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High Court of New Zealand Decisions |
Last Updated: 31 July 2011
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV 2009 409 000834
BETWEEN RONALD LESLIE FUSSELL PATRICIA LOUISE MCNAMARA Plaintiffs
AND BROADBASE CHRISTCHURCH LIMITED
First Defendant
AND JEREMY NIGEL HENDERSON Second Defendant
AND QBE INSURANCE (INTERNATIONAL) LIMITED
Third Party
Hearing: 18 March 2010 with additional written submissions 8 February 2011 and 17 February 2011
(Heard at Christchurch)
Counsel: N Till QC and B W Walker for Third Party/Applicant
C R Johnstone and E J Walton for Second Defendant/Respondent
Judgment: 29 June 2011
JUDGMENT OF ASSOCIATE JUDGE OSBORNE
as to strike out application
[1] This is an application by the third party (QBE) for an order striking out the defendants‟ (Broadbase/Henderson) claims. To the extent this judgment refers to matters of fact it refers to the facts as stated in the pleadings which are taken to be correct for the present purpose.
Factual background – Mrs McNamara’s and Mr Fussell’s investment advice
from Broadbase/Henderson
[2] The plaintiffs, Mrs McNamara and Mr Fussell (then aged 76 and 68 respectively), went to Broadbase for financial and investment advice in 2004.
FUSSELL V BROADBASE CHRISTCHURCH LIMITED HC CHCH CIV 2009 409 000834 29 June 2011
Broadbase was and is a Christchurch based provider of financial and investment advisory services. The person at Broadbase with whom Mrs McNamara and Mr Fussell dealt was Mr Henderson. Mr Henderson made investment recommendations.
[3] In 2006 Mrs McNamara and Mr Fussell again consulted Mr Henderson who made further investment recommendations. Mr Henderson recommended secured debentures in a number of companies including Bridgecorp Ltd ($75,000.00) and in Propertyfinance Ltd ($75,000.00). Mrs McNamara and Mr Fussell invested in those companies‟ debentures.
[4] The Bridgecorp and Propertyfinance debentures were to mature on
15 March 2008. Bridgecorp and Propertyfinance were placed in receivership in July and August 2007 respectively. At the date of their pleading the plaintiffs pleaded losses from their Bridgecorp and Propertyfinance investments of $71,193.96 and
$98,532.09 respectively. Propertyfinance had in the meantime (in February 2008)
come out of receivership.
[5] Mrs McNamara and Mr Fussell sued Broadbase and Mr Henderson.
[6] Broadbase/Henderson entered through their broker and agent Marsh Ltd a claim under a professional indemnity insurance policy. QBE declined the claim. When this proceeding was issued Broadbase/Henderson joined QBE as a third party.
The factual background – Broadbase’s professional indemnity insurance policy
with QBE
[7] Broadbase, through group professional indemnity insurance, entered into insurance contracts with QBE from March 2002. A policy was in place for each of the ensuing years commencing 1 April 2002 through to and including the year commencing 1 April 2008.
[8] This proceeding directly involves the 2007 policy, although it will be necessary to refer to the policies in place in other years.
[9] The key financial details of the 2007 policy were:
a. Limited indemnity: $2,000,000.00 in the aggregate.
b. Excess: $5,000.00 each and every claim/costs inclusive. c. Agreed (group) premium: $20,000.00 plus GST.
[10] QBE on 2 May 2007 issued an Investment Adviser‟s Endorsement which read:
Investment Advisers Endorsement (Sentinel and Lifestyle Security
Reverse Mortgage Amendment)
QBE shall not be liable under this Policy to provide indemnity in respect of any Claim alleging, arising out of, based upon or attributed to, or in any way involving, directly or indirectly:
a. depreciation, or failure to appreciate, in value of any investments, including but not limited to securities, commodities, currencies, options and futures transactions; or
b. any actual or alleged representation, advice or guarantee provided by or on behalf of the Insured as to the performance of any such investments; or
c. the sale or promotion of any investment that is not compliant with all statutory requirements; or
d. the sale or promotion of any contributory mortgage or contributory scheme including, acting as promoters, acting as a broker, and any advice in relation to investment in a contributory mortgage or contributory scheme; or
e. the sale or promotion of any reverse mortgage or reverse mortgage scheme, including acting as a broker in respect of such scheme and any advice in relation to the release of any equity as part of a reverse mortgage product.
In respect of Sentinel and Lifestyle Security Investment Products only, it is agreed that where the investment adviser has advised the client that they require separate legal advice prior to the transaction being carried out and that the investment adviser receives from the solicitor confirmation that the advice has been given in writing, sub-paragraph (e) is deleted subject to a minimum excess of $25,000 each and every claim.
Provided always that this exclusion does not apply to any Claim or Circumstance arising directly out of the Insured‟s failure to effect a specific investment transaction pursuant to a specific instruction from a client of the insured.
[11] Broadbase/Henderson say that the Court in interpreting the 2007 policy should also have regard to the previous policies and the later policy. Details of those policies are set out in Schedule A to this judgment.
The plaintiffs’ claim
[12] Mrs McNamara and Mr Fussell sue Broadbase/Henderson in four causes of action:
a. For breach of contract (against Broadbase only) – for “very limited and poor financial planning and investment advice”.
b. For negligence (against both defendants) – in relation to the same conduct.
c. For breach of fiduciary duty (against both defendants) – alleging that the defendants had an actual or potential conflict of interest in securing commissions or other benefits through causing the plaintiffs to invest with Bridgecorp and Property Finance.
d. For breach of the Fair Trading Act 1986 (against Broadbase) – alleging that Broadbase engaged in misleading conduct by incorrectly representing that the recommended portfolio involving four finance companies was appropriate for the plaintiffs and by incorrectly representing that the plaintiffs‟ investments were underwritten by Lloyds of London.
The defendants’ claims
[13] Broadbase/Henderson, in their amended statement of claim against QBE, plead four causes of action :
(a) For breach of a contract (the 2007 policy) requiring QBE to indemnify
Broadbase/Henderson.
(b) For breach of the Fair Trading Act – alleging that QBE (directly or through its agent, Marsh) misrepresented for what claims Broadbase/Henderson would be indemnified under the policies from
2003 to 2007.
(c) For enforcement of an expectation of indemnification – alleging that QBE is estopped from refusing indemnification through having created in Broadbase and Mr Henderson an expectation or belief that the 2007 policy would indemnify them.
(d) For breach of a duty of utmost good faith – alleging that in underwriting the policies and specifically the 2007 policy, demanding and receiving policy premiums, and then adopting and maintaining the interpretation which QBE adopts in this proceeding, QBE has breached a duty of utmost good faith and has caused damage to Broadbase/Henderson to the value of the indemnification.
[14] As an adjunct to his submissions, Mr Johnstone provided a further draft amended statement of claim by the defendants. The proposed pleading adheres to the four causes of action previously pleaded but in amended form.
QBE’s application to strike out the defendants’ claim
[15] QBE applied for an order striking out the defendants‟ claim against QBE.
The defendants oppose the application.
Striking out a claim – the principles
[16] High Court Rule 15.1 makes provision for orders striking out all or part of a pleading. In this case QBE as the applicant invokes r 15.1(1)(a) - no reasonably arguable cause of action.
[17] I adopt the following as the general principles applicable to the consideration of this application:
(a) The Court is to assume that the facts pleaded are true (unless they are entirely speculative and without foundation).
(b) The cause of action must be clearly untenable in the sense that the
Court can be certain that it cannot succeed.
(c) The jurisdiction is to be exercised sparingly and only in clear cases.
(d) The jurisdiction is not excluded by the need to decide difficult questions of law, even if requiring extensive argument.
(e) The Court should be slow to rule on novel categories of duty of care at the strike out stage. See Attorney General v Prince [1998] 1 NZLR
262.
[18] Having accepted that the principles are along the above lines, Mr Johnstone submitted that applicable to this case are two further considerations. I accept that they are both considerations to be taken into account.
