REINSURANCE v ODYSSEY

• 1 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

No 3016 of 2000 REINSURANCE AUSTRALIA CORPORATION LIMITED v ODYSSEY RE (BERMUDA) LIMITED (COMPANY NO 16193)

JUDGMENT 1 MASTER: This is an application under section 459G of the Corporations Law to set aside a statutory demand dated 9 June 2000 claiming US$4,144.628.41 from the plaintiff by the defendant. I will deal with some of the factual background so that the argument and the parties' stance in the matter can be understood. 2 The plaintiff is a listed Australian based reinsurance company with net assets said to be in the order of some $42 million. Since February 2000 the plaintiff has been in what is described as "run off". This means that it has written no new business since that time and is presently involved in the process of paying out its liabilities under its existing reinsurance contracts which process includes discussions with various companies for a commutation of the plaintiff's liability in respect of existing reinsurance contracts. The plaintiff says that after this process is complete it will be paying a substantial dividend to shareholders. The defendant puts a somewhat different view of the reasons for the run off process. 3 The defendant company is a reinsurance company within the Fairfax Group of insurers. That group has reinsured various of its risks with the plaintiff. One of the risks placed with the plaintiff was a US$10 million reinsurance policy covering three years from 1 January 1998. The plaintiff's share of the liability under the policy was some 50 percent. The policy was placed on behalf of a number of companies including the defendant. 4 Initially a claim estimate was made by the defendant under the relevant policy of reinsurance which was in respect of the Sydney hail storm and a European storm. On 29 March 2000 the defendant changed its demand to one in respect of the Turkish earthquake. That was an earthquake which occurred on 17 August 1999 and the epicentre of the earthquake was near Izmit on the Asian shore of the sea of Marmara. The earthquake caused considerable loss of life and property damage. Between April and 12June 2000 when the statutory demand was served both the commutation issue and the claim in respect of the Turkish earthquake were being considered and discussed between the plaintiff and the defendant. According to the plaintiff the first date on which the defendant intimated that its claim in respect of the Turkish earthquake might be pursued independently of commutation was 19 April 2000. There is a dispute between the parties on this aspect. 5 From at least 18 May 2000 and on a number of occasions thereafter, the plaintiff has demanded that the defendant permit the plaintiff to inspect the defendant's records pursuant to an access of records clause in the policy of insurance. This was to enable the plaintiff to consider its position in the commutation process and arguably to assess its liability in respect of the demand that had been made on 29 March 2000 by the defendant's broker Aon Group Limited. That request was refused by the defendant who required that its claim be paid before access would be granted. 6 The documentation in respect of the contract of reinsurance only consists of the original signed slip in December 1997. The full policy wording has not been agreed although one was offered by the defendant's broker on 19 April 2000. Although I will return to the terms of the policy in more detail it is clear that the policy even in its abbreviated form included:-

(c) proper law and jurisdiction governing the reinsurance (including arbitration tribunals) shall be English law. 7 Following upon the refusal of inspection the plaintiff, as it was entitled to do, commenced the first set of arbitration proceedings in England which raised the question of the defendant's refusal to allow an inspection. At about the same time the demand was served on 12 June 2000. The defendant ultimately conceded that inspection should be permitted and this was allowed on 28 June 2000. An inspection was carried out by Mr Norrington for the plaintiff between 10 and 17 July 2000. That inspection allowed the identification by the plaintiff of three alleged grounds upon which it said the debt was disputed. The first of these was that the Turkish earthquake occurred in Europe such that the US$5 billion global market condition was not triggered and liability did not occur under the policy. The second was that under the ultimate net loss clause, deductibles under other reinsurance policies should be credited against the claim, bringing the claim to zero. The third concerned the proper treatment of reinstatement premium and no claim bonuses. On 13 September 2000 the plaintiff commenced a London arbitration to resolve the disputes. Both parties have appointed arbitrators and a third arbitrator will be appointed to complete the panel. 8 A recounting of the above facts makes it clear that a number of the grounds sought to be advanced in respect of the matter have been discovered after the issue of the demand. In response to the issue of the demand the proceedings were filed on 30 June 2000 within time and there was also filed a very detailed affidavit of Mr M. Moyes sworn on the same date. Mr Moyes was the General Manager of the plaintiff company. Following the inspection by Mr Norrington which it will be seen was after Mr Moyes' affidavit of 30 June 2000, the plaintiff has filed further affidavits in support of the grounds identified as a result of the inspection. It is thus necessary to determine whether these affidavits which are filed outside the statutory period may be used for the purpose of the plaintiff's present application. Mr Moyes in his initial affidavit identified the lack of access as a reason why the demands were disputed. 9 Before dealing with this aspect it might be useful to look at the grounds which emerged from Mr Moyes' first affidavit to see if those might be determinative of the matter. 10 The points raised in Mr Moyes' first affidavit or alternatively as matters of law arising on the facts disclosed in that affidavit are as follows:-

1. The amount claimed in the demand is not a debt within the meaning of that expression in s 459 E of the Corporations Law. It is submitted that the amount of the claim is for unliquidated damages for breach of the promise to indemnify under the insurance policy.

