Vollstedt v Calibre Enterprises Pty Ltd [1999] VSC 128

11. Shortly following the date on which Pitts advertised the business for sale the plaintiffs consulted Pitts with a view to purchasing the business. The plaintiffs allege that with a view to inducing them to purchase the business Pitts made certain representations to them concerning the profitability of the business.

14. Shortly thereafter the plaintiffs attended at the business to discuss their proposed purchase of it with O'Connor. The plaintiffs allege that O'Connor also made representations to them concerning the profitability of the business designed to induce them to purchase the business.

17. Following their visit to the business the plaintiffs consulted the accounting firm of R.W. Longley to advise them in relation to their proposed purchase of the business. The partners in R.W. Longley are the sixth and seventh defendants Steven Longley and Ron Longley (Longley).

20. The case for the plaintiffs is that by reason of the representations made to them by Pitts and O'Connor and the advice given to them by Longley they purchased the business in May 1990 for $169,000.

23. The plaintiffs allege that having taken over the business they found that the representations made by Pitts and O'Connor as to its profitability were false and that the advice given to them by Longley was erroneous. As a consequence of such matters they contend that they have suffered significant financial loss.

26. On 16 April 1996 the plaintiffs caused a writ to be filed in the Court seeking damage in respect of that loss. The defendants to the proceeding were Calibre, O'Connor, Pitts, Steven Longley and Ron Longley.

32. By order of O'Bryan, J. made on 7 April 1997 the executors of Pitts' estate were substituted for Pitts as defendants to the proceeding. The executors are now the third defendant Joy Maree Campbell, the fourth defendant Karen Ann Nicholson and the fifth defendant Marcia Helen Dwyer.

35. At all material times Pitts was insured by HIH Insurance pursuant to a professional indemnity insurance policy. The policy indemnified Pitts in respect of any claims made against him for breach of professional duty during the period of insurance while acting in his capacity as a real estate agent.

38. The following are the clauses of the policy relevant for present purposes:

"The Company agrees, subject to the following limitations, terms and conditions and subject to any policy endorsements: 1. To indemnify the Insured against any Claim(s) for actual or alleged breach of professional duty in the Profession (as defined) which are first made against the Insured during the period of insurance as stated in the Certificate of Insurance by reason of any act, error or omission committed on the part of the Insured and which are notified to the Company or their representatives during the period of insurance as stated in the Certificate of Insurance; ... Claim(s) means any writ, statement of claim, summons application or other originating legal or arbitral process, cross claim, counter-claim or third or similar party notice issued against or served upon the Insured or the receipt by the Insured of any written or verbal notice of demand for compensation made by a third party against the Insured."

42. Following Pitts' death the executors of his estate sought indemnity from HIH Insurance in respect of the present claim. By letter of 17 July 1997 HIH Insurance's solicitors advised the estate's solicitors that HIH Insurance denied any liability to indemnify the estate. The denial was based primarily on the failure of Pitts or the executors of his estate to give notice of the claim made against Pitts to HIH Insurance until 12 months after service of the writ on Pitts.

45. By order of a Master of the Court made on 7 May 1998 the sixth and seventh defendants (Longley) were given leave to commence a third party proceeding against HIH Insurance.

48. The following is the basis upon which the sixth and seventh defendants make their claim against HIH Insurance.

51. The sixth and seventh defendants have claimed contribution from the executors of Pitts' estate in the event that they are held liable to the plaintiffs by reason of any of the matters alleged by the plaintiffs in their statement of claim.

54. In that situation, so it is said, the sixth and seventh defendants are for the purposes of s.51 of the Insurance Contracts Act 1984 (Cth.) "third parties" entitled to recover under the policy from HIH Insurance either an amount equal to HIH Insurance's liability under the policy in respect of any liability in damages of the executors of Pitts' estate in the proceeding, or are entitled to recover under the policy so much of the sum properly payable under the policy to the executors of Pitts' estate that is found by the Court to be payable by the executors of Pitts' estate to the sixth and seventh defendants by way of contribution.