[19] To be struck out a claim must be so hopeless that it is beyond curing by amendment of the pleadings or more sophisticated argument: Mr Johnstone made reference in particular to the decision in Twin Bright Shipping Co SA v Tauwhareparae Farms Ltd HC Gisborne CIV 2003-416-1, 26 May 2006, per Williams J, at [5]. Reference may also be made to the judgment of Tipping J in Marshall Futures Ltd v Marshall [1992] 1 NZLR 316 at 324, in which his Honour drew upon the motor vehicle insurance world to make a distinction between a pleading which is a total write off and one which is deficient but is capable of effective repair. The Court must have regard to the dangers of striking out the claim of an insured against its insurer when the insured‟s liability to its client (and the basis of any such liability) is yet to be determined. The point is well summarised in Laws of New Zealand, Insurance (Professional Indemnity Insurance) at para 483:
Regardless of how the insured‟s client frames his or her case against the insured, the Court must ascertain, by reference to the ascertainable facts, what the real essence of the client‟s case is. This can normally be done by waiting until the insured makes good his or her liability, the nature of the
findings will then be conclusive as between the insured and the insurer, because it is the insured‟s liability to the client, as ultimately found, that is the basis of the insurer‟s liability. If the client‟s case is found to rest ultimately on the dishonesty of an employee, the insurer will not be liable.
[20] Application of such an approach may be illustrated, as Mr Johnstone suggested, by reference to two New Zealand decisions. In Vero Liability Insurance Ltd v Symphony Group Ltd [2008] NZCA 419 the Court of Appeal heard an appeal in relation to the High Court‟s refusal to strike out a claim against an insurer. The appeal was allowed upon the basis that the insured‟s claim under a policy of indemnity insurance did not disclose an arguable cause of action. The insurer had alternatively argued that even if there was arguable indemnity cover an exclusion clause applied in any event. Harrison J, for the Court, observed at [39] that it was unnecessary for the Court to consider the construction of the exclusion clause (and the application of s 11 Insurance Law Reform Act 1977) because of the primary conclusion reached. His Honour added -
... we would have been reluctant to determine the scope and effect of the clause in the absence of primary evidence, such as might have been given if the Court had earlier ordered formulation of a question or questions for trial, informed by evidence of a limited nature: see r 418 of the High Court Rules. The reason is that on one view of the provision (a view which Mr Hunter supported in oral argument) its scope is much wider than simply excluding liability for damage resulting from “leaky building syndrome”, although presumably that syndrome was the reason for including the exclusion.
[21] In Clasper v Duns [2007] NZHC 1000; [2008] NZCCLR 32 Panckhurst J considered a fraud and dishonesty exemption clause under a professional indemnity insurance policy. QBE, as third party, applied for an order striking out the third party claim against it. Panckhurst J, at [102], recognised that the manner in which the plaintiff‟s claim is formulated is not determinative of its substance (as reflected in the Laws of New Zealand passage I have referred to above [19]) and cited the judgment of Devlin J in West Wake Price & Co v Ching [1956] 3 All ER 821 (an authority also cited by the authors of Laws of New Zealand). His Honour‟s ultimate conclusion, at [117], was that actual fraud or dishonesty was required under the exemption clause and that:
Whether either was a proximate cause of the loss must await resolution of the claim, at which point the real basis, or substance, of the case will fall for consideration.
[22] After I had heard argument in this case, the Court of Appeal heard and subsequently determined an appeal in Trustees Executors Ltd v QBE Insurance (International) Ltd [2010] NZCA 608. Trustees Executors had sought a declaratory judgment as to the interpretation of an exclusion clause which bears some resemblance to the financial adviser‟s endorsement in this case. In the High Court a declaratory judgment had been granted as a simple and inexpensive way to resolve a fundamental question of interpretation of the policy. The Court of Appeal found error in that approach. Glazebrook J for the Court at [42] said:
[42] We do not consider that the Judge was correct in this assessment. We consider that the interpretation of the Policy should be undertaken at a full trial where the question can be considered other than in what is somewhat of a factual vacuum. This is particularly the case because we were urged to consider the background circumstances by both parties (with each asserting that the relevant background supported their interpretation);
and later, at [45]:
[45] We do not consider that we have sufficient evidence to evaluate the different contentions properly. For example, we do not know the exact extent of the investment business of Trustees Executors and exactly how much QBE knew about that business and its extent. We have had no information on the pricing of the Policy as compared to other policies with similar alleged coverage or to those with more extensive coverage. We have limited information on market practice. We also have limited information on exactly how the losses eventuated and the link with the alleged breaches of contract. For example, merely having links between borrowers, valuers and lessees might increase the risks of default but by itself is not necessarily causative of loss. We also have no information on market trends during the relevant period and limited information on market practice. There may also be issues relating to subsequent conduct and possibly even prior negotiations.
(Footnotes excluded)
[23] While the observations of the Court of Appeal in Trustees Executors arose in relation to a declaratory judgment, the Court‟s reasons for considering the declaratory judgment route inappropriate have force in relation to a strike out application also.
The interpretation of contracts – general principles
QBE’s submissions
[24] Mr Till, for QBE, submitted that the starting point for interpretation is the words themselves, applying the ordinary meaning and their policy context, and in the light of the surrounding circumstances known to the parties at the time of the contract. By reference to the decision of the Court of Appeal in Boat Park Ltd v Hutchinson [1999] 2 NZLR 74 (which had adopted the then recent decision of the House of Lords in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98 at 114-115), he accepted that surrounding circumstances include “absolutely anything” reasonably available to the parties which would have affected the way in which a reasonable person would have understood the language of the contract.
[25] With recurring reference to another judgment of the Court of Appeal in Potter v Potter [2003] 3 NZLR 145 at paragraphs [34] to [36], Mr Till submitted that the appropriateness of referring to surrounding circumstances is a rule of last resort which cannot be used to create an ambiguity which, on the ordinary meaning of words, is not there. Reference to the surrounding circumstances should therefore be limited to cases where words used give rise to ambiguity or literal meaning gives rise to unreasonable outcomes. Although Mr Till‟s submissions at the hearing did not particularly refer to the judgment of Ronald Young J in Trustees Executors Ltd v QBE Insurance (International) Ltd HC Auckland CIV 2009-409-1165, 9 October
2009, the approach urged by Mr Till was closely aligned to what his Honour had
summarised as the “interpretative aids” at paragraphs [29] – [30] of the judgment –
29 The starting point is, as always, the words themselves. The words of a contract should, unless the context clearly requires otherwise, have their ordinary meaning. Assistance can be gained from the context in which the disputed words occur, including the phase, the paragraph and the whole of the contract itself. The relevant factual matrix can also assist.
30 The key to ascertain objectively the common intention of the parties using the above factors. If there is ambiguity or other interpretative difficulties then an assessment of the commercial realities, common sense and a consideration of whether a particular result might lead to an unreasonable outcome are relevant.
[26] Against this background, Mr Till, in his oral submissions, submitted that the observations of the Court of Appeal in Potter v Potter remain valid for the primary proposition that it is not appropriate in interpreting a contract to set out to create an ambiguity.
Broadbase/Henderson submissions
[27] Mr Johnstone centred his submissions upon the five principles of interpretation fashioned by Lord Hoffman in Investors Compensation Scheme (above [24]) as adopted by the Court of Appeal as early as 1999 (Boat Park Ltd v Hutchinson) and more recently approved by the Supreme Court in Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5 per Blanchard J at [4] and [11]; Tipping J at [22]; McGrath J at [61] – [66]; Wilson J at [127] and Gault J at [151].
[28] Mr Johnstone submitted that the decision in Potter v Potter, upon which Mr Till had placed some emphasis, is no longer good law. Mr Johnstone made reference to the judgment of McGrath J in Vector at [64] where his Honour characterised Potter v Potter as representing “the more restrictive traditional approach” in relation to ambiguity, which no longer holds good. Mr Johnstone adopted the illustration given by Tipping J in Vector at [22] of the modern approach to interpretation –
An example of that situation is when plain words, read contextually, lead to a result which does not make sense, whether commercially or otherwise: a meaning that flouts business commonsense must yield to one that accords with business commonsense.
[29] That said, it was well recognised in Vector (see, for example, Tipping J at [23] and McGrath J at [66]) that displacement of an apparently plain and unambiguous meaning may be difficult as a matter of proof or may require a strong case.
The Court of Appeal judgments in Trustees Executors Ltd v QBE Insurance
(International) Ltd
[30] The Court of Appeal delivered judgment in Trustees Executors Ltd v QBE
(above [22]) on 14 December 2010 whereupon I offered counsel the opportunity to
make any further submissions arising from that judgment, which opportunity was taken up by counsel in February 2011. Mr Till‟s submissions for QBE focussed on the facts of this case (and comparison of the facts in Trustees Executors v QBE) rather than upon the principles of interpretation. Insofar as the Court of Appeal in Trustees Executors Ltd v QBE had determined that interpretation of the policy in that case should be undertaken at full trial, Mr Till noted (again with reference to the facts) that in Trustees Executors v QBE there was detailed evidence filed to support the contention that interpretation required more background facts than those available from the pleadings.
