Watson, Estate of v Conolly

Supreme Court of NSW|2012-06-22|Before: Beech-Jones J, Gzell J

ex tempore Judgment 1Before me is the plaintiff's notice of motion which seeks to strike out paragraphs 184 to 189 of the defence to their further amended statement of claim filed 22 November 2011. At the hearing of this motion, the defendant sought leave to file an amended in defence to the further amended statement of claim. The argument proceeded in respect of both applications. I will deal with the notice of motion filed by the plaintiff first before turning to the further amendments sought to be made by the defendants.

Factual Background 2The substantive proceedings involve a claim of professional negligence by the estate of a deceased liquidator, Mr David Watson (the "Estate"), against his former solicitors. In summary, on 7 May 2001 Mr Watson was appointed official liquidator of Hypec Electronics Pty Ltd ("Hypec"). He was removed as a liquidator following a judgment of Gzell J on 2 December 2004 to that effect (BL & GY International Co Ltd v Hypec Electronics Pty Ltd [2004] NSWSC 1119). In the interim, Mr Watson was involved in various pieces of litigation related to his position as liquidator. The Estate alleges that the defendant firm was retained by Mr Watson's accounting firm and that they acted for him in that litigation, including on the removal application. The Estate pleads that the defendant firm was negligent in a number of respects, which are unnecessary to detail. The date that Mr Watson passed away is not disclosed by the evidence. 3There are three aspects of the damage claimed by the Estate. First, the Estate claims damages arising from various costs orders that were made against Mr Watson throughout those proceedings. Second, the Estate claims damages arising from his removal as a liquidator of Hypec, including his loss of income arising from that circumstance. Third, the Estate claims damages arising from the need for Mr Watson, in light of his removal as liquidator, to obtain legal advice from lawyers independent of the defendant firm. 4Mr Watson's professional indemnity insurer was Allianz Australia Pty Ltd. His firm obtained a policy of insurance. He was entitled to the benefit of it. At some point not disclosed in the evidence, Mr Watson made a claim on Allianz, presumably in respect of at least the costs orders that had been made against him. Either Mr Watson or the Estate commenced proceedings against Allianz seeking recovery. At some point those proceedings were compromised. An amount of $1 million was paid by Allianz to Mr Watson or the Estate's solicitors on 2 May 2007. 5Clause 37 of the relevant professional indemnity policy stated as follows: "SUBROGATION If we make a payment under this policy we are subrogated to all your rights of contribution, indemnity or recovery. You must always act to secure, preserve your rights of contribution, indemnity and recovery, and must do all things and execute all documents to enable us to recover such contribution, indemnity or recovery in your name."

