Transport Accident Commission v CMT Construction of Metropolitan Tunnels

C.M.T. was at the relevant time insured by the second respondent, National Employers' Mutual General Insurance Association Ltd. ("N.E.M.") under a policy of indemnity insurance against liability to pay compensation under the Workers Compensation Act 1958 Vict. ("the Act"). It was also insured by the appellant, then the State Insurance Office ("S.I.O."), under a policy of indemnity insurance against liability incurred in respect of death or bodily injury caused by or arising out of the use of a motor car.

On behalf of C.M.T., N.E.M., as workers' compensation insurer, made payments to and on behalf of the injured worker amounting to $31,609.62 ("the compensation payments"). The payments corresponded with the amounts of weekly compensation and medical and like expenses payable as compensation under the Act.

The injured worker brought action in the Supreme Court of Victoria to recover damages from C.M.T. The Act allowed him to do this, but required that any judgment be reduced by the amount of the compensation payments.

The worker was successful in his action. Damages were assessed at $257,000 and the sum of $31,609.62 was deducted before entry of judgment. The questions which arise on this appeal are whether C.M.T. must reimburse N.E.M. for the compensation payments, and, if so, whether S.I.O. must indemnify C.M.T. Those questions arose in third party proceedings between C.M.T. (as defendant in the action brought by the injured worker) and N.E.M. and S.I.O. It is not necessary to recount the history of those proceedings. It is sufficient to say that the pleadings in those proceedings were amended after entry of judgment for the plaintiff worker to raise the issues now under consideration.

At first instance O'Bryan J. held that C.M.T. was under no obligation to reimburse N.E.M. for the compensation payments made on its behalf. On appeal, the Full Court (Murphy, Gray and Phillips JJ.) held that C.M.T. was obliged to reimburse N.E.M. and that C.M.T. was entitled to indemnity from S.I.O. in respect of the moneys required to be reimbursed. In the result it was ordered that there be judgment for N.E.M. against C.M.T. in the sum claimed together with pre-judgment interest and costs and judgment for C.M.T. against S.I.O. in the same total amount together with costs. From that decision and consequential orders S.I.O. brings the present appeal.

It is convenient to note at once that the appeal is not concerned with contributions as between insurers by reason of double insurance. Nor is it concerned with subrogation in the ordinary sense of an insurer standing in the place of an insured to enforce an outstanding right of action. The right asserted by N.E.M. is asserted whether or not C.M.T. has any right to be indemnified by S.I.O. in respect of the compensation payments.

The claim made by N.E.M. against C.M.T. is put in two ways. First, it is said that there is an obligation on the part of C.M.T. to account because C.M.T. has derived a benefit in that its liability to pay common law damages has been reduced by the compensation payments made by N.E.M. In the Full Court this basis of liability found favour with Gray J., with whom Phillips J. agreed. Alternatively, it was put that the effect of judgment in the common law action was to extinguish ab initio the liability of C.M.T. under the Act, that being the liability against which N.E.M. had agreed to indemnify C.M.T. This latter view found favour with Murphy J., his Honour holding that "the loss insured against never occurred".

It has long been accepted that after payment on a policy of indemnity insurance the insured must account to the insurer for any benefit which reduces the loss or liability insured against: Castellain v. Preston [25] . In British Traders' Insurance Co. Ltd. v. Monson [1] , Kitto, Taylor and Owen JJ. expressed some regret that the right had been described in Castellain in terms of subrogation and explained that decision and the right there identified as follows [2] :

The insured had been paid a sum of money under the policy on the footing that that was the amount of his loss The judgments explain with care how large is the right of an insurer to be placed in the position of the insured in relation to both his rights against third parties and the fruit of those rights. The decision was that the insured was accountable to the insurer for the amount which the third party had paid him. This was because the insurer's obligation had been only to indemnify the insured against his loss, and the payment originally made to the insured had been made not because it was in fact required for indemnification but because of a mutual assumption, which had turned out to be erroneous, that it was required for indemnification. 1. (1883) 11 Q.B.D. 380, at pp. 389-390, 393-394 and 402. 2. (1964) 111 C.L.R. 86. 3. (1964) 111 C.L.R., at p. 94.