[31] Ms Walton, for Broadbase/Henderson, similarly focussed mainly on the facts of the two cases but additionally developed a further submission as to the need for interpretation of the policy document in this case against its wider background and circumstances. She noted particularly that in following the majority of the Judges in Vector, the Court of Appeal in Trustees Executors v QBE (per Glazebrook J at [32]) had emphasised the mandatory nature of the exercise –
Under that approach, the wider background and circumstances should always be considered, even if there is no ambiguity or other interpretive (sic) difficulty with the words used by the parties.
[32] The footnote to that observation reads –
See Vector at [4] per Blanchard J (with whom Gault J agreed); at [23] per Tipping J; and at [64] per McGrath J. Potter v Potter [2003] 3 NZLR 145 (CA) at [33]–[34], to which we were referred by QBE, is not good law to the extent it may be seen as suggesting that background is only relevant in the case of ambiguity. Potter v Potter, as McGrath J pointed out in Vector at [64], was overruled on that point by this Court in Ansley v Prospectus Nominees Unlimited [2004] 2 NZLR 590 at [36].
[33] Ms Walton submitted that, absent the relevant background evidence, the
Court cannot properly or fully evaluate the different interpretations contended for.
[34] The very issue raised (the correct approach to interpretation of an insurance contract) has recently been the subject of consideration in this Court and the Court of Appeal. The principles enunciated by the Court of Appeal in Trustees Executors v QBE are applicable in this case.
[35] It is therefore appropriate that, without paraphrase, I adopt that part of the judgment of the Court of Appeal in Trustees Executors v QBE which deals with the applicable approach –
[31] The approach to contractual interpretation in New Zealand is based on the principles set out in Investors Compensation Scheme Ltd v West Bromwich Building Society. The Investors Compensation principles were accepted as applying in New Zealand in Boat Park Ltd v Hutchinson and were most recently considered by the Supreme Court in Vector.
[32] The majority of the judges in Vector adopted the approach in Investors Compensation whereby the language the parties have used must be read in the context of the document as a whole and the surrounding circumstances. Under that approach, the wider background and circumstances should always be considered, even if there is no ambiguity or other interpretive difficulty with the words used by the parties. Evidence of background circumstances is not, however, relevant if it does no more than tend to prove what individual parties subjectively intended or understood their words to mean or to prove what a parties‟ negotiating stance may have been at a particular time.
[3] While it usually makes sense to start with the words of the contract and then move to the context of the contract before considering the wider background and circumstances, there is no presumption in favour of ordinary meaning. A meaning that may appear, when devoid of external context, to be plain and unambiguous, may not ultimately be what the parties intended when considered against all the relevant circumstances. As was noted by Tipping J in Vector, any initial view of the meaning must be provisional only and the reader must be prepared to accept that the provisional meaning may be altered once context has been brought to account.
(Footnote references and footnotes omitted)
QBE Submissions
[36] In his written submissions, Mr Till did not dwell upon any special approach to be taken to the interpretation of exclusion clauses in a contract of insurance. Rather, he emphasised the nature of exclusions (or exceptions) in relation to the operative (or insuring) clause, the operative clause being the starting point for any indemnity assessment. By reference to D Derrington & R Ashton, The Law of
Liability Insurance (2nd ed, LexisNexis, 2005) at [7.5], Mr Till submitted that the
nature of exclusions is to restrict the ambit of an insuring promise so that it does not apply to claims of the kind described. Exclusions may be found in the standard policy wording and may also be enclosed by endorsement. The issue of interpretation is whether this indemnity entitlement under the operative clause is negated by the exclusion (Derrington & Ashton, at [7.11]).
Broadbase/Henderson submissions
[37] Mr Johnstone submitted that there are specific principles applicable to exclusion clauses and that they may be expressed in three different ways:
(a) Exclusion clauses are to be construed narrowly.
(b) A liberal interpretation in favour of the insured should be adopted so far as the ordinary and natural meaning of the words used by the insurers permits that to be done (Mt Albert City Council v New Zealand Municipalities Co-operative Insurance Co Ltd [1983] NZLR
190 per Cooke J at 193, adopting 25 Halsbury‟s Laws of England, 4th
ed., para [594], note 1).
(c) An ambiguity is generally to be construed against the insurer if the insurer has drafted the policy (Trustees Executors v QBE at para [31]).
[38] Mr Johnstone further submitted that the onus of establishing facts sufficient to bring the case within an exception rests on an insurer (citing New Zealand
Municipalities Co-operative Insurance Co Ltd v Mt Albert City Council [1983] NZLR 200 per Somers J at 210).
[39] Mr Johnstone‟s submissions in this regard bore a close resemblance to the formulation of Ronald Young J in Trustees Executors v QBE (above [25]) at [31] where his Honour said –
In particular in relation to exclusion clauses:
(a) The onus of establishing that an exclusion clause applies is on the insurer;
(b) Exclusion clauses should be narrowly construed;
(c) Ambiguities are generally to be construed against the insurer if they have drafted the Policy.
Trustees Executors v QBE
[40] While counsel for both parties in the appeal in Trustees Executors v QBE recognised the principle that an exclusion clause is to be construed narrowly, Trustees Executors contended for an approach that requires the insured‟s interpretation to be preferred where both parties‟ interpretations are reasonably available.
[41] In the judgment of the Court, Glazebrook J, at [38] to [39], recognised as principles that an exclusion clause should be construed narrowly and that the contra proferentem rule (by which a Court will resolve an ambiguity against the party who proffered the phrase) applies in cases of genuine ambiguity.
[42] Her Honour then summarised the correct approach to exclusion clauses at
[40] in this way –
[40] In light of the recent decisions of this Court, it is apparent that, while exclusion clauses (including those in insurance contracts) are to be narrowly construed, a court should adopt an interpretation that correlates with the presumed mutual intention of the parties. We do not, therefore, accept the submission of Trustees Executors that the insured‟s interpretation is, by default, always to be preferred. While it is clear that, in cases of genuine ambiguity, a court will resolve the ambiguity against the party who proffered
the phrase, a court should be wary of creating an ambiguity when no such ambiguity exists.
Interpretation of contracts – subsequent conduct as an aid
QBE’s submissions
[43] Mr Till, for QBE, did not suggest that the Court may not in appropriate cases resort to subsequent conduct to assist interpretation of the contract. Rather, he referred to the six specific acts of subsequent conduct which Broadbase/Henderson have identified and submitted that none of those should lead the Court to depart from the ordinary meaning of the wording used.
Broadbase/Henderson submissions
[44] Mr Johnstone submitted that for the purposes of QBE‟s strike-out application, this Court must proceed upon the basis that the law may permit the admission of subsequent conduct as an aid to interpretation. He referred to observations of the members of the Supreme Court (Blanchard J reserving) in Gibbons Holdings Ltd v Wholesale Distributors Ltd [2008] 1 NZLR 277.
[45] Mr Johnstone accepted that any such conduct would need to be mutual or shared conduct, referring to observations of Tipping and Anderson JJ in Gibbons Holdings. Wylie J had approached the issue of contractual interpretation in precisely that manner in ANZ National Bank Ltd v Tower Insurance Ltd CIV 2005-404-7271, HC Auckland 12 February 2009, at [29] – [31].
Discussion
[46] Given the current state of the law in this area, it would not be appropriate in the context of an application to strike out a claim to treat subsequent conduct as inadmissible in interpreting the contract in question.
Interpretation of contracts – standard form and standard terms
Discussion
[47] Where there is within an industry a practice of adopting standard form contracts or standard terms within contracts the need for consistency in the construction of such contractual terms may influence the determination of what was the objectively assessed intention of particular parties to that contract.
[48] This situation was addressed by Lord Bridge in A/S Awilco of Oslo v Fulvia S.p.A. di Navigazione of Cagliari (The Chikuma) [1981] 1 WLR 314 (HL), where his Lordship said, at 322:
The ideal at which the courts should aim, in construing such clauses, is to produce a result, such that in any given situation both parties seeking legal advice as to their rights and obligations can expect the same clear and confident answer from their advisers and neither will be tempted to embark on long and expensive litigation in the belief that victory depends on winning the sympathy of the court. This ideal may never be fully attainable, but we shall certainly never even approximate to it unless we strive to follow clear and consistent principles and steadfastly refuse to be blown off course by the supposed merits of individual cases.