2. The refusal to allow inspection amounted to a breach of contract and that such a breach led to the inference that there was a genuine dispute as to the existence of the debt.

3. There is some other reason why the court, under s 459J, as a matter of discretion, should set aside the statutory demand. The reasons advanced are:- (a) the defendant issued the statutory demand in breach of its contract in two respects. (i) the defendant had promised that the only courts with jurisdiction in the matter would be English Courts; (ii) the defendant had promised that all disputes on differences should be determined by arbitration In London applying English law; and that the issue of the demand in these circumstances amount to an abuse of the process of the court. (b) the defendant used the threat of the demand to progress its interests in the commutation discussions which had been proceeding up until that time. (c) There is a defect in the demand rendering it liable to be set aside under s 459(3)(a) by reason of the fact that no debt had has fallen due for payment. (d) There is a defect in the affidavit in support of the statutory demand rendering it liable to be set aside under s 459 (J)(b) as it was misleading and failed to comply with the rules. (e) By virtue of the provisions of s 7 of the International Arbitration Act 1974 the proceedings should be stayed. 11 In the event that the above matters do not dispose of the proceedings, it will be necessary to move to the next aspect. This will require determination of whether the grounds disclosed in the affidavits filed after the 21 day period can be considered. The grounds are:- (a) by reason of the location of the Turkish earthquake loss being in Europe rather than Asia, no obligation to pay under article 16 arises; (b) alternatively, the quantum of the claim of the defendant under the contract has been wrongly calculated by reason of the failure of the defendant to credit deductibles under other reinsurance policies against the claim pursuant to the ultimate net clause in the contract; (c) there has been an improper treatment of the reinstatement premium and no claim bonuses. 12 In respect of (b) and (c) above there is no doubt that these grounds were only known to the plaintiff after inspection. In respect of (a) the plaintiff was well aware of the ground before the issue of the demand and did not include it in the initial affidavit in support of the application to set aside the demand. Notwithstanding that different items of evidence became available after inspection, the ground could have been raised in the first affidavit. 13 I turn to the terms of the relevant policy. The December 1997 note set out the terms although not the full details of the wording. The territorial scope of the policy was set out in two sections. Section A included Europe and Japan and section B included the rest of the world excluding the U.S.A. (50 States). It was for a period of 36 months commencing 1 January 1998 and provided for an excess of US$250,000. The policy was for a further US$10,000,000. There was a condition that the policy would only be triggered in the event of there being an estimated original insured market loss resulting from a natural peril equal to or greater than US$5,000,000,000 in respect of losses occurring within section A of the territorial scope or US$1,000,000,000 in respect of losses occurring within section B. It seems fairly clear, and the parties are not in dispute, that the relevant trigger would have occurred if the loss was in section B, namely, the rest of the world but not if it was in section A, namely, Europe and Japan. The policy included a number of conditions. Some of the relevant ones are as follows:-

1. Ultimate Nett Loss Clause (amended to provide for " a Quota Share and/or Surplus Reinsurers, if applicable and also amended to allow the reinsured to have the benefit of underlying recoveries on other excess of loss contracts).

3. Proper Law and Jurisdiction governing this reinsurance (including Arbitration Tribunals) shall be English Law.

5. Offset Clause - reinsured has the option to offset any recovery hereunder against any amounts due by the reinsured to reinsurers on any other contracts.

6. Access of Records Clause. 14 As I have recorded the final wording of the policy has not been agreed between the parties. The terms of the wording were submitted by the defendant's brokers and they are put forward by the defendant in these proceedings as the appropriate terms. Although not accepting them, the plaintiff argues the case on the basis of the terms as put forward by the defendant. 15 The relevant parts of the proffered agreement so far as they touch upon the arguments before me are as follows:-

Article 1 Insuring Clause "The Reinsurers hereby agree to indemnify the Reinsured for that part of their Ultimate Nett Loss which exceeds USD250,000 or equivalent in other currencies on account of each and every loss occurrence but not exceeding USD10,000,000 or equivalent in other currencies Ultimate Nett Loss on account of each and every loss occurrence (subject to the provisions of Article 12 (Reinstatement).

Article 3 Territorial This Agreement shall apply to losses occurring as follows:- SECTION A - Europe and Japan. SECTION B - Rest of the World excluding United States of America (50 States).