57. Section 51 of the Insurance Contracts Act provides:

"SECTION 51 RIGHT OF THIRD PARTY TO RECOVER AGAINST INSURER 51(1) [Where third party may recover directly from insurer] Where -

(a) the insured under a contract of liability insurance is liable in damages to a person (in this section called the 'third party');

(b) the insured has died or cannot, after reasonable enquiry, be found; and

(c) the contract provides insurance cover in respect of the liability,

the third party may recover from the insurer an amount equal to the insurer's liability under the contract in respect of the insured's liability in damages. 51(2) [Payment discharges liabilities] A payment under subsection (1) is a discharge, to the extent of the payment, in respect of -

(a) the insurer's liability under the contract; and

(b) the liability of the insured or of the insured's legal personal representative to the third party.

51(3) [Other rights of third party unaffected] This section does not affect any right that the third party has in respect of the insured's liability, being a right under some other law of the Commonwealth or under a law of a State or Territory."

69. On 9 December 1998 HIH Insurance caused a summons to be filed in the Court whereby it sought an order that the sixth and seventh named defendants' third party statement of claim be struck out pursuant to the provisions of Rule 23.01 or Rule 23.02 of the Supreme Court Rules. It was that summons which was before the Master on 31 March 1999 and which the Master dismissed.

" 23.01 Stay or judgment in proceeding 23.01(1) Where a proceeding generally or any claim in a proceeding -

(a) does not disclose a cause of action;

(b) is scandalous, frivolous or vexatious; or

(c) is an abuse of the process of the Court -

the Court may stay the proceeding generally or in relation to any claim or give judgment in the proceeding generally or in relation to any claim.

(2) Where the defence to any claim in a proceeding -

(a) does not disclose an answer; or

(b) is scandalous, frivolous or vexatious -

the Court may give judgment in the proceeding generally or in relation to any claim.

(3) In this Rule a claim in a proceeding includes a claim by counterclaim and a claim by third party notice, and a defence includes a defence to a counterclaim and a defence to a claim by third party notice."

23.02 Where an indorsement of claim on a writ or originating motion or a pleading or any part of an indorsement of claim or pleading -

(a) does not disclose a cause of action or defence;

(c) may prejudice, embarrass or delay the fair trial of the proceeding; or

(d) is otherwise an abuse of the process of the Court -

the Court may order that the whole or part of the indorsement or pleading be struck out or amended."

92. The following are the grounds upon which HIH Insurance seeks to have the sixth and seventh defendants' statement of claim dismissed:

(1) No claim can be made against HIH Insurance until such time as the liability of Pitts' estate to the plaintiffs has been established or the liability of Pitts' estate to make contribution to the sixth and seventh defendants has been established.

(2) In the circumstances of this case Pitts' estate has no liability in damages to the sixth and seventh defendants. In this connection it is said that the words "liable in damages" where used in s.51 can only mean liability in damages for a wrong which is either a tort or a breach of contract. See Mayne & McGregor on Damages, 14th Edition, p.3 and Halsbury's Laws of England, 4th Edition, vol. 12(1), para. 802.

It is not alleged that Pitts committed a tort against the sixth and seventh defendants nor was he guilty of breach of any contract between himself and the sixth and seventh defendants as there never was any such contract. At most the sixth and seventh defendants have a claim for contribution against Pitts' estate.

(3) Section 51 of the Act does not extend a right of recovery except to those persons who have suffered damage by reason of a tort committed by the insured or by reason of the insured's breach of contract between himself and the third party.