[49] Belgrave Finance Ltd (in receivership) v K C Securities Ltd HC Auckland CIV 2009-404-6022 9 February 2010 (Associate Judge Bell) contains a recent discussion (at [37] – [38]) of these considerations.
[50] The possibility arises with a standard form term that there is within the market a well-understood meaning. The importance of such meanings to the efficient execution of contractual obligations was recognised by Lord Hope in one of the cases to which Associate Judge Bell referred in Belgrave Finance Ltd v KC Securities Ltd, namely Fiona Trust & Holding Corporation v Privalov [2007] 4 All ER 951.
[51] It follows that if a particular clause has achieved common usage in a particular industry, then litigation in relation to such a clause may require evidence of any commonly understood meaning attaching to that clause.
First cause of action – breach of contract - Is this a suitable case for an application to strike out the claim?
Introduction
[52] While I have yet in this judgment to rehearse the competing arguments as to the interpretation of the contract, it is appropriate to set out at this point the conclusion I have reached in relation to the QBE application.
[53] In my judgment, the interpretation of the policy must be undertaken at a full trial in the same way as the QBE Policy and Securities Exclusion will be considered in Trustees Executors v QBE.
The Broadbase/Henderson claim
[54] Simplified, the Broadbase/Henderson claim is this –
(a) Broadbase/Henderson were financial planners and investment advisers.
(b) At March 2006, 70 percent of their income was earned through investment products.
(c) They were members of the Institute of Financial Advisers Inc. (the IFA) and were required by the IFA‟s Code of Ethics and Professional Conduct (introduced in May 2006) to be covered by professional indemnity insurance at all times covering those areas in which members practise to provide clients with protection from errors and omission, to a minimum level of cover of $500,000.00 with a maximum excess of $10,000.00.
(d) From 2002, renewing annually, Broadbase had a group professional indemnity insurance policy with QBE, arranged through the broker Marsh.
(e) QBE knew, or ought to have known, that Broadbase/Henderson carried on business as financial planners and investment advisers.
(f) QBE knew or ought to have known that approximately 70 percent of Broadbase‟s/Henderson‟s income was earned through “investment products”
(g) QBE directly, or through Marsh, knew that Broadbase/Henderson needed to be covered by professional indemnity insurance under IFA‟s Code of Ethics and Professional Conduct.
(h) QBE, from 2002, issued the various policies and endorsements referred to above and in Schedule A.
(i) QBE in other policies (but not in relation to Broadbase/Henderson) introduced an Insolvency Exclusion (also known as the Bridgecorp Exclusion) which stated –
QBE shall not indemnify the Insured for Claims relating directly or indirectly, attributable to or in consequence of the insolvency of any financial institution or fund manager.
(j) In October 2007, the plaintiffs made allegations of negligence against
Broadbase/Henderson following the collapse of Bridgecorp Ltd.
(k) On 12 October 2007, Broadbase/Henderson notified QBE of the claim and claimed indemnity under the 2007 policy.
(l) From then until October 2008, QBE had Duncan Cotterill acting as solicitors for both itself and Broadbase/Henderson and paid Duncan Cotterill‟s fees.
(m) On 4 April 2008, Angela West of QBE told a Marsh employee that renewal premiums contained in the renewal terms were the absolute minimum for the 2008 renewal on the basis that QBE had a reserved claim of $1.6m.
(n) On 8 May 2008, Angela West told a Marsh employee that QBE had reserved $1,500,000.00 (including $314,000.00 for costs) for claims arising out of losses suffered through the collapse of Bridgecorp and other finance companies.
(o) In early May 2008, Angela West told a Marsh employee that she regretted her oversight in failing to place a Bridgecorp exclusion (or Insolvency Exclusion Endorsement) on the 2008 policy.
(p) On 4 June 2008, Craig Anderson of QBE told a Marsh employee that the intent of the Investment Adviser‟s Endorsement is to remove the effect of the general cycle of ups and downs which did not involve negligence by the adviser and that for there to be cover under the policy, there would have to be negligence on the part of the adviser.
(q) QBE appointed solicitors and counsel to act for Broadbase/Henderson and has, from 2008, paid and is continuing to pay all legal costs in defending four complaints to the IFA Disciplinary Committee brought by clients against Henderson in connection with losses suffered through the collapse of Bridgecorp and other finance companies.
[55] The above is a summary of the Broadbase/Henderson case. In the context of this strike out application, it is taken to be factually correct.
QBE’s case
[56] QBE‟s case in relation to the application to strike out the Broadbase/Henderson claim is that the Broadbase/Henderson claim must fail by reason of the 2007 Investment Adviser‟s Endorsement (above [10]) as correctly interpreted.
[57] QBE says that position arises under both limbs of the Endorsement. It arises under para (a) of the Endorsement because the term “depreciation” encompasses any lower value, including outright loss and covers a situation of corporate failure as
well as market fluctuation in the corporate‟s shares or other securities. Additionally, QBE says that it is not liable under the policy by reason of para (b) of the Endorsement as the plaintiffs‟ claims arose from recommendations made by Broadbase/Henderson as to how the plaintiffs might achieve their retirement goals of income and investment security.
[58] Broadbase/Henderson take issue with the assumptions of meaning contained
within QBE‟s declinature.
The interpretation of the Policy and Endorsement
[59] As my reason for declining the QBE application in this case rests on other aspects of interpretation than these matters of plain, ordinary meaning, I simply at this point summarise the Broadbase/Henderson contentions as to ordinary meaning –
Although the five forms of investments identified in the Endorsement para (a) (the depreciation exception) are not a limited class, the term “investments” must be construed ejusdem generis so that the plaintiff ‟s investments (secured debentures) fall outside paragraph (a). All the other five types of investment are traded on the New Zealand stock exchange, each with a component of performance and a risk that return may not be as much as planned or expected because of market fluctuation. Conversely, the secured debentures carried a fixed interest rate with principal to be repaid on a maturity date and security for the principal by way of a floating charge over company assets.
The terms “depreciation” and
“performance” are not apt to cover the situation of the financial
failure
of the institution behind the security. Reference may be made to
dictionary definitions of “depreciation” which bring
into play
considerations of market value and decrease in value due to market
conditions.
QBE‟s professed position in this litigation,
namely that “depreciation” and “performance”
as used in
the Investment Adviser‟s Endorsement does not mean a loss caused by market
fluctuation, is weakened by QBE‟s
assertion of precisely that
interpretation in Trustees Executors v QBE.
If the intention of the parties (including QBE) was to
exclude claims for “any loss in any investments” then those
are the
words that QBE ought to have adopted (rather than “depreciation in value
of any investments” and “performance”)
– see also the
Court of Appeal‟s discussion of the submissions of Trustee‟s
Executors as to interpretation in Trustees Executors v QBE at [43].
[60] For the same reasons as weighed with the Court of Appeal in Trustees Executors v QBE I do not consider that it is possible to evaluate the different contentions as to interpretation without trial evidence. The need for evidence can be exemplified by reference to matters identified at para [45] of the judgment of the Court of Appeal in Trustees Executors v QBE –
(a) Broadbase/Henderson pleads (and it is assumed for the present purposes to be correct) that 70 percent of their income was earned through investment products and that QBE knew or ought to have known of that – findings on that will be made at trial.
(b) Evidence on the pricing of this policy as compared to other policies with similar alleged coverage or to those with more extensive coverage are a matter for trial.
(c) The Court has limited information on market practices, including in relation to the use of insolvency endorsements. There is no evidence yet as to communications which occurred between QBE and Marsh, at the time group schemes were instituted Policies issued, or Endorsements introduced.
(d) The Court has no information on insurance market trends during the relevant periods and little information (other than through decided cases) on market practice.
(e) There are issues relating to subsequent conduct.
[61] These considerations, which can only properly be explored at trial, then flow into the proposition centrally advanced by Mr Johnstone that it cannot have been the mutual intention of the parties to exclude all coverage for the investment business of the Financial Investment Advisory Service which was Broadbase. This, of course, is the very formulation adopted by the Court of Appeal (at [51]) when making its assessment of the meaning of the expression “depreciation (or failure to appreciate)
in value of any investments” in Trustees Executors v QBE. The Court went on to observe, at [53] –
Our inclination would thus be to categorise the Exclusion clause as excluding what can be broadly described as losses arising from investment forces.