Article 5 Ultimate Nett Loss The term "Ultimate Nett Loss" shall mean the sum actually paid by the Reinsured in settlement of losses or liability after making deductions for all recoveries, all salvages and all claims upon other reinsurances, whether collected or not, and shall include all costs and adjustment expenses arising from the settlement of claims other than the salaries of employees and the office expenses of the Reinsured. All salvages, recoveries or payments recovered or received subsequent to a loss settlement under this Agreement shall be applied as if recovered or received prior to the aforesaid settlement and all necessary adjustments shall be made by the parties hereto. Provided always that nothing in this clause shall be construed to mean that losses under this Agreement are not recoverable until the Reinsured's Ultimate Nett Loss has been ascertained. …. Article 9 Warranties It is hereby warranted as follows: (1) No loss shall attach hereunder unless the Reinsured sustain loss from two or more original risks involved in the same loss event. The Reinsured shall be the sole judge as to what constitutes a risk. (2) It is a condition that this Agreement shall pay only in the event of their being an estimated Original Insured Market Loss resulting froth a Natural Peril equal to or greater than USD5,000,000,000 in respect of losses occurring with Section A of the Territorial Scope or equivalent in other currencies using the Rates of Exchange (mean) ruling in London at the date of loss and USD1,000,000.000 in respect of losses occurring within Section B of Territorial Scope or equivalent in other currencies using the Rates of Exchange (mean) ruling in London at the date of loss. If on the aforesaid dates such rates are not obtainable, the rates for the previous day for which such rates are published shall be taken. In establishing the total amount of the Original Insured Market Loss, Reinsurers hereon shall accept the figure as published by SIGMA (a publication of the Swiss Reinsurance Corporation). In the event of a market loss which solely affects the U.S. Virgin Islands and/or Puerto Rico, Reinsurers shall accept the figure as published by Property Claims Service. Provisional settlement hereon when the loss is first estimated by SIGMA and/or Property Claims Service. Final evaluation of the loss shall be the figure published in the 1999, 2000, 2001 or 2002 year applicable Handbook/Publication, whichever being relevant, but not later than within 24 months of the expiry of this Agreement. If the estimate for the loss occurrence is subsequently revised to below USD5,000,000,000 in respect of losses occurring with Section A of the Territorial Scope or USD1,000,000,000 in respect of losses occurring within Section B of Territorial Scope then the Reinsurers shall be entitled to a return of funds paid by virtue of the original estimate being in excess of USD5,000,000,000 in respect of Section A of Territorial Scope and USD 1,000,000,000 in respect of Section B of Territorial Scope Loss date to be commencing date shown in SIGMA and/or Property Claims Service. In the event that the loss information is not available from SIGMA and/or Property Claims Service an alternative source will be used (such alternative to be an Insurance Publication, if available) subject to the agreement of the Reinsurers and Reinsured, or in the event of a lack of agreement, will be referred to a court of arbitration, but not before 12 months from the date of Original Loss.

Article 16 Loss Settlement All loss settlements made by the Reinsured provided the same are within the terms of the original policies and/or contracts or as provided in Article 7 (Extra Contractual Obligations Clause) and within the terms of the Agreement, shall be binding upon the Reinsurers and amounts falling to the share of the Reinsurers shall be payable by them upon reasonable evidence of the amount paid being given by the Reinsured.

Article 18 Access to Records Clause The Reinsurers may by a duly appointed representative inspect, at any reasonable time at the head office of the Reinsured, or at the place where they may be kept, any records or documents which relate to business covered under this Agreement, provided always that the Reinsurers shall have given to the Reinsured not less than forty eight (48) hours prior notice of their intentions so to do. It is agreed that the Reinsurers' right of inspection shall continue as long as either party remains under any liability arising out of this Agreement.

Article 22 Arias Arbitration Clause All disputes and differences arising under or in connection with this Agreement shall be referred to arbitration under Arias Arbitration Rules. …….. The seat of arbitration shall be London. The proper law of this Agreement shall be the law of England.

Article 23 Proper Law and Jurisdiction This agreement shall be governed by and construed in accordance with English Law under the jurisdiction of the English Courts. The Arbitration Tribunal shall also be English Law and Jurisdiction.

