Second Construction
Sub-section 6(1) speaks at the time of adjudication. As at that time, the insured entered into a contract of insurance by which the insured 'is indemnified [at the time of adjudication] against any liability to pay damages or compensation.' The expression, 'shall be a charge' does not convey a future tense but is prescriptive of the legal result to which the courts must give effect. The charge which the section creates exists on and from the Event. The charge is a fixed charge in the case where insurance moneys are payable at the time of the Event and a floating charge in respect of insurance moneys that may become payable, and do in fact become payable, at a later date. In relation to the latter, it is immaterial that the insurance moneys become payable pursuant to an insurance contract entered into after the Event: once insurance moneys have in fact become payable in respect of the liability, the charge fixes upon them.'
837 In that case, Lindgren J rejected the approach of Cole J in Manettas and preferred the second of the alternative constructions supported by the differing authorities. His Honour stated (at 64-65) that, in his view, the following considerations supported that construction:
"1. … I do not think that the expression 'is indemnified' speaks at the time of the Event, and therefore requires a contract of insurance be in existence at that time. The construction that that expression speaks at the time of adjudication by the Court is at least equally open and, in my view, it is the construction suggested by the natural and unforced reading of sub-s 6(1).
2. The charge is expressed to be on, relevantly, "insurance moneys that may become payable" in respect of the insured's liability to pay damages or compensation. … the expression … "moneys that may become payable" is apt to also accommodate moneys that may become payable after the subsequent entry by the wrongdoer into a claims made and notified contract of insurance.
3. The terms of sub-s 6(1) do not expressly restrict the charge to, relevantly, moneys that may become payable under a contract of insurance in existence at the time of the Event. Nor should such a limitation be held to be implied unless this is plainly required. It should not be readily implied because it is inconsistent with the policy objective which underlies the provision, namely, that of achieving the result that the moneys which in fact become payable under a liability indemnity policy are made available to a claimant. It would have been a simple matter for Parliament to add such words as "under the contract of insurance in existence at the time of the event giving rise to the insured's liability" at the end of sub-s 6(1) if the provision had been intended to have the restricted operation suggested.
4. No reason of policy has been suggested, and I can think of none, why the provision should not apply to a claims made and notified policy which comes into existence after the Event. According to either of the two constructions described earlier, the charge is a 'windfall' for the claimant. It is no part of the policy which underlies the provision, that the claimant should have been aware of the existence of the contract of insurance, bargained for its existence, or dealt with the insured in reliance on its existence. The legislative policy of ensuring that the claimant will have the benefit of the moneys payable under a contract of liability indemnity insurance is better served by the second construction than by the first. The two constructions referred to earlier are both arguable, and the second should be preferred as better conforming to the purpose of the provision.
5. Sub-section 6(7) presents no difficulty for either construction: according to the first, "the contract of insurance" to which that sub-section refers is that which was in existence at the time of the Event; according to the second, it is that which existed during the period in which the relevant claim was made and notified.
6. Once it is accepted that the expression "moneys may become payable" encompasses the situation where moneys become payable pursuant to a claims made and notified policy entered into after the Event, it is clear that the language of sub-s 6(1) is always satisfied at the time of the Event, since it is always the case that the wrongdoer may, after the Event, enter into a claims made and notified policy under which the relevant moneys will become payable.
7. It seems to me, with respect, that the reasoning in Manettas gives an undue significance to the words 'on the happening of the [Event]'Indeed, it is reasonable to think that in most cases, including non 'claims made and notified cases', it is insurance moneys that 'may become payable' after the Event rather than those that 'are payable' at the time of the Event, on which the statutory charge can be expected to operate. This is because in most cases (as sub-ss 6(2) and (3) contemplate) the amount of the insured's and the insurer's liability will not be known on the happening of the event, and because the making of a claim by the insured upon the insurer for indemnity will be a condition precedent to the arising of the insurer's liability to indemnify. If sub-s 6(1) had made explicit that which is implicit, by saying '… on and from the happening of the Event …' rather than simply '… on the happening of the event …', the capacity of the provision to encompass claims made and notified policies subsequently entered into would, perhaps, have been clear."