[62] Mr Till endeavoured to meet the suggestion that (on QBE‟s contended interpretation of the Endorsement) Broadbase/Henderson would have virtually no coverage. He listed a series of claims which would not be precluded from coverage, namely claims arising out of the failure to effect a particular transaction; the defence of complaints to the IFA Disciplinary Committee; cover for “fraud and dishonesty of employees” extension; claims of civil liability not arising out of depreciation of investments including breach of contract; defamation; Fair Trading Act; intellectual property; joint venture liability; and loss of documents.
[63] Mr Johnstone characterised Mr Till‟s list as “underwhelming”. On QBE‟s interpretation Broadbase/Henderson would not be covered for the area of its operation most likely to incur liability, namely client losses arising from Broadbase/Henderson negligent advice.
[64] There is a real question in this case as to what the parties must be taken, objectively speaking, to have intended when entering the contract of insurance and in particular the 2007 policy. Did they intend that Broadbase/Henderson were insuring such a relatively modest part of their exposure? The Court will need to hear evidence of the make-up of the Broadbase practice, the value of its various components, and the pricing of policies in relation to the different risks.
[65] In relation to post-contract conduct this is also a case, as in Trustees Executors v QBE, where there have been issues raised as to subsequent conduct. There may be found to be in that conduct evidence relevant to the correct interpretation of the policy. Mr Till made cogent submissions as to the inadmissibility of the conduct relied upon by Broadbase/Henderson. For instance, the conduct and statements of an employee of the broker, Marsh, may be considered unlikely to aid interpretation but the admissibility and weight of such evidence may be better assessed when the Court has heard evidence of Marsh‟s involvement, and
its communication and dealings with QBE. The admissibility and weight of the post-contract conduct remains an area which at this point has not been fully explored in New Zealand and there is the real possibility that some aspects of the subsequent conduct may be found by a trial judge to assist interpretation. That assessment can be properly made when all the evidence concerning conduct is before the Court.
The second cause of action – Fair Trading Act 1986
The Broadbase/Henderson pleading
[66] The defendants plead as their second cause of action breaches of the provisions of the Fair Trading Act. The pleading is –
47. At all material times, the Third Party was in trade.
48. The Third Party has engaged in misleading and/or deceptive conduct and/or alternatively, has made false and misleading representations to the Defendants, directly and/or through the Defendant‟s broker and agent Marsh in that it has:
i. The Third Party knew or ought to have known that at all material times, the Defendants carried on business as financial planners and investment advisers.
ii. The Third Party knew, or ought to have known that approximately 70% of the Second Defendant‟s total income was earned through “investment products”.
iii. Providing representations or advice as to the performance of financial market investments is part of the Defendants‟ business.
iv. The Third Party knew directly, or through Marsh (pursuant to section 10 of the Insurance Law Reform Act 1977), that the Defendants needed to be covered by professional indemnity insurance to provide clients with protection from errors and omissions under the IFA‟s Code of Ethics and Professional Conduct.
v. Loss is an essential element of civil liability for, inter alia,
negligence.
vi. Investment loss is most likely to give rise to allegations of civil liability against the Defendants by any act, error, or
omission or conduct of the defendants in connection with their business;
b. Since 2002, annually issued the Defendants with professional indemnity insurance policy wording which represented that;
i. the Defendants would be indemnified for any investor‟s claims for investment loss alleging civil liability for any act, error, omission or conduct occurring in connection with the Defendants‟ business;
ii. the Defendants would be indemnified for claims by investors, such as the Plaintiffs, for investment loss arising out of the insolvency of finance companies.
iii. the Defendants would be indemnified for claims by investors, such as the Plaintiffs, for investment loss arising out of the failure of fixed interest investments.
iv. The Defendants would be indemnified for claims by investors, such as the Plaintiffs for investment loss arising out of representations or advice as to performance of investments.
c. Since 2003, issuing Investment Adviser‟s Endorsements to the Defendants‟ professional indemnity policies which represented that claims by investors arising out of market fluctuations in the value of investments (absent any act, error, omissions or conduct of the Defendants) would be excluded.
d. During 2003, 2004, 2005, 2006 and 2007 the Third Party issued different Investment Adviser Endorsement wordings to the professional indemnity policies interchangeably and without sufficient notice, thereby representing the Endorsements had the same effect.
49. The Defendants relied on the Third Party‟s conduct and representations in:
a. annually renewing their professional indemnity policies with the
Third Party rather than any other insurer; and
b. providing and continuing to provide services to the Plaintiffs and other investors.
50. The Third Party has refused to indemnify the Defendants for their
alleged civil liability to the Plaintiff ‟s (if any).
[67] In the further draft amended statement of claim provided by Mr Johnstone with his submissions, Broadbase/Henderson add a further set of particulars as to representation which would become para [48][e] and reads –
e. In 2006, through the Professional Indemnity Proposal Form (“the Proposal”) and its agent Marsh pursuant to section 10 of the Insurance Law Reform Act 1977:
i represented, by the title to the Proposal that the professional indemnity policy to which it pertained was suitable for FINANCIAL PLANNERS AND INSURANCE ADVISERS;
ii. represented, by question 1.5 that the professional indemnity policy to which the Proposal pertained was suitable for members of FPIA;
iii represented, by question 2.3 that the professional indemnity policy to which the Proposal pertained was suitable for Investment Advisers;
iv. represented, by question 2.5 that Valid Claims in relation to the types of investments listed at (i), (ii) and (iii) might not be covered, implying all others would be.
The Broadbase/Henderson submissions
[68] Broadbase/Henderson claim that QBE has breached the Fair Trading Act.
[69] Mr Johnstone adopted the three step analysis set out in AMP Finance NZ Ltd v Heaven (1997) 8 TCLR 144 (CA) which requires the Court in relation to s9 Fair Trading Act to determine -
(a) Was the third party‟s conduct capable of being misleading?
(b) Were the defendants in fact misled by that conduct?
(c) Was it reasonable for the Defendants to have been misled by that conduct?
[70] The assessment is an objective one: Goldsbro v Walker [1993] 1 NZLR 394 at 397.
[71] Mr Johnstone accepted that at common law there was no general obligation upon contacting parties to advise one another as to the law. Even silence as to proper interpretation of the contract, without more, will not constitute misleading or
deceptive conduct. He made reference to Mander Forklifts Pty Ltd v Dairy Farmers
Co-operative (1991) 80 PR (Digest) 53-227 at 53-228.
[72] Specifically, with regard to contracts of insurance, Mr Johnstone accepted that an insurer does not breach s 9 Fair Trading Act by negotiating a policy without first warning the insured as to the insured‟s legal obligations in general and t he disclosure obligation in particular. He made reference to Gate v Sun Alliance Insurance Ltd HC Auckland CP 1218/92, 19 January 1994 (Fisher J).
[73] Mr Johnston submitted that the nature of the Broadbase/Henderson business which was the subject of insurance is key. As pleaded, Broadbase/Henderson were financial advisers in the business of giving investment advice with 70 percent of their income earned through investment products. They were members of the IFA whose Code of Ethics required them to carry professional indemnity insurance providing clients with protections from errors and omissions.
[74] Mr Johnstone submitted that also important was the form of proposal provided by QBE and Marsh as broker (the proposal being the subject of the further draft pleading, above [66]). QBE is pleaded to have represented by the title and by questions within the proposal that the professional indemnity policy to which it pertained was suitable for financial planners and investment advisers.
[75] Mr Johnstone summarised the Broadbase/Henderson case under the Fair
Trading Act as turning on three aspects of alleged conduct –
(a) QBE‟s issuing of a policy clearly unsuitable for the
Broadbase/Henderson business and receiving premiums for it;
(b) QBE‟s issuing the Endorsement and Diminution Endorsement interchangeably;
(c) Representations contained in the proposal.
[76] By reason of my conclusion as to the arguability of other aspects of the Fair
Trading Act claim, which I will come to shortly, I do not find it necessary to analyse
in detail Mr Johnstone‟s extensive argument (and Mr Till‟s equally extensive response) as to an “interchangeable” use by QBE of different Endorsements over the years (as set out in the schedule to this judgment). Mr Johnstone submitted that QBE, by issuing the different Endorsements “interchangeably” over a period of years and often well after the period of insurance had begun, had represented to Broadbase/Henderson that the two forms of Endorsement had the same application under the policy and would respond to civil liability claims for the acts, errors, omissions and conduct of Broadbase/Henderson. Mr Till emphasised the separate nature of each contract of insurance as it arose and characterised the Broadbase/Henderson argument as a boot-strapping argument. His submission, in short, was that each policy meant what each policy said. Mr Till noted that before the 2007 policy there had been two policies (2005 and 2006) with an identical Investments Adviser‟s Endorsement.