Whether the amount claimed in the demand is a debt within the meaning of that expression in s 459E of the Corporations Law. 16 This question involves a consideration of the meaning of the word "debt" when used in s 459E and also a consideration of the relationship between the parties assuming there had been a refusal to meet the claim pursuant to clause 16 under the policy of insurance. 17 The plaintiff suggests that prior to there being an arbitrator's award in favour of the defendant, after refusal to pay under the policy, that there is no debt. The principal case upon which they rely is the decision of Penrith City Council v GIO (1991) 24 NSWLR 564. That was a limitation case in which Giles J, as he then was, had to consider the time at which the cause of action accrued under the policy. In the course of doing so His Honour referred to the policy which closely followed the insuring clause in the present Article 1. At page 568 His Honour said the following:- "There is a fundamental flaw in these submissions. It is not in question that the plaintiff was entitled to indemnity when the Mitora claim was made against it, or when it gave notice of the claim to the defendant, in the sense that it was then entitled to the benefit of the defendant's promise to indemnify it against the claim. But the plaintiff's cause of action was for unliquidated damages for breach of contract: see Luckie v Bushby (1853) 13 CB 864; 138 ER 1443; E Pellas & Co v Neptune Marine Insurance Co (1879) 5 CPD 34; William Pickersgill & Sons Ltd v London and Provincial Marine and General Assurance Co Ltd [1912] 3 KB 614 at 622; Chandris v Argo Insurance Co Ltd [1963] 2 Lloyd's Rep 65 at 74 and Reynolds v Phoenix Assurance Co Ltd [1978] 2 Lloyd's Rep 440 at 462. It had to establish a contract (the policy) by which the defendant promised to do something (indemnify it against Mitora's claim), and breach of that contract (failure to indemnify it against Mitora's claim). It could then recover the loss suffered as a consequence of that breach. The plaintiff's cause of action accrued upon breach. Thus it must be asked what the defendant was required to do in performance of its promise, and when it failed to do what was required of it. Only when the defendant failed to do what was required of it could a cause of action for damages for breach of contract accrue to the plaintiff. There was no cause of action simply because Mitora made its claim or the claim was notified to the defendant - the defendant could have thereafter fully performed its promise." 18 The last two cases to which His Honour refers in the above quote also clearly support the view in English law that a policy of insurance is only a promise of indemnity giving a right of action for unliquidated damages in case of non payment. It is, of course, important in this case that English law so provides because the parties have, by the terms of their contract, provided for the proper law to be English law. 19 The courts have frequently referred to the expression "debt or liquidated demand" as it has played an important part in the nature of proceedings since the middle of the last Century. In Alexander v Ajax Insurance Co Ltd (1956) VLR 436 His Honour Mr Justice Sholl had to consider whether a claim for indemnity by an insured person fell within the meaning of that expression. His Honour reviewed extensively cases involving claims upon insurance policies and ultimately concluded that a claim for indemnity against a total loss of goods by an insured person under an insurance policy is not a liquidated demand when the policy is not a "valued" policy. Although it is of assistance it is important to realise that in dealing with section 459E we are concerned simply with the word, "debt" not the expression "debt or liquidated demand". 20 There have been a number of cases that deal with the word "debt" in the context of demands under the Corporations Law and its predecessors. The first of these is Rothwells Ltd v Nommack (No 100) Pty Ltd (1988) 6 ACLC 1 199. That was a decision of McPherson J of the Supreme Court of Queensland who was considering a notice under s 364 of the Companies (Queensland) Code. That provision required that there must be a "creditor to whom the company is indebted in a sum exceeding $1,000 then due…" His Honour took the word "indebted" to be referring to a debt being a liquidated sum in money presently due owing and payable by one person called the debtor to another person called the creditor. After dealing with some of the facts His Honour went on deal with what was a debt at common law such as would support an action in debt or indebitatis assumpsit. He indicated that there were three ways in which a debt could arise. They were:- 1. By judgment; 2. By deed under seal; and 3. As the quid pro quo for a consideration that was executed. 21 The factual circumstances related to a promise to pay a sum to a third party. His Honour found in the circumstances that the arrangements did not give rise to a debt which he saw as importantly different from a claim for breach of contract. 22 The next case is First Line Distribution Pty Ltd v Paul Whiley & Ors (1995) 13 ACLC 1216. This was a decision of Cohen J of the Supreme Court of New South Wales and was concerned with a contract which gave a right to distribute and sell the company's products. Money was paid to the company for the right to distribute and under the contracts goods were delivered to the defendants. For a while they were paid for but the company was unable to continue to supply the goods. The statutory demand, under the present Corporations Law, claimed that the monies that had been paid for the right to distribute the company's products were now debts owing to the defendants. His Honour referred to the fact that contingent or respective liabilities may not be the subject of the demand. He pointed out that the defendant would be entitled to claim damages for breach of the agreement. His Honour went on to say: "However, as none of the defendants have brought an action for damages there is no judgment debt against the company, the company's claim is, and was at the time the demand was served, merely one for unliquidated damages. The amount of damages has not been ascertained and the company does not owe a debt to any of the defendants until then." 23 In the present case, Article 1 provides that the reinsurers agree to indemnify the reinsured for part of their ultimate net loss. It is clear that Article 1 is a contract of indemnity and that which is indemnified against is "the ultimate net loss". That expression is defined in Article 5. It is clear that there are many different items which have to be taken into account when determining the ultimate net loss. It seems to me, therefore, that consistent with the authorities I have referred to that the defendant has a right to damages for a breach of the contract of indemnity. That can be enforced under the terms of this particular policy by an appropriate arbitration which in due course will lead to an award and ultimately a judgment debt for the purposes of enforcement. None of those circumstances has occurred. I am satisfied that the claim is not for a debt. There is no quid pro quo merely by the entry into the contract for reinsurance. Accordingly, it would seem that there is a genuine dispute in respect of the amount of the debt claimed in the demand. See First Line Distribution at 1219 or, alternatively, there is some other reason why s 459J 1(b) of the demand should be set aside. See NT Resorts Pty Ltd v Deputy Commissioner of Taxation (1998) 38 ATR 425 at 432. Accordingly, I propose to set aside the demand. 24 I will now turn to look at some of the other grounds advanced.