838 The principal issue to be determined by the Court in relation to the proper construction of section 6, and the point which distinguishes the two lines of authority on this issue, was identified by Lindgren J in National Mutual in the following terms:
"… the issue which divides the authorities on the question whether s 6(1) applies to a claims made policy issued after the event is the question whether the word 'charge' in the subsection refers to something the nature of which necessitates that the contract of insurance already exist at the time of the event." [at 76,712]
839 The authorities are in agreement that the charge descends, if at all, on the happening of the event giving rise to the claim for damages or compensation. In Bailey v NSW Medical Defence Union, McHugh and Gummow JJ stated (at 446):
"By its own force, the statute, in circumstances where it applies, creates, on the happening of the event giving rise to the claim for damages or compensation, a charge on all insurance moneys which are then payable in respect of the liability against which the insured is indemnified and on all such insurance moneys that may become payable in respect of that liability." [Emphasis added]
840 In an examination of section 6 by the Court of Appeal in Oswald v Bailey, Kirby P also said that:
"Section 6(1) speaks of a 'charge' at a specified time, namely 'the happening of the event giving rise to the claim for damages or compensation. It is at that time, and none other, that the charge attaches. The subject matter of the charge must then be determined, again at that time. Otherwise there would be no point in providing in terms of a 'charge'. In some cases the precise amount of insurance moneys will be clearly established by the terms of the contract of insurance. In others, such as the present, they will need to be established by litigation. They are thus, for the purposes of the charge, moneys payable which 'may become payable in respect of that liability."
841 Lindgren J also recognised, as a background against which the question of the proper construction of section 6 was to be determined, that "the charge for which sub-s 6(1) provides arises on the happening of the Event [giving rise to the claim for damages or compensation]": FAI v Sweeney at 64; see also National Mutual v Citibank Savings at 76,712.
842 The starting point in an inquiry as to the proper construction of section 6 is the decision of the High Court in Bailey v NSW Medical Defence Union (1995) 185 CLR 399. The case involved an occurrence policy, not a claims made policy, which existed at the time that the event occurred. The Court was required to decide whether or not the section applied in circumstances where the insurer purported to deny indemnity on the basis of a retrospective amendment to the terms of the policy. The joint judgment of McHugh and Gummow JJ, in the minority, addressed the issue of the construction and application of section 6. Brennan CJ and Deane and Dawson JJ endorsed the interpretation of the provision offered by McHugh and Gummow JJ .
843 Their Honours stated (at 449-450)
"The phrase in s 6(1), 'insurance moneys that ... may become payable', is apt to deal with the situation where, whilst the charge has descended, there is as yet no sum which could be identified as presently payable by the insurer to the insured. In such a case, the statutory charge operates, by loose analogy to an agreement for a charge on after-acquired property, upon such moneys as and when they do become payable. However, there will be nothing in respect of which the charge may be enforced if the moneys never become payable by reason of the exercise by the insurer of rights to avoid the contract or of a vitiating factor in its formation. So also in the case of a breach which pursuant to the terms of the contract or the general law, entitles the insurer to disclaim liability and this state of affairs exists when action is brought by the claimant under s 6(4) or, as necessary, leave is sought to commence that action. In all these cases, there were no insurance moneys which were payable when the charge arose and none have become payable.
However, once the charge has descended on the happening of the event giving rise to the claim for damages or compensation , no mutual or unilateral action of insurer or insured which is taken otherwise than under or pursuant to the contract of insurance or general law as it operates upon the contract may vary, discharge or otherwise qualify or abrogate the contract of insurance so as to deny to the claimant what otherwise would be the fruits of enforcement of the charge by action taken under s 6(4) against the insurer. The contract of insurance is that as it stood when the charge descended ." [Emphasis added]
844 The High Court was not required to consider the issue which is currently before the Court, that is whether or not a section 6 charge is applicable in circumstances where no contract of insurance was in existence on the happening of the event giving rise to the claim for damages. In the course of construction of section 6, however, the statement by Justices McHugh and Gummow that "the contract of insurance is that as it stood when the charge descended" assumes that a contract of insurance was required to be in existence at the relevant time. It seems to me, than, that the effect of their Honours' decision is that no charge can be created in favour of a third party if the event occurred prior to the existence of a relevant contract of insurance and, therefore, that the section has no operation in the present proceeding.