[77] As I reach my conclusion in relation to the cause of action under Fair Trading Act for different reasons, I refrain from expressing a concluded decision on this aspect of the argument.
[78] I turn to examine the two remaining areas of Mr Johnstone‟s submissions on this point together. The first area relates to the professional indemnity proposal form used for the 2007 policy. While it is a document headed with the name of the broker (Marsh) Mr Johnstone characterises that heading as “mere branding” with the proposal clearly intended to be the vehicle for obtaining QBE‟s policy for financial planners and insurance advisers. It is that title which is used in the proposal. Combined with questions specifically referring to aspects of the profession, Mr Johnstone submits that there are representations as to the suitability of the policy for financial planners and investment advisers. Mr Johnstone submits that by calculating and accepting a premium based on the whole of Broadbase‟s turnover (including the 70 percent which is related to investment products), QBE engaged in misleading and/or deceptive conduct or made false and misleading representations. Perhaps the most succinct manner of summarising the misconduct or misrepresentations is to treat QBE as having represented that this was an insurance policy suitable for financial planners and investment advisers.
[79] Mr Johnstone referred to a decision of the Supreme Court of South Australia in Messagemate Aust. Pty Ltd v National Credit Insurance (Brokers) Pty Ltd (2003)
[2002] SASC 327; 85 SASR 303. The case concerned a policy of trade credit insurance issued by an insurer (FAI) through a broker (NCL). FAI had refused to indemnify the plaintiff arguing that cover under the policy did not extend to the particular circumstances of the claim. In the event Williams J rejected the construction of the policy advanced by FAI. Judgment was entered against FAI on that basis.
[80] His Honour referred not only to the wording of the policy but also to the relevance of the premium paid. His Honour said, at [49] –
The premium paid upon the policy was calculated on the whole of Messagemate‟s turnover which was subject to the ROT [retention of title]. Unless the policy is construed in the manner which I have indicated, I cannot identify any risk to which the policy might attach under the Distribution Agreement in the absence of some implied right to dispose of goods without paying for them...
and at para [50] –
In the present case I can find little if any work for the insurance policy unless the cover be with respect to the general dealings under the distribution agreement ...
[81] His Honour accordingly ruled against FAI on the construction issue. He nevertheless turned to examine the allegations of misrepresentation and misleading and deceptive conduct. At para [95] he said –
In my opinion, it is clear that if (contrary to my judgment) the FAI policy be given the construction for which FAI contends then FAI‟s conduct would nevertheless be in breach of ... the Trade Practices Act as pleaded ... Having calculated and accepted a premium based on the whole of Messagemate‟s turnover (in knowledge of the ROT clause) FAI was representing to NCI and its customer that the policy would respond so as to indemnify the plaintiff in respect of credit sales made under its distribution agreement. It was unconscionable for FAI to take the premium if FAI was not to be effectively placed at risk by virtue of its unusual interpretation of the policy...
QBE submissions
[82] Mr Till, in his written submissions, focussed on Mr Johnstone‟s submissions as to the alleged interchangeability of policies rather than on Mr Johnstone‟s submissions which developed upon the Messagemate case.
[83] In his oral submissions, Mr Till suggested that Broadbase/Henderson could not point to conduct (representation or otherwise) on the part of QBE. At most, Mr Till suggested, what was alleged was knowledge on the part of QBE.
[84] In his reply submissions, Mr Till noted in relation to Messagemate that the case was decided against FAI by virtue of the interpretation of contract of the policy. He submitted that it was important to have regard to Williams J‟s conclusion (at para [95]) that FAI‟s adoption of the unfavourable interpretation had been unconscionable (as well as incorrect). He suggested that the substance of the case was that the insurer was seeking to take premiums without any risk (which Mr Till accepted as an established category of breach of duty). Mr Till rejected the suggestion that there is any duty on the part of an insurer to provide insurance suitable to the needs of the insured. He submitted the Court must respect the rights of the parties to protect their conflicting interests – the insurer with its interest to obtain the greatest premium for the minimum risk and the insured with the converse interest.
Discussion
[85] Mr Till‟s submissions in relation to the Fair Trading Act cause of action suffered from a repeated emphasis upon the suggestion that, when the Broadbase/Henderson case was properly analysed, the cause of action depended upon the mere issuing of the policy.
[86] At the heart of this cause of action for misleading conduct (or misrepresentation) is the fact that QBE put an insurance product on the market specifically for investment advisers and it is alleged (which for present purposes must be accepted) that the premium extracted by QBE was calculated upon
Broadbase‟s entire business. Behind these dealings stood the requirements upon
members of the IFA, such as Broadbase, to carry insurance for their activities.
[87] In Messagemate, the Supreme Court of South Australia found that FAI‟s conduct would have been in breach of the equivalent provisions in the (Australian) Trade Practices Act. Williams J, following his discussion of the applicability of the Trade Practices Act provisions, made reference to FAI‟s “unusual interpretation of the Policy” but that was linked to his Honour‟s additional finding that FAI had acted unconscionably in taking the premium if it was not to be effectively placed at risk by virtue of that interpretation. I do not read his Honour‟s judgment in relation to the Trade Practices Act issues as turning on the fact that FAI‟s interpretation was “unusual”. The salient features in the present case relate to the nature of the industry, its ethical requirement of insurance, and QBE‟s setting and acceptance of premiums based on the full turnover of this insured‟s business.
[88] Assuming the facts to be as pleaded by Broadbase/Henderson, I find it arguable that QBE (in the event that it is successful on its interpretation argument under the first cause of action) engaged in misleading/or deceptive conduct or made false and misleading representations to Broadbase/Henderson directly and/or through Marsh.
Third cause of action – estoppel
The pleadings
[89] Broadbase/Henderson as a third cause of action plead –
51 By its representations and actions pleaded at paragraph 48 above, the Third Party created or encouraged the Defendants to believe or expect that the 2007 policy would indemnify them for any claim:
b for clients‟ investment losses.
52. The Defendants relied on their belief or expectation in:
a annually renewing their professional indemnity insurance policies with the Third Party, rather than any other insurer; and
b. providing and continuing to provide services to the Plaintiffs and other investors.
53. The Defendants have suffered detriment as a result of the Third Party declining their claim for indemnity in that the Defendants have been denied the right of indemnity for any judgment (if entered) obtained by the Plaintiffs and/or any settlement sum payable to the Plaintiffs, and the legal costs, disbursements, witness, assessor or expert costs incurred by the Defendants to answer the Plaintiffs‟ claim and defend this proceeding.
54. The Third Party‟s refusal to indemnify the Defendants based on the
Investment Advisers Endorsement is unconscionable.
The Broadbase/Henderson submissions
[90] Mr Johnstone invited the Court to assess the cause of action in estoppel in the context of what he submitted are the four traditional elements, namely:
(a) A belief or expectation that has been created or encouraged through some action, representation or omission to act by the party against whom the estoppel is alleged;
(b) Reliance on the belief or expectation by the party alleging the estoppel;
(c) Detriment to the party alleging the estoppel;
(d) The creation of unconscionability if the party against whom the estoppel is alleged were to cut across the belief or expectation created.
[91] Since Gillies v Keogh [1989] 2 NZLR 327 (CA) there has been a tendency to depart from strict criteria and to adopt a more open-textured, less exacting test based on unconscionability.
[92] For conduct and representations creating a belief or expectation, Mr
Johnstone referred to the same conduct and representations as relied upon by
Broadbase/Henderson in relation to the Fair Trading Act cause of action. Broadbase/Henderson are entitled in this strike out context to have treated as proved the reliance and detriment which they plead at paragraphs 52 and 53 of the statement of claim.
[93] Mr Johnstone points to the Messagemate decision as one in which the trial judge found unconscionability by reference to circumstances not dissimilar to those pleaded in the present case. He referred also to the judgment of Associate Judge Lang in Lovett v Crown Worldwide (NZ) Ltd HC Auckland CP 373-SD02, 10 June
2004 at paragraphs [94] to [95]. The judgment in Lovett was in a similarly summary context in relation to an insurance situation. His Honour found that it would be possible to found a cause of action based on estoppel in relation to the conduct of an insurer shown to have led its insured to believe that particular cover was provided by an umbrella policy.