Whether the refusal to allow inspection amounted to a breach of contract leading to an inference that there was a genuine dispute as to the existence of the debt. 25 Article 16 of the policy provides that loss settlements made by the reinsured are binding upon the reinsurers and that all that is necessary to make a claim is to present reasonable evidence of the amount having been paid to the reinsurer. There are two conditions to which that obligation is subject. One is that the settlements are within the terms of the original policies. Secondly that they are within the terms of the policy of reinsurance. The reinsurer is not normally privy to the details of the loss claims. Indeed these are matters which are peculiarly within the knowledge of the reinsured. For this reason, absent an access to records clause, the reinsurer has no means of knowing whether the conditions are fulfilled. Plainly the purpose of the access to records clause as set out in Article 18 is to provide protection for the reinsurer in these circumstances. Such a view of the operation of a similar policy was adopted by His Honour Mr Justice Hoffman in Re a Company ex parte Pritchard (1992) 1 Re LR 288. There His Honour was concerned with a situation extraordinarily similar to the present matter before me. There had been claims on policies of reinsurance, non payment and then the reinsurers sought access pursuant to an access to records clause. This was denied on the basis that as there were claims unpaid no inspection would be allowed until payment had been received. In due course a petition was presented to wind up the company. That petition was opposed on the basis that it was an abuse of process because the indebtedness was bona fide disputed on substantial grounds. His Honour referred to the submission that the obligation to pay and the obligation to give access were concurrent obligations and that, therefore, a company had no right to refuse to make a payment until it had exercised the right to inspect. His Honour went on to say:- "This may be true at the point when no request to inspect has been made and refused. But I think that the situation is different if inspection has not allowed. That is, in my judgment, sufficient given the particular terms of the reinsurance treaty to raise the inference that there is a dispute on substantial grounds. Just as a refusal to pay an indisputable debt gives rise to an inference that the company cannot pay and is therefore insolvent so it seems to me that a refusal to allow an inspection to which the company is plainly entitled gives rise to a inference that there are matters in the possession of the syndicates which would justify non payment by the company. It would, in my view, be unfair to allow the syndicates to enforce their claim by a winding up petition when they have flatly refused to allow any inspection at all." 26 It is submitted that, in the circumstances, of this case which is on all fours with the case I have just referred to, that I should infer that by reason of the refusal of the right to inspect there is a genuine dispute as to the existence of the debt. In order to consider this it is necessary to refer in a little more detail to the facts. I have already set out a number of the background facts relating to this matter. I will now look at them in a little more detail. 27 On 25 January 2000 the plaintiff created a case reserve of $5 million on the relevant policy of insurance. At that time it had been notified of a possible claim 28 The purpose of creating a reserve was to provide against any claim which might be made under the policy. It was clearly not an admission of liability. 29 The commutation process started in late February. The intent of the parties was that the process would take two to four weeks in total. It was a two stage process: first all of the relevant contracts of insurance were to be agreed, and then the commutation number was to be negotiated. 30 The draft list of contracts was provided by De Maria on 9 March. Mr De Maria was a senior executive with Riverstone Reininsurance Services Ltd, a company retained by the Fairfax Group to represent it in the commutation process. The plaintiff's response was made on 12 April. De Maria replied on 18 April. Thus it had taken two months to get close to the end of stage one of the commutation. The reason for the delay was the complexity in identifying the various companies and contracts in the Fairfax Group. 31 On or about 29 March 2000, the defendant changed its demand to one in respect of the Turkish earthquake. This was the first such advice. Mr Smith, an officer of the plaintiff handling the claim, who reported to Mr Moyes, raised a query to AON, the insurance brokers, on 3 April as to whether the loss was in Europe. 32 The response of AON of 3 April was to proffer the Sigma catastrophe list to verify both location of loss and quantum of loss. Under the contract, however, Sigma did not have an agreed role to verify location of loss. 33 There was consideration within the plaintiff, below the level of Mr Moyes, the General Manager, of various arguments as to whether the place of the loss was in Europe for the purpose of the policy. Eventually these arguments were rejected by Smith, Wareburn (the current but not the relevant Underwriter) and certain other unidentified persons. 34 Mr Moyes learnt of these views in an email from Smith of 4 April. He did not hold the same view. He always considered that it was arguable that the place of the loss was in Europe for the purpose of the policy but not necessarily for the reasons given in the email. 35 Moyes did not respond on this point immediately to AON and the matter continued to be handled on the part of the plaintiff by Mr Smith. 36 On 14 April 2000 Smith sent a request to AON for a bordereau. A response came in on 17 April. Mr Moyes thought it was an inadequate response. He did not immediately respond. 37 On 18 April Mr Smith sent a fax to AON asking what discount their client would accept. Thereafter Mr Smith appears to have taken no further part in the matter. Given the terms of the correspondence and the evidence of usual practice, it seems clear that by this time that the reinsured had provided "reasonable evidence of the amount paid" under Article 16. The liability to pay had thus arisen. 38 The commutation proposal was received by Mr Moyes on 16 May 2000. It was for $91 million and the amount was a great shock to him. 39 On 15, 16 and 18 May 2000, REAC requested inspection of records relating to three companies within the Fairfax Group, one of which was Sphere Drake/Odyssey of Bermuda. The latter group included the contract the subject of the Turkish claim. One of the stated purposes of the inspection was to validate the amounts presented to the plaintiff for settlement. Mr Moyes stated that it was illogical to have to pay the claims first and then carry out the inspections. This was clearly a reference to the claims which had been made, including the Turkish claim. He was responding to the position taken by Riverstone in the commutation discussions that inspection would not be allowed until all payments were made. 40 On 26 May 2000 the plaintiff made a further request for inspection of records. In particular Mr Moyes referred to the very large claim which had been submitted for the Turkish earthquake. He stated it had no way of verifying the claim without carrying out the inspection. 41 There have been a number of conversations between the relevant parties to the commutation discussions. The first one was between Mr De Maria and Mr Moyes on 15 May which it will be recalled was the day before the receipt of the commutation proposal which so surprised Mr Moyes when it was received by him. He says that Mr Moyes said that they would not pay US$14.6 million in the balances due outside a commutation because of the plaintiff's serious financial condition. Mr Moyes denies that account but concedes that he would have said he would not be paying any claims until a commutation proposal had been submitted and agreed to by the plaintiff. Mr De Maria had some notes of the conversation and his reconstruction in the affidavit of the conversation tends not to follow the order of matters appearing in his notes. He had difficulty recalling it in the witness box without reference to his affidavit. Given the fact that the large commutation proposal had not been received, I think it unlikely that Mr Moyes would have responded as alleged by Mr De Maria. I accept that certainly Mr Moyes would have said that they would not be paying any claims until a commutation proposal had been submitted to and agreed by the plaintiff. 42 The next conversation took place on either 17 or 18 May and it was between Mr Vines, Mr Lee and Moyes of the plaintiff and Mr Becker Jones, Mr Gibbs and Mr De Maria from Riverstone. The position taken by the plaintiff before they discussed the proposal any further was that they wanted to carry out an audit of records as they were entitled to do. This conversation seems to traverse the positions of both parties and during the course of it Mr De Maria asked if there was an inspection and legitimate problems were not identified whether the claims would be paid. Apparently, Mr Vines, according to him, said that they could not answer such a hypothetical question but in the end it would depend upon their financial condition at that point in time. According to Mr Moyes the question of financial condition was not mentioned but the position simply taken that they would not be able to determine the position until the audit had been completed. It would seem that the answer is somewhere between the two versions. Mr De Maria's file note referred to Mr Vines saying that he would need to know the result of the audit and the financial condition in order to be able to respond. I will accept that that was said in the conversation. 43 The next relevant conversation is the 26 May between Mr Moyes and Mr Becker Jones of Riverstone. Mr Becker Jones seems to have accepted Mr Moyes' version. In cross examination it is clear the parties were talking about what they thought the real position was in commutation discussions. Mr Moyes was suggesting that his real figure was $22 million and Mr Becker Jones a figure of $40 million to $50 million. According to Mr Moyes he concluded by saying that they still wanted to inspect all documents. The letter of 26 May to Mr De Maria from Mr Moyes of 26 May made it perfectly plain, albeit in the context of the commutation discussions, that they wished to inspect the policies. In particular reference was made to two very large claims, one of which was the Turkish earthquake. The plaintiff's position was clearly put that they needed those claims to be verified and suggested that there were some inconsistencies in the documentation. The letter then went on to deal with inspection generally in respect of the whole commutation proposal. 44 The position that had been reached by 26 May would appear from the cross examination to be as follows:-