It follows from Castellain and British Traders' that if there never was any liability on the part of C.M.T. to make workers' compensation payments to its injured worker, or if that liability was subsequently extinguished ab initio then C.M.T. must reimburse N.E.M. for the compensation payments. However, it does not follow from those authorities or any authority cited in argument that a benefit which does not reduce or extinguish the liability or loss insured against must be brought to account.

The argument that an insured must account for a benefit, notwithstanding that the benefit does not reduce or extinguish the liability insured against, was put in terms of subrogation. The argument is contrary both to authority and principle. Contrary authority is to be found in Burnand v. Rodocanachi [3] . In that case an insured had received payment for loss under a valued policy of marine insurance. The sum paid was less than the actual loss. The insured later received payment of the difference between his actual loss and the sum insured from a compensation fund created by Act of Congress of the United States. An action by the insurer to have that money brought to account was unsuccessful, the crucial question being identified in the speech of Lord Blackburn [4] as whether the sum was or was not "paid so as to be a reduction or diminution of [the] loss"?

1. (1882) 7 App. Cas. 333. 2. (1882) 7 App. Cas., at p. 339.

As a matter of principle, whether the doctrine of subrogation is put in terms of equity (as, e.g., by Lord Denning M.R. in Morris v. Ford Motor Co. [5] ) or on the basis of implication of contractual terms (as put by Diplock J. in Yorkshire Insurance Co. Ltd. v. Nisbet Shipping Co. Ltd. [6] ), it rests on the proposition stated in Castellain by Brett L.J. [7] that an insured "shall be fully indemnified, but shall never be more than fully indemnified". An insured is not fully indemnified in respect of loss or liability if required to account for benefits not touching that loss or liability. Thus the question of N.E.M.'s right to reimbursement depends on the absence of liability on the part of C.M.T. to make compensation payments under the Act.

1. [1973] Q.B. 792, at pp. 800-801. 2. [1962] 2 Q.B. 330, at pp. 339-341. 3. (1883) 11 Q.B.D., at p. 386.

Before turning to the provisions of the Act it is convenient to note that one significant concern of workers' compensation legislation has been to define the circumstances in which the receipt of compensation as provided by that legislation either will or will not affect an injured worker's right to recover damages whether from his employer or some other person.

Early workers' compensation legislation was framed so as to make it clear that the right to compensation and the right to recover damages were not cumulative. The usual legislative mechanism employed to ensure that the rights were not cumulative was to give "the workman his choice of two remedies whilst preventing the employer from having to pay both damages and compensation": Young v. Bristol Aeroplane Co. Ltd. [8] per Lord Porter. In effect the election by the injured worker to enforce one remedy barred the other: Smith v. Commonwealth Oil Refineries Ltd. [9] ; Farmer & Co. Ltd. v. Griffiths [10] ; Cain v. Malone [11] . Over time the legislative schemes usually had engrafted on to them provisions specifying the circumstances in which actions by a worker which might be taken to constitute a final election did not bar the pursuit of the other remedy.

1. [1946] A.C. 163, at pp. 184-185. 2. (1938) 60 C.L.R. 141. 3. (1940) 63 C.L.R. 603. 4. (1942) 66 C.L.R. 10.

In its original form the Act conformed to the general pattern of early legislation as outlined above. The situation in which an injury might give rise to a cause of action against the employer was dealt with by s. 5(2), which then provided that nothing in the Act should "affect any civil liability of the employer, but in any such case the worker may at his option either claim compensation under this Act or take proceedings independently of this Act but the employer shall not be liable to pay compensation both independently of and also under this Act "

In the case of an injury giving rise to a cause of action against a person other than the employer, s. 62, in its original form, gave the employer the right to "take proceedings both against that person to recover damages and against any person liable to pay compensation under this Act" but provided that the worker was not "entitled to recover both damages and compensation".