[94] In Lovett, Associate Judge Lang, having determined that Crown could found a tenable cause of action on estoppel, went on to consider (at [134] - [146]) whether the Crown‟s estoppel claim amounted to a good arguable case against Royal & Son. On the facts, his Honour determined that Crown could not establish a good arguable case based on estoppel. (A review of the Associate Judge‟s decision was subsequently determined on 29 October 2004 – see Lovett v Crown Worldwide (NZ) Ltd HC Auckland CIV 2002-404-1877, 29 October 2004, Harrison J.) While Harrison J allowed the application to review on other grounds – as to whether Crown had a good arguable case based on breach of a duty of care – the review and judgment did not involve the Associate Judge‟s consideration of the estoppel cause of action.
[95] In Lovett, the Associate Judge, at [146], concluded on the evidence before him that Crown could not point to any act on the part of the insurer (Royal & Son) as distinct from the broker (Jardine) that could have led Crown to believe or expect that the umbrella policy in place provided it with the care, custody or control cover which Crown asserted it was entitled to.
[96] In the application before me, a strike out application, the Broadbase/Henderson allegations are as to misleading conduct or misrepresentations by the insurer (QBE) itself directly or through Marsh as its agent. There was no third party‟s summary judgment application against the defendants and there is no basis upon which the Court can determine the relative merits in terms of evidence. Mr Johnstone submitted that on the facts pleaded it is reasonably arguable that it would amount to unconscionability (parallel to the unconscionability identified by the South Australian Supreme Court in Messagemate). This, he submitted, would justify the estoppel of QBE from asserting that the Broadbase/Henderson claim falls outside the policy coverage.
QBE submissions
[97] For QBE, Mr Till submitted that to the extent that the Broadbase/Henderson pleading relies upon the issuing of the policy, including the Endorsement, the QBE conduct in issuing the Policy cannot of itself create a belief or expectation that the policy would be providing greater coverage than it does. Something more would be required.
[98] Mr Till then turned to the Broadbase/Henderson pleading at paragraph 48 (a) where it is pleaded that QBE had knowledge (actual or imputed) as to the business and make-up of business of Broadbase and as to the requirement (through the IFA‟s code of ethics) for Broadbase/Henderson to be covered by professional indemnity insurance to provide clients with protection from errors and omissions.
[99] To this aspect of the cause of action in estoppel, Mr Till‟s written submission
responded –
82. The allegation is that QBE created or encouraged a belief that the policy was more extensive than it is by the mere issue of that policy. This is tantamount to imposing a duty of care on QBE to provide adequate insurance cover to Broadbase. Stripped to its essentials, it is to say there was a likelihood of certain claims and an ethical obligation to insure for them, which the insurer was obliged to provide cover for. Nowhere however is the basis for such obligation set out. The fact that such basis is not pleaded is not surprising when one considers that Broadbase was represented throughout by one of the world‟s largest Brokers: Marsh. The role of the Broker is to ascertain the needs of the insured and to obtain cover suitable
both as to terms and price to the needs of the client from the insurer. It is obvious that in that situation the interests of the insurer and insured are in conflict with each other and that it is the Broker not the insured who is required to protect the interests of the insured in that way. The Broker is under a duty to give sound advice to the insured (Derrington & Ashton para
13-96 – 13.98 pp 1370-1371).
[100] The concluding reference in that part of Mr Till‟s submissions to Derrington
& Ashton is to those passages (paragraphs 13.396 – 13.398) in which the authors deal with the causes of action which an insured may have against parties other than the insurer, and in particular, causes of action against a broker. Mr Till‟s submission is that any belief or expectation created in this case arose through reliance by Broadbase on its own broker, Marsh. Mr Till again submitted that in essence the Broadbase/Henderson claim is based on the wording of the policy, with any such pleading being misconceived.
[101] In his oral submissions, Mr Till noted a relationship between the conscionability issues of the third cause of action and the good faith issues of the fourth cause of action. In submissions he developed in relation to the alleged duty of the utmost good faith, he submitted that there is no general duty of good faith and that in the pre-contractual period (in this case that is prior to the entry into the 2007 contract of insurance on or about 30 March 2007) it is for the insured to satisfy itself that it is obtaining the coverage it requires.
Discussion
[102] I do not consider it fair to characterise the Broadbase/Henderson claim as based primarily on QBE‟s issuing of the policy. The Broadbase/Henderson claim as pleaded brings in a range of conduct which is said to have created a belief or expectation that the policy would provide greater cover than it does (if the Court favours the QBE construction of the policy).
[103] Ultimately an estoppel is imposed because a Court considers that the defendant‟s conscience is so affected that the defendant should be required to fulfil the expectation that it has created. Whether a range of conduct has reasonably created an expectation in the plaintiff and whether the plaintiff has reasonably acted
in reliance upon that expectation will usually be best considered by a trial judge who has heard the evidence in its entirety.
[104] While the cause of action in the Messagemate case to which I have referred in some detail was in terms of the Trade Practices Act, it was noteworthy that the trial judge in that case reached the conclusion that FAI would be acting unconscionably if, having taken the premium, it was not to be effectively placed at risk. His Honour found significant in reaching that conclusion the evidence as to the calculation of premium on the plaintiff‟s estimated turnover. Each case will have its own particular facts and nuances. In this case Broadbase/Henderson plead other matters such as QBE‟s marketing of an Investment Adviser‟s policy alongside QBE‟s knowledge of the make-up of Broadbase‟s business and the IFA‟s requirements in terms of insurance cover. Broadbase/Henderson also refer to what might be described as the modest range of cover which would remain if QBE‟s construction of the policy is correct. Ultimately, when the value of the cover as asserted by QBE is assessed as against the premium paid it may well be that counsel for QBE at trial will argue that this is simply a case where the insured made a very bad bargain and that it is not for the Court to provide a remedy.
[105] In the Messagemate case the Court found that a remedy would have been available for what it found to be FAI‟s unconscionable conduct, albeit a remedy under the Trade Practices Act. Without resort to statutory remedies, the Courts in equity had already fashioned the remedy based on estoppel. Cases such as Gillies v Keogh demonstrate the flexibility of approach on the part of the Courts to responding to factual situations in which one party has created or encouraged expectations to another‟s detriment.
[106] On the facts pleaded in this case, it is appropriate that it be a trial court that determines on the evidence whether it would be unconscionable for QBE to rely on an interpretation of the policy which precludes this investment adviser from coverage for much of its business, and should be estopped from doing so.
Fourth cause of action – breach of a duty of utmost good faith
The pleading
[107] Broadbase/Henderson as a fourth cause of action plead a breach of a duty of good faith in relation to the 2007 policy. Their pleading is –
56. The Third Party owed the Defendants a duty of utmost good faith;
57. The Third Party breached the duty of utmost good faith by:
a. underwriting the Policies, and specifically the 2007 policy, which does not protect the Defendants from claims alleging civil liability for the Defendants‟ acts, errors, omissions and conduct, if investment loss is the result;
b. underwriting the Policies, and specifically the 2007 policy, which does not protect the Defendants from claims alleging civil liability for the Defendants representations, advice or guarantee, as to the performance of any financial market investment;
c. underwriting the Policies and specifically the 2007 policy which does not protect the Defendants‟ clients from loss resulting from their acts, errors, omissions and conduct, if investment loss is the result, contrary to the Defendant‟s obligations under the IFA Code of Ethics and Professional Conduct.
d. underwriting the Policies, and specifically the 2007 policy which does not protect the Defendants‟ clients from loss resulting from their representation, advice or guarantee as to the performance of any financial market investment.
e. demanding and receiving premium for the 2007 policy which does not protect the Defendants from claims alleging civil liability for their acts, errors, omissions and conduct:
i. if investment loss is the result; or
ii. involving any representation, advice or guarantee as to the performance of any financial market investment.
f. unconscionably adopting an interpretation of the Investment Adviser‟s Endorsement upon which to decline the Plaintiff ‟s claim, twelve months after notification of that claim.
g. maintaining an interpretation of the Investment Adviser‟s
Endorsement which;
i. directly contradicts the Insuring Clauses;
ii. breaches a fundamental and essential term of the
2007 policy.
iii. is contrary to the purpose of the 2007 policy;
iv. flouts commercial commonsense;
vi. applies the policy contrary to the Third Party‟s
representations pleaded at paragraph 38 above;
58. The Defendants have suffered loss as a result of the Third Party‟s breach of the duty of utmost good faith in that the Defendants have been denied the right of indemnity for any judgment (if entered) obtained by the Plaintiffs and/or any settlement sum payable to the Plaintiffs, and the legal costs, disbursements, witness, assessor or expert costs incurred by the Defendants to answer the Plaintiffs‟ claim and defend this proceeding.
