Yanagisawa v Shamrock Civil Engineering Pty Ltd [2021] NSWSC 761 | Case summary

The second defendant's position

The second defendant is being indemnified by the statutory insurer. The solicitors HWL Ebsworth ("HWLE") are instructed and being paid by that insurer.
The second defendant opposes the late claim for contractual indemnity on the basis that the "Employer's Policy of Insurance" (as a Workers Compensation/Employer's Liability Policy is apparently now known), would not cover the second defendant in respect of any liability arising under contract. The second defendant says that in those circumstances, HWLE would be in a potential conflict of interest because, although the second defendant would be entitled to coverage under the employer's policy in respect of any tortious liability, it would not be entitled to indemnity in respect of any contractual liability. This is said to give rise to a potential conflict of interest.
On 1 June 2021, HWLE wrote to the second defendant informing it of the proposed cross-claim and informing it that GIO (the statutory insurer) would indemnify the second defendant in respect of any liability arising out of negligence but not indemnify it in respect of any liability that it may have as a result of the contract claim. Further, HWLE informed the second defendant that because of the potential conflict of interest GIO would not be in a position to defend it in the proceedings and it would need to obtain its own legal representation. GIO would cover its defence costs but only to the extent that those costs are incurred in defence of the negligence claim. HWLE further suggested that the second defendant engage its own lawyers and notify its insurance broker.
In his written submissions, Mr Doak submitted: The potential for a conflict of interest arises because of the disparate interests created by the limited liability of Valley under the WCA and the liability of Valley under the contractual claim. A finding of total liability in Shamrock would be in the interests of Valley's workers compensation insurer but would not be in Valley's interest if the contractual claim succeeded. At the same time, it would potentially be in Valley's interests for there to be a finding that Valley was to bear the majority, if not all of the liability as a tortfeasor.