The Act in its original form also specified a number of situations which either did not constitute an election between the available remedies or, if constituting an election, did not bar the pursuit of the other remedy. For present purposes it is sufficient to mention only s. 79(1) of the Act. In its original form, s. 79(1) provided that the acceptance of weekly payments, if no award of compensation had been made under the Act, should not be deemed or taken to be an exercise of the option under s. 5(2) or the recovery of compensation within s. 62 of the Act so as to bar proceedings for damages brought within two years of the injury. Weekly payments accepted by a worker were, by s. 79(2) and (3) of the Act, to be deducted from any judgment obtained by the worker. In the case of a judgment obtained against a person other than the employer, provision was made in s. 79(3) for judgment for the amount deducted to be entered in favour of the employer (if a party to the proceedings) or (if not a party to the proceedings) to be indemnified in respect of any weekly payments made under the Act.

The Act was amended from time to time, but until 1970 its general structure was as stated above. Within that structure the right of an injured worker to recover compensation under the Act and the right to recover damages were properly categorized as alternative rights. However, in the case of an injury giving rise to a cause of action against an employer, it would not be entirely accurate to describe the liability to pay compensation and the liability in damages as alternative liabilities. Rather the injury gave rise to two possible liabilities, one of which (subject to specific statutory exceptions) would be barred by the election of the injured worker to enforce the other. Weekly payments and, following amendment in 1965, compensation payments (thereafter covering payment of medical and like expenses as well as weekly payments) were, unless an award of compensation had been made under the Act, thus merely advances against whichever liability might ultimately be enforced against the employer. In the case of an injury giving rise to a cause of action against a person other than the employer they were advances against a contingent liability which would become an actual liability if the worker elected to enforce that liability to the exclusion of his right to recover damages against the other person.

It is now necessary to turn to the provisions of the Act relevant to the present appeal, noting that the Act has since been amended so that those provisions operate only in respect of injuries sustained prior to 5 January 1982. In so far as it operates, the Act provides for the payment of weekly payments: (s. 9), payment of medical and like expenses (s. 26) and fixed sum compensation for specified disabilities (s. 11). Liability is imposed by s. 5(1) in the following terms:

If in any employment personal injury arising out of or in the course of the employment is caused to a worker his employer shall subject as hereinafter mentioned be liable to pay compensation in accordance with the provisions of this Act. Sections 62 and 79 relevantly provide:

62.(1) Where the injury for which compensation is payable under this Act was caused under circumstances creating a legal liability in some person other than the employer to pay damages in respect thereof -

(a) proceedings may be taken both against that person to recover damages and against any person liable to pay compensation under this Act for such compensation;

(aa) if a judgment for damages has been satisfied in whole or in part or a payment into court by that person has been accepted -

(i) the right to compensation under this Act shall be reduced by an amount equal to the amount recovered under the judgment or payment into court, as the case may be;

(ii) the right of a worker to any further weekly payments under this Act shall thereupon cease and determine; and

(iii) the Board may refuse to make any award in favour of the worker for any damage caused by an injury if it is satisfied that the judgment for damages or payment into court, as the case may be, was in respect of the damage caused by such injury;

79.(1) Subject to sub-sections (1AA), (1AB) and (1AC) nothing in this Act shall affect the right of any person to take and prosecute any proceedings for damages against an employer or any other person whether he has accepted payment of compensation under this Act or not.

(1a) Where a judgment or order for damages in favour of a worker and against his employer has been satisfied in whole or in part or a payment into court by the employer has been accepted for an injury for which compensation would have been payable under this Act -

(a) the right of a worker to any further weekly payments under this Act shall thereupon cease and determine; and

(b) the Board may refuse to make any award in favour of the worker for any damage caused by an injury if it is satisfied that the judgment for damages or payment into court, as the case may be, was in respect of the damage caused by such injury.