Strike Out Application 6I turn then to the application by the Estate to strike out paragraphs 184 to 189 of the amended defence. Those paragraphs can be conveniently separated into two groups. The first group all assume or assert that the Estate's claim against the defendant firm is somehow affected by the payment of the $1 million by Allianz. Thus, for example, present paragraphs 185 to 186 state as follows: "185 Further the defendants say that David Watson received from Allianz Australian Insurance Limited the sum of $1 million dollars towards the costs he was to pay to Mead and that this sum should be setoff against and/or discount any damages the plaintiff may recover (the entitlement to which is denied). 186 Further the defendants say that David Watson was incorrect to accept the sum of $1 million dollars from Allianz as the limit under that policy exceeded the amount claimed by Mead in respect of his costs and, as such, David Watson compromised his entitlement to a complete indemnity and did so negligently and/or based on a perceived need to compromise his claim which lacked foundation." 7Paragraphs 187, 188 and 184 to the extent of particulars (a) to (d) take this proposition further by alleging that the advice given to Mr Watson or the Estate to enter into the compromise with Allianz was negligent. They assert that in some way or other that negligence was causative of the loss claimed or operated to diminish the amount of the claim. 8The Estate effectively makes two related complaints about these parts of the pleadings. First, it contends that the payment of $1 million by Allianz in the manner I have indicated is irrelevant to any determination of the amount it might recover from the defendant firm. It says that the effect of the subrogation clause and the general law is such that to the extent it recovers from the defendant firm any amount representing the payment made by Allianz there will arise a corresponding liability or obligation on it to pay that amount to Allianz. It says that, therefore, the Allianz payment is a matter that is entirely neutral in determining the amount of its claim against the defendant firm. 9Secondly, the Estate contends that those paragraphs are vexing and embarrassing to the extent that they complain that the negligence of various other persons caused the amount obtained from Allianz to be too low. The Estate submits those paragraphs raise irrelevant but serious allegations that would require detailed factual investigation, thereby expanding the scope of the proceedings considerably. It is also submitted they may have the potential to affect which legal advisers will ultimately advise and appear for the Estate, as the lawyers named have in the past acted for the Estate. 10Fundamental to these points is the question of principle about the relevance or otherwise of the $1 million payment. In my view, subject to the consideration of the proposed amendments by the defendants to which I will come, it is entirely irrelevant. 11In Le v Williams [2004] NSWSC 645 at [65] Campbell J stated that: "It has been clear law at least since the decision of the Court of Kings Bench in Mason v Sainsbury and Another (1782) 3 Dougl 61; 99 ER 538 that the fact that an insured has recovered his loss from an insurer does not prevent the insured from suing, for the full extent of the loss, a wrongdoer who has caused it. Mason v Sainsbury arose in a situation where the Riot Act had made the Hundred liable, to the same extent as the trespassers who actually caused the damage, for loss sustained in a riot. A householder whose house had been demolished in the Gordon Riots of 1780, had been paid the amount of his loss by his insurer. The insurer brought an action, in the plaintiff's name and with his consent, against a representative of the Hundred. The insurer's right to do so was upheld." Later at [71] his Honour stated: "71 ... In other words, the insured may well hold any damages he recovers on trust for his insurer, but that does not affect his entitlement to those damages. 72 Because Mr Williams owned the fixtures in the kitchen, it is he who has suffered loss in consequence of them being burnt. Legislation required that the owners' corporation take out insurance, which covered loss of the type which Mr Williams sustained. That legislation also required that, when a claim was made on the insurance for Mr Williams' loss, the proceeds of the insurance be expended in making good his loss. Even though he was not named as an insured in the policy, it was a policy which was, in its application to the fire in his unit, no different to an insurance which he had taken out himself. The claim which Mr Williams brings against Ms Le in the Local Court proceedings, is one which alleges that she or her agents were negligent, and alternatively that she is in breach of the terms of the lease. Thus, those proceedings are ones which allege that she is a wrongdoer. In these circumstances the principle in Mason v Sainsbury and Another (1782) 3 Dougl 61; 99 ER 538 prevents her from arguing that the insurance payment which Mr Williams has received, has resulted in him suffering no loss. 12Similarly, in Scholle Industries Pty Ltd v AEP Industries (NZ) Ltd [2009] SASC 145 at [16] White J stated (citations omitted): "Subrogation is recognised as a remedy, founded upon equitable principles, which is available in a variety of circumstances providing for the transfer of rights by operation of law from one person to another. In the insurance context, its purpose is to preclude insureds from being unjustly enriched by a double indemnification. Subrogation is a remedy and not a cause of action. In the case of indemnity insurance, the remedy is available to the insurer. In that context, the doctrine of subrogation does not purport to provide any remedy to a tortfeasor or other third parties who can be compelled to make good the loss insured against." (emphasis added) 13Later his Honour cited the decision in Castellain v Preston (1883) 11 QBD 380 which includes the following quotes from Brett and Bowen LJJ: " Later, Brett LJ said: Now it seems to me that in order to carry out the fundamental rule of insurance law, this doctrine of subrogation must be carried to the extent which I am now about to endeavour to express, namely, that as between the underwriter and the assured the underwriter is entitled to the advantage of every right of the assured, whether such right consists in contract, fulfilled or unfulfilled, or in remedy for tort capable of being insisted on or already insisted on, or in any other right, whether by way of condition or otherwise, legal or equitable, which can be, or has been exercised or has accrued, and whether such right could or could not be enforced by the insurer in the name of the assured by the exercise or acquiring of which right or condition the loss against which the assured is insured, can be, or has been diminished. Bowen LJ, in a passage to similar effect, said: [The principle] is a corollary of the great law of indemnity, and is to the following effect:- That a person who wishes to recover for and is paid by the insurers as for a total loss, cannot take with both hands. If he has a means of diminishing the loss, the result of the use of those means belongs to the underwriters . If he does diminish the loss, he must account for the diminution to the underwriters ." 14If any further confirmation of the principle is required, it is to be found in Esso Petroleum Co Ltd v Hall Russell & Co Ltd [1989] AC 643 ("Esso Bernicia") at 672. 15Subject to any modification of the above principle arising by reason of s 48 of the Insurance Contracts Act (1984) (Cth), a matter to which I will come, these paragraphs in the defence are liable to be struck out. They are, in my view, irrelevant and if they remain they are likely to lead to an expansion of the scope of the issues of what is already likely to be a difficult and complicated matter. 16The other part of paragraphs 184 to 189 to which objection is taken is paragraph 184, particulars (e) to (h). In effect, this part of the pleading pleads some form of contributory negligence on the part of the Estate or Mr Watson in seeking and obtaining advice from three named lawyers to commence these very proceedings and failing to obtain independent legal advice to commence these proceedings. The implication is that the three named lawyers did not give such advice. 17I cannot see how, even if the advice to commence these proceedings was said to be negligent, that provides any possible argument that the loss or damage which is alleged to have been suffered could have somehow been caused by either of them acting in that way. Of necessity the loss claimed in these proceedings predates its commencement. Those paragraphs cannot be sustained. 18It follows that, subject to considering the amendments sought by the defendants, I would strike out the paragraphs objected to.