1. The plaintiff was requesting inspection of the records including those in respect of the subject claim in respect of Turkey. Officers of the defendants, or their representatives Mr Becker Jones and Mr De Maria, understood the request as such. However, they took the position that the plaintiff must pay the outstanding claims before they would be allowed to inspect. The plaintiff for its part took the position that it would not pay until it was allowed inspection. The matter continued on for about ten days or more after 26 May and ultimately on 12 June the statutory demand was issued. The precise detail of what occurred in this period is not relevant to the present matter that I have to determine, namely, whether I should infer that there was a genuine dispute arising from the refusal for inspection. 45 If one stand back and looks at the situation from a distance, one has the claim being handled by Mr Smith, on behalf of the plaintiff, outside the commutation discussions. By the end of April that had gone as far as it could at his level and nothing further was done by the plaintiff who refused to meet that claim. During May the commutation proposals advanced to the extent that there was a very substantial claim made for the commutation sum and the plaintiff took the position that it wished to verify the claim before making payment. Very clear requests were made for inspection of the records for verification of the claims and these were so understood by the relevant agents of the defendant. However, the inspection was refused. In the context of the somewhat short time frame involved and the commutation discussions it is difficult to see that there was any intention or refusal to delay payment of the claims. This period is in marked contrast to the case Mr Justice Hoffman was dealing with where there was a lengthy delay of about a year in the process to which I have referred. 46 The defendant submitted that the dispute which concerned the refusal for access was not a dispute in relation to the debt. It suggested that the matter should simply be looked at in the terms of the two concurrent obligations which arose from clauses 16 and 18. It characterised the dispute as one in relation to access which had nothing whatsoever to do with the debt which admittedly had become due under paragraph 16. To my mind that over simplifies the situation and it is perfectly apparent that the parties were locked in a dispute which concerned the debt. Under clause 16 there were two conditions which were the foundation of the liability which was due and payable. The only means of checking was by inspection. That was something which the plaintiff genuinely wished to do. Given the history and the short time span between the submission of the claims, it seems to me one should not infer that the request for inspection was not genuine. The request became particularly important when the commutation proposal arrived suggesting that there was a large liability, including claims that had not been notified. Meeting the claims without checking would appear to be somewhat bold on the part of the officers of the plaintiff. 47 In these circumstances, I am satisfied that I should infer, as did Mr Justice Hoffman, that there was a genuine dispute in respect of the debt. Accordingly, on this ground I would also set aside the statutory demand. 48 I turn to the next argument to set aside the statutory demand under s 459J, namely, (a) the defendant issued the statutory demand in breach of its contract in two respects.