Sub-sections (2), (3), (3A), (3B), (3C) and (4) provide by various mechanisms that an injured worker may neither recover nor retain payments of compensation and damages, in the following terms:

(2) Where a judgment or order for damages in favour of a worker is to be entered or made in any court in respect of the injury of the worker in proceedings independent of this Act against an employer by whom payments of compensation have already been made in respect of that injury under this Act, the amount of the judgment or order shall be reduced by the amount of the payments already made.

(3) Where a judgment or order for damages in favour of a worker is to be entered or made in any court in respect of the injury of the worker in proceedings independent of this Act against a person for whose acts or defaults the worker's employer is not responsible and payments of compensation have already been made in respect of that injury by the employer under this Act, then -

(a) (if pursuant to any rules of the court made in that behalf the employer has joined in the proceedings) a judgment or order in favour of the employer may be entered or made in respect of an amount equivalent to the payments so made as aforesaid and the amount of the judgment or order in favour of the worker may be reduced by the corresponding amount accordingly;

(b) (if the employer has not joined in the proceedings aforesaid but it is made to appear to the court that payments as aforesaid have been made) the amount of the judgment or order shall be reduced by the amount of the payments so made, and in any such case the employer shall be entitled to be indemnified for the payments so made pursuant to section sixty-two of this Act -

but where the amount of the judgment or order in favour of the worker is not so reduced as aforesaid, the employer shall be entitled to be indemnified for the payments so made pursuant to the said section sixty-two, and the person by whom the judgment or order is to be paid or has been paid shall, if he has so indemnified the employer, be entitled to retain or (as the case requires) to recover from the worker in any court of competent jurisdiction as a civil debt recoverable summarily an amount equivalent to the amount of payments so made, and where any amount is retained in accordance with the provisions of this paragraph the judgment or order, to the extent of that amount, be deemed to have been satisfied.

(3a) Where in an action for damages brought by a worker independently of this Act in respect of injury to the worker against a person for whose acts or defaults the employer of the worker is not responsible an amount is lodged or paid into court by or on behalf of that person in accordance with the Rules of the Court in which the action is brought and the amount is accepted by the worker, the worker shall refund immediately to the person by whom the compensation was paid an amount equivalent to the amount of payments of compensation received under this Act in respect of the injury or the amount accepted, whichever is the lesser.

(3b) Where pursuant to the provisions of sub-section (3A) moneys are required to be refunded but are not refunded in accordance with that sub-section, the person entitled to the refund may recover the money in any court of competent jurisdiction as a civil debt recoverable summarily.

(3c) Notwithstanding anything to the contrary in this Act the employer shall not be indemnified in respect of any moneys already paid by him to the worker by way of compensation under this Act where the worker is required to refund an amount equivalent to those moneys pursuant to sub-section (3A).

(4) Where a claim by a worker independent of this Act for damages in respect of the injury of the worker against a person for whose acts or defaults the employer of the worker is not responsible has been settled or compromised without regard to the fact that payments of compensation had been made by the employer under this Act, then the person by whom payment was made upon the settlement or compromise of the claim as aforesaid shall, if he is subsequently required pursuant to section sixty-two of this Act to indemnify the employer for the payments so made, be entitled to recover from the worker in any court of competent jurisdiction as a civil debt recoverable summarily an amount equivalent to the amount of payments so made.

The first question which arises is whether, in the light of the above provisions of the Act, payments of compensation in respect of an injury giving rise to a right to recover damages from an employer retain their character as advances against the liability ultimately enforced. If they do then, as the liability ultimately enforced by the injured worker in the present case was the liability to pay damages, the payments made by N.E.M. are not payments by way of indemnity against liability arising under the Act and may be recovered under the principle stated in Castellain [12] and British Traders' [13] .

1. (1883) 11 Q.B.D. 380. 2. (1964) 111 C.L.R. 86.