Consideration

It is unfortunate there has been such a delay in the application to file the cross-claim. Case management orders, including orders ensuring that the pleadings are finalised well before the hearing, are generally made for the very purpose of avoiding this type of dispute.
Of course, as set out in s 56 of the Civil Procedure Act 2005 (NSW), the overriding purpose of the Act and the rules of the Court is to facilitate the just, quick and cheap resolution of the real issues in the proceedings.
As set out in s 57, the objects of case management include the just determination of the proceedings, the efficient disposal of the business of the Court, and the efficient use of the available judicial and administrative resources.
Having said that, it is important to emphasise that any decision must ensure that justice is done between the parties. Doing justice between the parties necessarily includes an assessment of the interests of the parties in bringing the proceedings to an end and ensuring that all issues between the parties are able to be resolved and determined.
I apprehend that there is no dispute as to the terms of the labour hire contract, although I hasten to add that nothing I am saying at this stage prevents the second defendant from raising any defence in answer to the cross-claim. There is a term in the contract pursuant to which the first defendant submits it is entitled to indemnity from the second defendant.
Having accepted the explanation for the delay in the filing of this cross-claim, the question which arises is: having regard to ss 56 and 57, what orders should be made which do justice between all of the parties which, of course, includes the plaintiff?
It seems to me that in the context of this application, it is necessary to say something about the position adopted by the second defendant.
Following decisions such as Nigel Watts Fashion Agencies Pty Ltd v GIO General Insurance Ltd [1994] NSWCA 365, there can be no dispute that the employer's policy does not cover the type of contractual liability which the first defendant seeks to impose upon the second defendant.
In my experience, and indeed as I apprehend the experience of those at the bar table, it has been the routine practice of employers' insurers to raise a potential conflict of interest with the insured whenever a claim in contract is pursued or suggested.
The approach of HWLE on instructions from the employer's insurer has become somewhat standard. That is not a criticism of the solicitor for the second defendant but it is an approach which appears to reflect a policy adopted by employers' insurers in dealing with claims against their insured in contract.
Yet, plainly, if it is necessary for the legal representatives of an insured to cease to act when confronted with a claim in contract and for the insured party to obtain its own legal representation or indeed for there to be separate representation, problems arise.
In my view, the problems or issues identified by the second defendant in its submissions in dealing with such contractual claims are overstated at least in the particular circumstances of this matter.
Indeed, it is not clear to me how ceasing to act could ever really be in the interests of an insured defendant in circumstances in which defendants involved in each proceedings are often small contracting companies who may be unlikely to be able to fund the defence of the matter themselves.
Firstly, it is far from clear that there could be separate representation on any hearing. In Elphick v Westfield Shopping Centre Management Company Pty Limited [2011] NSWCA 356 at [8], Young JA observed that the general rule is that the insured and insurer cannot have separate representation, even if there are insured and uninsured elements to the claim.
Secondly, HWLE are the solicitors for the second defendant, being Valley Earthworks. They owe obligations to their client. As a matter of fact, they have two clients: one being the insurer and one being the insured second defendant. The fact that they are being paid by and act on instructions of their insurer client does not limit the obligations which they owe to the party who they are representing in these proceedings.
They must represent the second defendant having regard to the interests of the second defendant. If, on their instructions there is a defence to the contract claim, they must pursue it.
HWLE acted appropriately by identifying a potential conflict of interest, However, the obligations in this tripartite arrangement are impacted upon by the content of the duty of good faith owed by the insurer to the second defendant
Mr Doak accepted that his insurer client owed a duty of good faith to the second defendant even though the Insurance Contracts Act 1984 (Cth) does not apply to his insurer client, as it is a statutory insurer.
Ordinarily, both parties owe an obligation to act with good faith towards each other. Of course traditionally at common law, the cases in which the question of breach of duty of good faith has arisen generally involved a breach of the duty by the insured.
However, the insurer owes the same obligation of good faith to its insured. In CGU Insurance Limited v AMP Financial Planning Pty Ltd (2007) 235 CLR 1; [2007] HCA 36 at [15], the obligation to act with the utmost good faith was expressed by Gleeson CJ and Crennan J in terms that: "In particular, we accept that utmost good faith may require an insurer to act with due regard to the legitimate interest of an insured as well as to its own interests".
The obligation is conventionally expressed as an obligation to act with fairness and honesty to the insured. It follows that, in conducting the defence of the matter through its own solicitors, the employer's insurer must act not only in its own interests but in the interests of its insured.
I do not apprehend there is any dispute about that in these proceedings, but Mr Doak submits that the potential conflict of interest arises because it would be in the interests of the second defendant that its tortious liability be high so that it has as much coverage as possible under the employer's policy, and in interests of the insurer, that the insured's tortious liability be low, leaving the insured second defendant exposed to the claim in contract.
However, whilst that might be a fair summation of the differing interests of the employer's insurer and the second defendant, that does not mean that the case cannot be properly conducted by those currently representing the second defendant.