99. For the sixth and seventh defendants it is said:

(1) The words "liability in damages" where used in s.51 must be given a far wider meaning than damages for tort or breach of contract. That much is clear so it is said from the Explanatory Memorandum in respect of the Insurance Contracts Bill 1984 and in particular paragraphs 169 and 170 of the Memorandum which read:

"169. Proposed Law - Third parties will, in all types of liability insurance, have the right to proceed directly against the insurer in the event of the insured's dying or in the event that he cannot be found after reasonable enquiry (clause 51(1)). The insurer's liability is limited to the extent that it would have been liable to the insured (clause 51(1)). Payment by the insurer to the third party discharges its liability under the contract as well as the insured's liability to the third party to the extent of the payment (clause 51(2)). Any other rights which the third party may have are unaffected by the proposed law (clause 51(3)). 170. Rationale - As the law stands, the third party may be faced with a number of difficulties in pursuing his claim against an insured. For example, he may, in the case of a deceased insured, need to bring initial proceedings to appoint a guardian ad litem. The third party's rights may well be defeated where an insurer insists that the third party pursue his claim against an absent insured on the basis that it should not be required to conduct a defence of an action in the absence of the insured. While the insurer is clearly in an unfortunate position in the absence of the insured, the third party should be able to claim directly from the insurer which has accepted premiums to cover the loss concerned. Any prejudice the insurer suffers is outweighed by the loss the innocent third party would otherwise suffer (ALRC para. 340).

There is no reference in those paragraphs to damages for tort or breach of contract, what is referred to is "the loss" suffered by a third party. If damages were to be restricted to damages for tort or breach of contract that fact would have been spelled out in the section.

(2) If Pitts, and more recently his estate, had not been sued by the plaintiffs, it would have been competent for the sixth and seventh defendants to have joined him or the estate as a third party to the proceeding seeking indemnity or contribution in respect of any damages the sixth and seventh defendants were ordered to pay to the plaintiffs. It is clear from the definition of "claim" in the policy that HIH Insurance would have been liable to indemnify Pitts or his estate in respect of such a claim.

It follows from that fact that the sixth and seventh defendants are entitled to recover from HIH Insurance an amount equal to HIH Insurance's liability to Pitts or his estate in respect of any liability of Pitts or his estate to the sixth and seventh defendants.

(3) It is not provided by s.51 that the insured's liability in damages must be established before a third party may institute proceedings against the insurer to recover its loss. Indeed it is implicit in the section that any proceeding instituted by the third party against the insurer will be instituted before any liability of the insured has been determined. That must follow from the fact that the third party has the right to recover from the insurer not only where the insured has died but where after reasonable enquiry the insured cannot be found. If an insured cannot be found, how can he be served with proceedings instituted against him by a third party and his liability to the third party be determined. The correct view to take of the section is that in the proceeding taken by the third party against the insured, the third party must establish first, that the insured is liable in damages to the third party; second, that the insured has died or cannot after reasonable inquiry be found; and third that the contract of insurance provides insurance cover in respect of the liability.

108. By its summons and now this appeal HIH Insurance is seeking to terminate the third party proceeding without trial.

111. It is now well established that the power of summary termination should only be used in exceptional circumstances (see Dey v. Victorian Railways Commissioners [1949] HCA 1; (1949) 78 C.L.R. 62 at p.92); and with exceptional caution (see General Steel Industries Inc. v. Commissioner for Railways N.S.W. [1964] HCA 69; (1964) 112 C.L.R. 125 at p.129).

114. It should only be used where the proceedings in question are manifestly groundless and so obviously untenable that they cannot succeed (see General Steel Industries supra).

117. I have considered the competing contentions in this case and I am by no means persuaded that the sixth and seventh defendants' claim against HIH Insurance is groundless and cannot succeed. In my opinion, and for the reasons advanced by counsel for the sixth and seventh defendants in opposition to HIH Insurance's appeal, it is arguable that the word "damages" where used in s.51 is to be given a wider interpretation than that contended for by counsel for HIH Insurance.

120. Further I also consider it is arguable that a third party does not have to establish the liability of an insured prior to instituting proceedings against that insured's insurer, but may institute the proceeding against the insurer with a view to establishing the liability of the insured in that proceeding and establishing the other matters the third party is required to establish by s.51 of the Act.

123. It follows therefore that the appeal from the order of the Master will be dismissed with costs to be taxed and paid by the third party HIH Casualty and General Insurance Limited.