(i) the defendant had promised that the only courts with jurisdiction in the matter would be English Courts;

(ii) the defendant had promised that all disputes on differences should be determined by arbitration In London applying English law;

and that the issue of the demand in these circumstances amount to an abuse of the process of the court.

49 There is no doubt that a court had the power to grant a injunction to restrain a party from invoking a jurisdiction which he had promised not to invoke whether by way of breach of an arbitration clause or in breach of an exclusive jurisdiction clause. See generally, CSR Limited v CIGNA Insurance Australia Limited (1996-7) 189 CLR 345 at 392 and Aggeliki Charis Compania Maritima SA v Pagnan SpA (The Angelic Grace) (1995) 1 Lloyd's Rep 87 at 96. It is also clear that in the context of the English Arbitration Act 1996 that there is a dispute whenever a claim is made by one party against another which has not been admitted. The existence of such a dispute activates the arbitration clause. In the present proceedings, however, it was the defendant who commenced the proceedings. The defendant was the company which took advantage of a statutory right to issue a demand under s 459E of the Corporations Law. The plaintiff has submitted that the defendant has caused the proceedings to be commenced and that this is an abuse of the process of the court which should lead to the setting aside of the demand. Reference was made in submissions to the draconian effect of the issue of the demand and that is undoubted. The plaintiff has effectively three options. It could make an application to set it aside, it could pay the demand or it could refuse. On refusal it could argue its solvency at the winding up hearing. 50 The statutory demand procedure is one which is merely part of the process of winding up an insolvent company. It would seem strange that such a process could be circumvented by the terms of the contract between the parties. If a dispute is raised about matters under the contract either at the stage of setting aside the statutory demand or at the stage of hearing an application under 459S in the liquidation proceedings it will not be the company issuing the demand or commencing the proceedings who raises the dispute. In any event the court concerned with either process will not be concerned to determine such dispute but merely to ascertain that a genuine dispute exists. There is thus no attempt to determine a dispute or difference under the agreement. Accordingly, on this ground I would not set aside the statutory demand.