The differences between the provisions of the Act as they apply to the present matter and the provisions of the Act until 1970 are significant. First, an injured worker is no longer required to elect between available remedies. Secondly, he may pursue his right to compensation to the finality of an award made under the Act without affecting his right to pursue an action for damages either against his employer or against a third person. Thirdly, even the satisfaction of a judgment for damages appears to leave open the possibility that there may be some residual right to compensation under the Act. Thus satisfaction of a judgment, in whole or in part, against a person other than the employer reduces the right to compensation under the Act: s. 62(1)(aa)(i). Satisfaction of a judgment, in whole or in part, terminates the right to weekly payments: ss. 62(1)(aa)(ii) and 79(1A)(a). But, subject to the reduction of the right to compensation effected by s. 62(1)(aa)(i), entitlement to medical and like expenses and fixed sum disability compensation are matters upon which the Board may refuse to make an award: ss. 62(1)(aa)(iii) and 79(1A)(b).

In Xpolitos v. Sutton Tools Pty. Ltd. [14] , Gibbs J. said in relation to s. 62(1)(aa)(iii) that "if the amount of damages equalled or exceeded the amount of compensation to which the worker was entitled the Board would be bound to refuse to make an award, but an award might be made if the right to compensation exceeded the damages". Subject to the reference to damages being understood as a reference to judgment to the extent that it is satisfied, that statement, in our view, accurately reflects the nature of the discretion vested by ss. 62(1)(aa)(iii) and 79(1A)(b).

In the light of the provisions applying to the present matter an injured worker's rights are no longer properly described as alternative rights. Nor, however, are they properly characterized as cumulative rights. Satisfaction of a judgment modifies the worker's right to compensation in the manner specified in ss. 62(1)(aa) and 79(1A). An injured employee is prevented by s. 79(2), (3), (3A) and (4) from recovering or retaining both compensation payments and damages. The rights are more properly to be viewed as separate but interdependent rights, each right to the extent of its realization modifying the realization of the other.

So too the nature of the liability imposed upon an employer has been altered. The Act no longer contains the prescript, originally found in s. 5(2), that an employer should not be liable both under and independently of the Act. The mechanism which gave effect to that prescript has also been removed: there is no longer any barring of liability by an injured worker's election to enforce one liability rather than another. Moreover, liability to make compensation payments may be enforced to the finality of an award under the Act without affecting the worker's right to pursue an action for damages, whereas as the Act stood prior to the 1970 amendments, the making of an award served to distinguish between payments, the acceptance of which constituted or did not constitute the exercise of the option conferred by s. 5(2) or the recovery of compensation within s. 62 of the Act.

The provisions of the Act relevant to the present matter expose an employer, whose worker suffered injury in the course of employment giving rise to a right to recover damages from the employer, to two separate and actual liabilities, albeit that the liabilities are interdependent in the sense that satisfaction (including partial satisfaction) of one modifies the other. Compensation payments are no longer merely advances against whatever liability might be enforced against the employer. They are payments in discharge of a liability imposed by the Act. As such the payments by N.E.M. in the present case are properly to be characterized as payments by way of indemnity against the liability of C.M.T. under the Act unless it can be said that that liability is to be treated as though it never existed. To that end is the argument on behalf of N.E.M. that satisfaction of a judgment for damages extinguishes ab initio liability to pay compensation under the Act.

The argument that satisfaction of a judgment for damages extinguishes ab initio liability to pay compensation under the Act faces formidable difficulties. First, the Act does not in terms say so. Secondly, the provisions of ss. 62(1) and 79(1A) in speaking of the reduction of the right to compensation (s. 62(1) only), of the cessation and termination of weekly payments, and of a discretion in the Board to refuse to make an award strongly suggest that the intention of the legislature was otherwise. Even accepting that the satisfaction of a judgment for damages in an amount equal to or exceeding the right to compensation would require the Board to refuse to make an award, there is no reason in principle why the right to compensation should in those circumstances be regarded as terminated ab initio rather than from the time of satisfaction of the judgment.