845 Lindgren J in National Mutual Property Services v Citibank Savings Ltd confined McHugh and Gummow JJ statements on the interpretation and application of section 6 to the particular facts before the High Court. Lindgren J said (at 76,712) that "What McHugh and Gummow JJ said in Bailey must be understood against the background that in that case the relevant contract was already on foot when the late Dr Bailey supposedly incurred liability to Mr Crawford...' Justice Lindgren stated further that:
"It is therefore readily understandable that their Honours might say, as they did, in the context of the facts and issue in Bailey , without foreclosing the possibility that in a different case the provision might operate although the contract of insurance was entered in to subsequently."
846 In Carnie v Richmond, Dowd J did not, however, regard the judgment of McHugh and Gummow JJ in Bailey as distinguishable in proceedings which concerned the application of section 6 to claims made policies. Further, his Honour considered that the judgment "underlined and supported" a construction of the section which held that it was inapplicable to claims made policies entered into after event giving rise to a claim for damages or compensation had occurred: Carnie v Richmond at 18
847 In my view, the construction of section 6 propounded by McHugh and Gummow JJ ought not to be confined to the facts of that particular case. While the circumstances which gave rise to the relevant liability in that case and the provisions of the policy of insurance under consideration by the High Court were materially different, in my view, their Honours' statements as to the operation of section 6 are of general application. I would not readily prefer to adopt an approach which would encourage alternative meanings of the words used in the statute dependent upon the context in which the proper construction of the statute arises for consideration.
848 Mr Slattery submitted that, contrary to the interpretation which I preferred above, support for the proposition that section 6 did not require, for its application, the existence of a policy of insurance at the time of the relevant event, may be found in the judgment of McHugh and Gummow JJ in Bailey. Mr Slattery relied on the following sentence from the extracted passage of their Honours' judgment:
"... there will be nothing in respect of which the charge may be enforced if the moneys never become payable by reason of the exercise by the insurer of rights to avoid the contract or of a vitiating factor in its formation."
849 Mr Slattery submitted that their Honours were there contemplating the operation of the section in situations in which there was no contract of insurance. He submitted that the consequences of a contract being avoided by an insurer or in relation to which vitiating factors occurred, such as lack of capacity of a contracting party or an insufficient correspondence between offer and acceptance, were materially similar to those in which no contract of insurance had yet been entered into as contemplated by Lindgren J in FAI General Insurance v McSweeney. [Transcript of 6 April 1998 at page 15 and of 7 April 1998 at page 77]
850 Mr Hutley submitted that the sentence from McHugh and Gummow JJ's judgment does not support such an interpretation. He submitted that McHugh and Gummow JJ were referring to the capacity at common law to avoid any policy of insurance ab initio in a case of either material misrepresentation or material non-disclosure. On Mr Hutley's submission, the passage did not support the proposition that section 6 applies even if no contract of insurance has been entered into for the reason that, where there has been avoidance ab initio, the law continues to recognise the contract of insurance for certain purposes.
851 Mr Hutley referred the Court to the decision of Rogers CJ Comm D in FAI General Insurance Co Ltd v Ocean Marine Mutual Protection and Indemnity Association (1996) 41 NSWLR 559 in which his Honour was required to consider whether or not a contract of insurance which had been avoided for material non-disclosure, remained on foot so far as it contained an exclusive jurisdiction clause relevant to the question of whether or not the Court should exercise jurisdiction. In relation to the subsistence of the contract, Rogers CJ stated (at 563-564):
"Sometimes words are used to the effect that a contract avoided ab initio is never taken to have existed. ... The words are sufficient for most purposes, but they should not be taken literally. Neither rescission by a party nor a judge's say so can turn the clock back to have that literal effect, and a contract avoided ab initio is not in Newspeak an uncontract. There was a contract, and there cannot be avoidance ab initio unless the avoiding party is in a position to restore the party to the pre-contractual position, at law with some exactitude but in equity by substantial restoration with allowances: see Alati v Kruger (1955) 94 CLR 216 at 223-224. Avoidance ab initio means that the parties are to be restored substantially to the positions they would have been in had there not been a contract, but it remains that there was a contract."