Application to Amend 19The proposed amendments to the defence that were brought forward today can be conveniently subdivided into four categories. First, amendments are proposed which seek to circumvent the proposition that I have referred to above as to the irrelevancy of the $1 million payment by pleading the fact that the late Mr Watson was not himself a party to the relevant contract of insurance with Allianz but instead could only pursue rights under it by the operation of s 48 of the Insurance Contracts Act. These amendments are reflected in an amendment to paragraph 185 and the addition of paragraph 190. 20At this point I am considering a proposed amendment put forward by the defendant in a case that has been on foot for a number of years. The approach I take is that it is for the defendants to persuade me that the relevant defence is sufficiently arguable to warrant the amendment being allowed. 21It seems that Mr Watson was not a party to the contract of insurance and could only have enforced its terms either by reason of the extended principles in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988] HCA 44; (1988) 165 CLR 107 or by s 48 of the Insurance Contracts Act. Section 48 provides: "Entitlement of named persons to claim (1) Where a person who is not a party to a contract of general insurance is specified or referred to in the contract, whether by name or otherwise, as a person to whom the insurance cover provided by the contract extends, that person has a right to recover the amount of the person's loss from the insurer in accordance with the contract notwithstanding that the person is not a party to the contract. (2) Subject to the contract, a person who has such a right: (a) has, in relation to the person's claim, the same obligations to the insurer as the person would have if the person were the insured; and (b) may discharge the insured's obligations in relation to the loss. (3) The insurer has the same defences to an action under this section as the insurer would have in an action by the insured." 22Mr Toomey QC contends that the fact that the late Mr Watson was not a party is a relevant differentiating factor from the general principle of subrogation described above. In support of this proposition he referred to the decision of Jagot J in Smart v Westpac Banking Corporation [2011] FCA 829; (2011) 282 ALR 400. In Smart a party to the proceedings sought leave to file a cross-claim against an insurer in relation to an insurance policy that they were not a party to, but that they had the benefit of by the operation of s 48. The party seeking leave sought to plead that there was an implied duty of good faith that was owed to him and claimed damages for the breach of that duty. Her Honour refused the application on the basis that it proceeded upon the false premise that s 48 operated to effectively make them a party to the contract of insurance and thereby provide them with all the rights of a party, including the benefit of the duty of good faith as owed by the insurer. 23Mr Toomey QC drew my attention to the following statement of principle from the decision in Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pty Ltd [2009] HCA 50; (2009) 240 CLR 391 at [24] per French CJ, Gummow and Crennan JJ (citations omitted) that was relied upon by Jagot J in Smart: "Section 48 confers a statutory right of recovery upon a non-party referred to or specified in a general contract of insurance as a person insured or to whom cover extends. It does so directly. Its enactment predated the extension, by the decision of this Court in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd of common law rights of recovery for non-party insured persons under an insurance policy. Section 48 does not deem such a person to be a party to the insurance contract thus attracting the rights conferred on a party. It does not purport to confer contractual or equitable rights upon such a person. There is therefore no basis in s 48 for assimilating the position of a non-party insured to that of a person who has "entered into" a contract of insurance within the meaning of s 45(1)." 24In my view this passage does not assist the defendant firm. In this extract their Honours considered whether s 48 deems a person to be a party to the insurance contract so as to attract "the rights conferred on a party". The principle being invoked here does not involve there being the conferral of rights upon the late Mr Watson but whether the Estate assumed an obligation to repay Allianz in the event the Estate recovers from the defendant firm. 25I have already set out the terms of s 48. Subsection 48(2)(b) provides that a person, in this case Mr Watson or the Estate, who has the right to recover by the operation of s 48(1) has "in relation to the person's claim, the same obligations to the insurer as the person would have if the person were the insured". 26On its face, there does not seem to me to be any reason why this would not impose the same obligation on a person in the position of Mr Watson or the Estate as the insured party to repay any amount obtained by way of recovery from a third party pursuant to the principles of subrogation. The subsection does not confine the source of the relevant obligation. It could be contract, equity or statute. 