage to" property such as the SRA train. The former type of indemnity is arguably in a special category because of its express limitation to "legal liability". Where the indemnity extends to loss or damage, the amount to which the indemnity relates may in my view, subject to questions of causation and remoteness, be established by a reasonable settlement made with a third party.
102 Whilst legal liability to a third party is not a necessary condition of recovery from a contract breaker or a tortfeasor of a payment made to the third party, it is a sufficient condition (subject again to questions of causation and remoteness). As I have concluded that RailCorp was in fact liable to SRA, at least for breach of the safe maintenance obligation, and it has not been suggested that the payment made exceeds the loss suffered by SRA, the amount paid is recoverable from Fluor without the need to embark upon any further consideration of the settlement between RailCorp and SRA.
103 If it is going too far to reach an affirmative conclusion that there was a liability of RailCorp to SRA, it must in my view at least be concluded that SRA's prospects of success in a claim against RailCorp based on the safe maintenance obligation in Clause 6.2 of the Access Agreement were high. For the reasons I have given in paragraphs [87-96] above, SRA and RailCorp were entitled to consider, as at 2003, that SRA's prospects were also high in relation to a claim based upon the commission of a "negligent or wrongful act" within the meaning of Clause 11.4(a) of the Access Agreement.
104 This is an entirely different starting point to that of the primary judge who concluded that there was no liability in respect of the maintenance obligation (Judgment [120]) or in respect of Clause 11.4(a) (Judgment [113]). The judge did not give an assessment of the prospects of success of claims on those bases but it is apparent from his conclusions that he assessed them as at least low, perhaps non-existent.
105 In these circumstances, the primary judge's conclusion that the settlement was not a reasonable one cannot stand. It was accepted by the parties that the decision in Unity Insurance required the reasonableness of the settlement to be assessed on an objective basis. So assessed, the settlement was, for the reasons following, in my view a reasonable one.
106 Leaving interest aside, it is apparent that the parties did not make any significant discount for a possibility that SRA might not be entitled to recover its losses from RailCorp. This can be demonstrated by reference to Mr Thomas' table which is set out in [41] above. The amount paid in respect to the first item, material damage to the SRA train, was substantially less than that "claimed", not because of any discount in respect of the prospects of the claim failing, but rather because the lower figure was agreed by the loss assessors to be the true measure of SRA's loss. It is probable that the same is true of the second item, the personal injury payments, although the difference between the amount paid and the amount claimed is in any event not significant in the context of the overall claim. The reason for the third item, that in respect of business interruption, not being the subject of payment can be inferred to be the provisions of Clause 11.5(a)(i) (see [25] above) which expressly exclude liability for "Economic Damage or consequential Losses". The difference between the amount paid and the amount claimed in respect of the fourth item, being various fees, may reflect some doubt about their recoverability but in any event the item is again too small to assume present significance.
107 The remaining item, "Interest (estimated)", is said to be the subject of a claim of $1M with "Nil" being paid. This represents a significant discount of the amount which reasonable people in the position of the parties would have contemplated that SRA would have been likely to obtain if it proceeded to enforce its claim.
108 Fluor submitted that there was in reality no claim made by SRA against RailCorp for interest. It referred in particular to handwritten notes of the meeting of 2 October 2003, taken by someone other than Mr Thomas, (see [47] above) and of a meeting subsequent to the execution of the Heads of Agreement (a meeting of 10 December 2003). Both sets of notes contain the words "interest - no claim". However, in my view these notes indicate no more than that SRA was prepared to settle without pursuing a claim for interest. This also was the effect of what Senior Counsel for RailCorp said when opening his case to the primary judge. The fact that a claim for interest had been in the parties' minds is evident from Mr Thomas' note of the 2 October 2003 meeting (see [47] above) and also the note referred to in [45] above of the meeting of 10 January 2003. Moreover, Mr Thomas' affidavit evidence, which was not challenged in cross examination, was clear in stating that there had been an interest claim of $1M prior to the signature of the Heads of Agreement. Common sense confirms that the question of interest would not have escaped the minds of the relevant officers at SRA in a circumstance where the payments by RailCorp under the settlement were to be made over three years after the derailment. Whilst SRA's expenses to repair its train were presumably incurred some time after the derailment, interest of $1M calculated at the rate of nine or ten percent, as referred to in the meeting notes, is within the range of what might have been expected to be ordered to be paid by way of interest up to the latter part of 2003.
109 In light of the high prospects of success of SRA's claim, agreement by RailCorp to reimburse SRA for what was effectively the whole of the principal amount of SRA's loss, in return for a waiver of a claim to interest, in my view constituted a reasonable settlement.
110 Considerable emphasis was placed by Fluor in its submissions on the limited evidence which was led by RailCorp as to the steps leading up to settlement and as to the absence of evidence of legal advice received by RailCorp. In cases where there is real doubt as to whether the plaintiff was liable to the third party, such evidence will usually be of considerable importance in assisting an objective assessment of the reasonableness of a settlement. However, in a case such as the present where, on my conclusions, the third party's prospects of success were high and some discount, albeit limited to interest, was given by the third party, a conclusion that the settlement was reasonable can readily be arrived at without the assistance of evidence of that type.