[Cf Mackender v Feldia AG [1967] 2 QB 591 per Diplock LJ; Clarke in The Law of Insurance Contracts , 2nd ed., (Lloyd's of London Press, London, 1994) at 609-610]
852 I do not accept the Plaintiff's interpretation of the sentence in McHugh and Gummow JJ's judgment, nor do I accept the proposition which that sentence is said to support. Reference is made by their Honours only to the consequences for the operation of the section of a contract being avoided ab initio, namely that there will be no insurance moneys to which the charge can attach. I accept that the principles applicable to determine whether or not a contract of insurance which has been avoided by the insurers will still be recognised for some purposes are as stated by Mr Hutley. It seems to me, on that line of authority, it cannot be assumed that McHugh and Gummow JJ were referring to the operation of section 6 in circumstances in which a contract of insurance was not yet in existence.
853 I was also referred to the decision of the New Zealand Court of Appeal in FAI v Blundell and Brown [1994] 1 NZLR 11 in support of the proposition that section 6 is applicable to claims made policies where the event giving rise to the claim for damages or compensation occurs prior to the existence of a policy of insurance which would respond to the relevant event. That issue was not directly raised by those proceedings which concerned an appeal against the granting of leave pursuant to section 9 of Law Reform Act 1936 (NZ), which is relevantly identical to section 6 of the NSW Act, in circumstances in which the insurer was notified of a claim in 1991 in relation to an event which occurred in 1984 and 1985. One issue in the proceedings was whether leave to proceed against the insurers ought to have been refused because the proceedings against the insured for an account of profits were said to be statute barred. In the course of dismissing the appeal, the members of the Court referred to the proper construction of section 9.
854 Richardson J said (at 16):
"Two elements must be present before a charge arises: the first is a contract of insurance by which the insured is indemnified against the liability to pay any damages or compensation; the second is an event giving rise to a claim for such damages or compensation. In providing that the charge arises 'on the happening of the event giving rise to the claim for damages or compensation' the subsection does not advert to those situations where the contract to indemnify was entered into subsequent to the event giving rise to the plaintiff's claim. … It is implicit in the subsection, and in accord with reality that the charge cannot arise unless and until there is insurance money available out of which it can be met. In short the charge only arises when there is in existence both a relevant contract of insurance indemnifying the insured and an event giving rise to the claim." [Emphasis added]
855 Robertson J stated (at 25) that the section would apply to a claims made policy where the Event preceded the existence of the policy:
"the respondent's claim against [the insured] is in equity and no limitation period applies. The relationship between [the insured] and his insurers is in contract. The trigger point in respect of a potential liability for the appellant is the emergence of a claim against [the insured]during the period of insurance. It would make the insurance cover of no utility if one were to interpret the provisions so that a claim notified in respect of an incident more than six years earlier (but itself not statute-barred) could not create a liability. The notification of the claim was made in this case more than six years after the event giving rise to the liability. I am not attracted by an interpretation which indicates that the remedial benefit contained in s 9 of the Law Reform Act is to have no potential for application." [Emphasis added]
856 Robertson and Richardson JJ stated that section 9 of the New Zealand Act would apply to claims made policies where the relevant event had occurred before the commencement of the policy. Their Honours reasoning cannot, however, be adopted by me because it is inconsistent with the judgment of McHugh and Gummow JJ in Bailey. Richardson J was able to conclude that section 9 of the New Zealand Law Reform Act applied, even when an event occurs before the applicable claims made policy had come into existence, by accepting that the charge only arises when the insurance policy comes into existence, which may be after the event has occurred; Roberston J, implicitly, also accepted the rationale [see underlined sections in above extracts from the judgments]. In the light of the High Court decision in Bailey, which held that the charge was created on the happening of the event giving rise to the claim for damages or compensation, it is not open to this Court to accept that line of reasoning in these proceedings, and for that reason, I do not find the decision persuasive.
857 The way in which section 6 ought to be construed in order to give effect to the legislature's intention, as raised in the judgment of Robertson J, will be further addressed below.