27It is to be remembered that at this point I am considering an application to amend brought by the defendant. I have not been presented with any authority which would suggest that the fact that the late Mr Watson was not a party to the insurance contract differentiates his position from that of an insured when considering the principle described above. What I have been presented with is a section which on its face suggests that he is not. I have not been given any underlying rationale which may suggest that the law might develop so that there might be some reason to differentiate the person in the position of the late Mr Watson from a party to the insurance contract. 28In these circumstances, I am not persuaded to the requisite degree that this aspect of the proposed defence is sufficiently arguable so as to warrant the amendment being made. These parts of the amendment application are refused. 29The second category of amendments in the proposed amended defence raise a contention that any obligation that might arise to repay Allianz the amount of $1 million was extinguished by reason of the fact that Allianz elected not to fund or contribute to the plaintiff's costs of these proceedings (proposed paragraph 191). No argument was directed to this paragraph. On its face I cannot think of any reason why the fact that Allianz has decided not to fund or contribute to the plaintiff's proceedings would in any way disentitle it to recovery of the $1 million. The application insofar as it seeks to add paragraph 191 will also be refused. 30The third category of amendment is set out in paragraph 192. It seeks to plead a defence invoking the proportionate liability provisions in Part IV of the Civil Liability Act 2002. The concurrent wrongdoers are pleaded as being the legal representatives to which I referred earlier. 31The proportionate liability provisions can only be invoked in circumstances where the relevant persons "caused, independently of each other or jointly, the damage or loss that is the subject of the claim" (s 34(2) of the Civil Liability Act). Accepting everything in the proposed defence at its highest, the only "loss" that could have been occasioned to Mr Watson or the Estate from the conduct of the named lawyers is the lost ability to recover a sum in excess of $1 million from Allianz. That is not the loss or damage the subject of the claim in these proceedings. Paragraph 192 in my view does not disclose a proper claim under Part IV of the Civil Liability Act. Leave to amend to add that claim is refused. 32Fourth, paragraph 174 of the proposed amended defence seeks to plead that the late Mr Watson's liability to pay the various costs amount was extinguished by the combination of the settlement with Allianz and cl 3.7 of a Deed of Moratorium between himself, his legal representatives and the person who had the advantage of the costs orders dated 19 September 2005. I have been provided with that Deed and also with a supplementary deed between the same parties dated 17 October 2006. 33The potential for this proposed amendment to prolong the length of the proceedings and expand the issues seems to me to be fairly remote. The form of the pleading seems to me to be solely concerned with the effect of the Deed of Moratorium and the fact of the settlement with Allianz. It does not call into question the wisdom of the settlement with Allianz, nor does it contain the vice that I have identified of assuming or asserting that the moneys paid by Allianz somehow qualify the amount that can be recovered from the defendant firm if the Estate was otherwise successful. 34Ms Heath for the Estate has submitted that the principle reason why the amendment should be disallowed is that it fails to take into account the effect of the supplementary deed. I think there is considerable force in that assertion. However, in my view, given the wording of the deed and that the disadvantage to the plaintiff from the amendment being allowed in terms of time and cost seems to be relatively small, I think it is more appropriate to allow that amendment. In my view it would be unwise, where there is no advantage in time and cost, to attempt to construe the terms of the deed in a factual vacuum on an amendment application. I will allow the application to amend only to the extent it pleads paragraph 174, noting that the plaintiff may wish to file a short reply in relation to that paragraph.

ORDERS 35Accordingly, the orders of the Court are as follows: (1)Paragraphs 184 to 189 of the amended defence are struck out. (2)Leave is granted to the defendants to file a further defence to the further amended statement of claim which adds paragraph 174 in the form that was handed up in court on 22 June 2012. (3)Any submission and affidavit material from the plaintiff on the question of costs and whether they are payable forthwith is to be filed and served by 28 June 2012 with such submission to be no longer than three pages. (4)Any material from the defendant in response to be filed and served by 4 July 2012, with any such submission to be no longer than 3 pages. (5)Any reply to be filed by 9 July 2012, with any such reply not to be longer than a page. (6)Plaintiff's application for indemnity costs to be payable forthwith to be determined on the papers. (7)Listed for further directions before a Registrar on 30 July 2012 at 9am.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 04 July 2012

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