If regard is had to both the obligation to act in good faith on the part of the insurer and the personal obligation of the solicitors to conduct the matter in the best interests of their client, then even though there may be a potential conflict of interest, the defence of the matter can be conducted by one firm of solicitors and one counsel. Implicit in the potential conflict of interest is the possibility either that the differing interests might lead to the case being conducted in such a way that the interests of the insurer are preferred or that there is a perception that that might occur. The former seems highly unlikely and the latter can be solved by communication and agreement in advance between the insurer and the insured.
At least in my experience, it is common practice amongst commercial insurers to identify a potential problem in respect of indemnity and enter into an arrangement with their insured which allows the insurer to continue to conduct the matter on a reservation of rights basis and continue to fund the defence of the matter. Indeed, it must be said that it would be more often than not in the interests of the insured defendant that the insurer continue to conduct the defence of the matter as the insurer will then fund it.
Having regard to what was said in Elphick, it seems an unlikely proposition that there could be separate representation on the hearing with one counsel representing the second defendant in respect of his tortious liability and one counsel representing the second defendant in respect of its contractual liability. Indeed, it might be said that the position adopted by the employer's insurer of shifting the obligation back to the second defendant to arrange representation, does not really solve the problem at all because on the submissions today, those representing the second defendant are also in a position of potential conflict of interest because they would be representing the second defendant both in respect of the tortious liability and the contractual liability.
It is a matter for the employer's insurer as to how it handles these types of matters. However, it does not seem to me that its position of suggesting a potential conflict of interest and that the insured should arrange its own representation as a response to a claim in contract (and a basis for opposing the cross-claim in this matter) is a position which it must adopt.
In the circumstances, I do not accept the second defendant's position that if the claim in contract is permitted, the employer's insurer will be forced to relinquish conduct and HWLE will be forced to cease to act and the second defendant will need time to obtain its own representation.
Further, the issue which arises in the contract claim is a construction issue. It is not submitted that it will be necessary for the parties to obtain and serve additional evidence. It is not submitted that those representing the second defendant would be incapable of making submissions in respect of the construction issue.
The other factor which was raised by the second defendant is that there appears to be a public liability insurer in the background. Subsequent to the letter from HWLE to the second defendant, the liability insurer was contacted.
There is an email from Ian Denham of Moray & Agnew dated 22 June 2021. In that email Mr Denham states that he has received instructions from a liability insurer but he did not have instructions to disclose the identity of the insurer. He said that he initially intended to appear under a reservation of rights basis but, although the insurer has not yet made a decision on indemnity, liability is also certainly excluded. He thus did not appear today.
No indication is given as to why coverage would not be available under the policy. I will not speculate why such a decision might be made. Having said that, if there was a dispute between the second defendant and its liability insurer, it is plainly something that can be dealt with by other lawyers instructed directly by the second defendant. By that I mean that if the second defendant seeks to obtain advice as to the obligation of the liability insurer to indemnify it, it can no doubt obtain that advice.
I do not know what the upshot of that advice might be or whether ultimately there would be a dispute between the liability insurer and the second defendant as to the application of its policy. I am thus not inclined to make a decision about the first defendant's proposed cross-claim on the basis that there may or may not be some dispute with the liability insurer.
I might also add that if it ultimately emerges that the liability insurer is liable to indemnify or agrees to indemnify the second defendant in respect of its contractual liability, I would expect that arrangements could be put in place again to ensure the proper running of this case when it commences on 2 August.
Having accepted the explanation for the delay and in circumstances where I do not accept that the position adopted by the second defendant is the only position that it might adopt, I am satisfied that leave should be granted to file the cross-claim, including the claim in contract, and leave is granted.
Having said that, if I am wrong and these matters of representation and involvement of other parties cannot be worked out before the hearing date, I grant leave to the parties to make an application to sever that part of the cross-claim, being the contractual count from the hearing which is commencing on 2 August. If that part of the cross-claim is severed, it will come back for final determination only after the findings have been made as to the circumstances of the accident and on the joint tortfeasors claim.
The second defendant seeks an order for costs on the motion. The first defendant opposes that order on the basis that the reason that we are here is because of the second defendant's attitude to the proposed cross-claim. The first defendant submits that the second defendant has been unsuccessful in opposing the cross-claim. Having said that, Mr Catsanos acknowledges that it was necessary to seek leave, having regard to the failure to comply with earlier court orders.
In my view, the first defendant should pay the costs of the motion. Although the first defendant was successful, leave was granted to file this cross-claim by 25 June 2020. In my view, the first defendant should pay the costs of the motion. There was a delay in the filing of the cross-claim and that led to the matter coming on before me only six weeks before the hearing in circumstances in which the second defendant, having regard to its instructions, felt obliged to oppose the application. In my view, the real reason we are here is because of the delay, and in those circumstances, I order the first defendant pay the costs of the motion.

Yanagisawa v Shamrock Civil Engineering Pty Ltd

At a glance

Court

Decision date

Before

Source

Judgment (6 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (4)