(d) There is a defect in the affidavit in support of the statutory demand rendering it liable to be set aside under s 459 (J)(b) as it was misleading and failed to comply with the rules. 51 The four grounds relied upon are:-

1. The affidavit does not set out the basis of Mr Harris' assertion that he is authorised by the creditor to make the affidavit.

2. Mr Harris failed to state in the affidavit that since 17 May the defendant had been refusing to allow the plaintiff to exercise its contractual right to inspect.

3. The omission rendered incomplete or misleading the assertion in the affidavit that there was no genuine dispute.

4. The affidavit failed to disclose that the full policy wording had not been agreed between the parties. 52 The affidavit was made by Mr Harris, director of the relevant company. He states in his affidavit that he is authorised by the creditor to make the affidavit on its behalf. This is precise compliance with the provisions of Rule 5.2 of the Corporations Law rules and no further evidence is required. 53 Mr Harris' affidavit clearly set out the basis of the claim for the debt. However, it did not refer to the contractual dispute about inspection that has arisen. That of itself is not a defect in the affidavit which might lead the statutory demand to be set aside. Likewise the affidavit did not disclose that the full policy wording had not been agreed. That also may have made the affidavit misleading but the fact that the affidavit is misleading by omission does not mean that the affidavit does not comply with the rules and thus is liable to be set aside. The affidavit does contain the relevant statement that the deponent believes that there is no genuine dispute about the existence or amount of the debt. No doubt such statements may have made upon advice. In the circumstances it seems to me that there are no defects in the affidavit in the sense of non-compliance with the rules of court. In these circumstances this is not a ground to set aside the demand.

(e) By virtue of the provisions of s 7 of the International Arbitration Act 1974 the proceedings should be stayed. 54 This submission was made after the close of the hearing and is based upon the provisions of the International Arbitration Act 1974 of the Commonwealth. The United Kingdom is a convention country for the purposes of s 7(1) and, given the exclusive jurisdiction in the arbitration provisions, s 7 is applicable. That section provides relevantly "(1) Where: (a) the procedure in relation to arbitration under an arbitration agreement is governed, whether by virtue of the express terms of the agreement or otherwise, by the law of a Convention country; ……. this section applies to the agreement. (2) Subject to this Part, where: (a) proceedings instituted by a party to an arbitration agreement to which this section applies against another party to the agreement are pending in a court, and (b) the proceedings involve the determination of a matter that, in pursuance of the agreement, is capable of settlement by arbitration; on the application of a party to the agreement, the court shall, by order, upon such conditions (if any) as it thinks fit, stay the proceedings or so much of the proceedings as involves the determination of that matter, as the case may be, and refer the parties to arbitration in respect of that matter." 55 It is apparent from this section that a stay must be granted if the relevant conditions are met. See Flakt (Aust) Ltd v Wilkins and Davies Construction Co Ltd (1979) 2 NSWLR 243 at 245. However, the section will only apply to proceedings involving a determination of a matter that in pursuance of the agreement is capable of settlement by arbitration. The determination to be made in these proceedings is whether the statutory demand should be set aside. That is not capable of settlement by arbitration. The present proceedings are statutory ones. The court has, as part of its decision making process, to determine whether there is a genuine dispute. It must do so. It is notable that there is no part of the proceedings that could be separately stayed as is contemplated by clause 7(2). In these circumstances even though I have not had the opportunity of submissions on this point by the defendants there is no basis for setting aside the demand upon this ground. 56 The remaining matter that arises from the affidavits filed prior to the expiration of the 21 days period is the application that the demand be set aside on the basis that the defendant used the threat of the demand to progress its interest in the commutation discussions. I do not propose to deal with that matter as I have dealt with sufficient matters on the various points raised by the plaintiff to determine the proceedings. The reasons which incline me not to deal with this aspect of the matter apart from this fact are:-

1. These are interlocutory proceedings. 2. The determination of the questions involves questions of credit which it is not necessary in the overall circumstances of the case to determine. 3. The matters, such as the present, which are statutory demand proceedings should be determined quickly and promptly. Given the pressure of business at this time of year, the late delivery of transcript and that a careful examination of the facts is necessary to address this aspect, a decision could not be made on this point before the close of term. There will thus be a substantial delay before the matter is resolved. 57 Given that I have determined to dispose of the proceedings by setting aside the demand on matters not relating to matters arising after the 21 day period, I do not propose to address those matters. The resolution of those difficult matters can await a case where a decision is necessary. 58 Accordingly, I order: 1. That the demand served by the defendant upon the plaintiff dated 9 June 2000 be set aside. 2. Order the defendant to pay the plaintiff's costs.

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