Nor, in our opinion, do the provisions of s. 79(2), (3), (3A) and (4) regulating against double recovery or double retention dictate a conclusion that satisfaction of a judgment extinguishes ab initio liability to pay compensation. Those provisions are not, and never were, directed to definition of an employer's liability in respect of an injury giving rise to a right to compensation and a right to recover damages from the employer. That function was performed by s. 5(2) of the Act until its repeal in 1970. Rather, those provisions are, and always were, directed to ensuring that an injured worker neither receives nor retains double payment for his loss. The mechanisms employed create statutory rights in an employer who has made compensation payments, including the right to have any judgment reduced by the amount of the payments made. That right, and the rights given where a third person is responsible for the injury, seem to us to be rights created by the Act by virtue of the payments having been made (whether by way of advance prior to 1970 or in satisfaction of liability thereafter), rather than rights affecting the nature or existence of the liability imposed by the Act. That being so and given the terms of ss. 62(1)(aa) and 79(1A) of the Act postulating consequences other than extinguishment ab initio, we are of the view that the liability to pay compensation imposed by s. 5(1) of the Act is not extinguished ab initio by the satisfaction of a judgment for damages obtained against the employer.

As C.M.T. was at all times under a liability to make compensation payments and that liability was not extinguished ab initio upon the satisfaction of the judgment obtained against it, the payments made by N.E.M. were and remain payments by way of indemnity in respect of the liability against which it insured C.M.T. Accordingly, in our view, they are not recoverable by N.E.M. from C.M.T., and no question arises as to S.I.O.'s liability to indemnify C.M.T. in respect of same. We would allow the appeal.

Our conclusion involves the consequence that N.E.M. was not entitled to judgment against C.M.T. On the hearing of the application for special leave to appeal made by S.I.O. it was put on behalf of C.M.T. that, in the event of special leave being granted, it should be allowed to maintain its defence to the claim made against it by N.E.M. C.M.T. did not lodge any notice of appeal but, without objection from either N.E.M. or S.I.O., argument was put on its behalf that it was under no obligation to refund the compensation payments. It may also be noted that by its notice of appeal S.I.O. sought that the judgment against C.M.T. be set aside, and at all times the appeal was conducted by all parties on the basis that the primary matter for decision was the question of C.M.T.'s obligation to reimburse N.E.M. for the compensation payments made on its behalf. However, in the absence of any notice of appeal by C.M.T., final orders should not be made disposing of the appeal in the manner sought by S.I.O. The matter should be stood over to allow the parties to take such steps as are necessary to enable the judgment against C.M.T. to be set aside or as they may otherwise be advised.

The payments made by the employer (C.M.T.) or on its behalf by the workers' compensation insurer (N.E.M.) to the injured worker were made in discharge of a statutory liability imposed on the employer by the Workers Compensation Act 1958 Vict. ("the Act"). The prosecution to judgment of an action to enforce a concurrent liability in the employer to pay damages does not change the character of those payments, though the making of those payments reduces the liability to pay damages. Section 79(2) of the Act affects the measure of the liability to pay damages, but it does not on that account transform the payments of compensation into payments of damages. The liabilities of an employer for damages and for compensation may exist concurrently, but they are distinct liabilities and a payment in discharge of one liability is not a payment in discharge of the other liability. The fact that the discharge of an employer's statutory liability to pay compensation reduces his concurrent liability in damages does not convert the worker's compensation payments into a payment pro tanto of the employer's concurrent liability in damages. Section 79(2) of the Act directs a reduction in the measure of the liability in damages by reference to workers' compensation payments, but it does not convert those payments into payments in discharge of the liability in damages. I am therefore in general agreement with the analysis of the Act made by the other members of the Court.

I also agree with their Honours that neither the recovery of a judgment nor the satisfaction of a judgment for damages extinguishes ab initio the statutory liability.