QBE’s pleadings
[108] Beginning with the QBE pleadings, QBE admits both that the 2007 policy is a contract of utmost good faith and that QBE owed Broadbase/Henderson a duty of utmost good faith. The Broadbase/Henderson allegations of breach of duty and of resulting loss are met by bare denials.
QBE submissions as to the scope of the duty of good faith
[109] The position accepted on the pleadings is that the 2007 policy is a contract of utmost good faith and that in relation to it QBE owed Broadbase/Henderson a duty of utmost good faith. That is reflected in the opening sentence of the chapter on “utmost good faith and disclosure” in Derrington & Ashton at para 4-1 –
Absent any agreement or legislation to the contrary, there is an underlying rule requiring the utmost good faith (uberrimae fides) mutually between the parties in all contracts of insurance because they are contracts on speculation.
[110] Carter v Boehm [1766] EngR 157; (1766) 3 Burr 1905; 97 ER 1162 (recognising a duty owed by the insurer to disclose the disappearance of the risk if that is unknown to the insured rather than to accept the premium) is often cited as a case involving the insurer‟s duty.
[111] Mr Till submitted that the Broadbase/Henderson submissions make clear neither the scope of the alleged duty of good faith (is it a general duty or something less?) nor the timing of when the duty arises.
[112] Mr Till submitted that there is no general duty of good faith, meaning that the situations in which good faith is required are specific. He noted that in the United Kingdom, building upon the provisions of s 17 Marine Insurance Act 1906, judicial indications at the highest level are that a general duty of good faith exists – see The Star Sea [2001] 2 WLR 170, para 6 per Lord Clyde. He submitted that the preferable approach for New Zealand is that argued by Neil Campbell in
„A sceptical view of good faith in insurance law‟ in D Webb and D Rowe (eds) Insurance Law: Practice, Policy & Principles (Centre for Commercial and Corporate Law Inc, 2004), page 205 at 206-210. Neil Campbell concludes that specific duties of good faith should be recognised in New Zealand but the recognition of a general duty of good faith is not justified.
[113] The implication of Mr Till‟s submissions in this regard was that a plaintiff
must bring itself within recognised categories of duty.
The Broadbase/Henderson submissions as to the scope of the duty of good faith
[114] Mr Johnstone did not seek to develop upon the distinction between a general duty of good faith and specific duties. He submitted however that the extent of the duty of good faith in New Zealand is unclear, referring to the observation of Winkelmann J to that effect in Pegasus Group Ltd v QBE Insurance (International) Ltd HC Auckland CIV 2006-404-6941, 1 December 2009 at [282].
[115] Mr Johnstone further submitted that the duty of good faith of an insurer may, as some commentators suggest, be more stringent than that owed by the insured (see Kelly and Ball [5.0250] at page 5629).
QBE submissions as to specific duties of utmost good faith
[116] Mr Till noted that the Broadbase/Henderson pleading does not identify a
particular duty but refers simply to “the duty of utmost good faith”.
[117] In turning to the pleaded breaches at para 57(a)-(d) of the amended statement of claim, which all involve QBE‟s underwriting for the 2007 policy, Mr Till submitted that the pleading effectively asserts that the mere act of entering into the contract of insurance amounted to the breach of good faith. That is said to arise because in substance the 2007 policy does not provide more extensive cover than the policy provides. Mr Till noted that the basis of the allegation that QBE had a duty not to enter into a policy containing the Endorsement but instead, presumably, a duty not to contract or to enter into a different, more extensive policy is not explained. The argument behind para 57 (a)-(d) of the pleading he suggested was inexplicable, illogical and unsustainable.
[118] In turning to para 57(e) (an alleged breach of the duty of good faith by demanding and receiving the premium for the 2007 policy when the policy does not give coverage for certain conduct), Mr Till identified the implicit argument in that regard as involving the same consequences and therefore being equally unsustainable.
[119] In turning to the pleading at para 57 (f) (unconscionably adopting an interpretation of the Investment Adviser‟s Endorsement upon which to decline the Plaintiff‟s claim, twelve months after notification of that claim), Mr Till submitted that if the Endorsement means what QBE maintains, the mere application of the Endorsement cannot amount to a breach of duty – QBE is then simply acting in accordance with the contract.
[120] In turning to the pleading at para 57(g) (maintaining an interpretation of the Endorsement which is described in various terms such as contradictory, contrary to purpose and flouting commonsense), Mr Till adopted his submissions in relation to para 57(f). Additionally, in relation to the particulars which allege that QBE‟s interpretation of the Endorsement is contrary to the purpose of the 2007 policy, flouts commonsense and renders the cover under the 2007 policy nugatory or merely illusory, Mr Till noted that such criticisms are met by the fact that the Court, in interpreting the contract as a whole, have first found in favour of QBE‟s construction. Finally, under this head, Mr Till submitted that the cover under the
2007 policy is not nugatory or illusory for the reasons earlier identified.
Broadbase/Henderson submissions as to the specific duties of utmost good faith
[121] What Mr Johnstone submitted was that the duty of good faith should extend to requiring an insurer to act with due regard to the legitimate interest of an insured. He referred particularly to Australian authority. First he referred to the decision of the High Court of Australia in CGU Insurance Ltd v AMP Financial Planning Pty Ltd [2007] HCA 36; (2007) 235 CLR 1. He referred to the joint judgment of Gleeson CJ and Crennan J who said at page 12 –
We accept the wider view of the requirement of utmost good faith adopted by the majority in the Full Court, in preference to the view that absence of good faith is limited to dishonesty. In particular, we accept that utmost good faith may require an insurer to act with due regard to the legitimate interests of an insured, as well as to its own interests (Distillers Co Bio-Chemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd [1974] HCA 3; (1974) 130 CLR 1 at 31 per Stephen J). The classic example of an insured‟s obligations of utmost good faith is a requirement of full disclosure to an insurer, that is to say, a requirement to pay regard to the legitimate interests of the insurer. Conversely, an insurer‟s statutory obligation to act with utmost good faith may require an insurer to act, consistently with commercial standards of decency and fairness, with due regard to the interest of the insured. Such an obligation may well affect the conduct of an insurer in making a timely response to a claim for indemnity.
[122] Mr Johnstone submitted that comments in relation to the Australian legislation (the Insurance Contracts Act 1984 (Cth)) are applicable in New Zealand as the statutory duty is identical to the common law duty. Mr Johnstone went on to refer to the decision of the English Court of Appeal in Re Bradley and Essex and
Suffolk Accident Indemnity Society Ltd [1911-13] All ER Rep 444. In particular, Mr
Johnstone noted the observation of Farwell LJ at 453B that -
... it is, in my opinion, scarcely honest to induce a man to propose on certain terms and then to accept that proposal and send a policy as in accordance with it when such policy contains numerous provisions not mentioned in the proposal, which operate to defeat any claim under the policy, and all the more to when such provisions are couched in obscure terms....
[123] Mr Johnstone submitted that it is at least arguable that QBE‟s failure to expressly bring the subsequent inclusion of the Endorsement to the attention of Broadbase/Henderson in the most explicit way, namely an explanation of its destructive effect on the Policy‟s cover, QBE had breached the duty of utmost good faith.
[124] Mr Johnstone submitted that the insurer‟s duty which he was advancing – to act with due regard to the legitimate interest of an insured – is not the same as “a duty to extra–contractually disclose or to ensure that an insured party understands terms and conditions already settled between them by agreement.” This was a reference to Harrison J‟s judgment in Lovett v Crown Worldwide (NZ) Ltd (above [93]) at para [23]).
[125] Mr Johnstone referred also to Bloor v IAG New Zealand Ltd HC Rotorua CIV
2004-463-425, 2 July 2007, a judgment concerning a strike-out application in which Associate Judge Abbott had followed conclusions in Lovett v Crown Worldwide (NZ) Ltd. Mr Johnstone submitted that Bloor, as with Lovett, could be explained in that those cases involve terms and conditions which were already settled between the parties by agreement. In the present case, the Endorsement comes after the Policy.
[126] The balance of Mr Johnstone‟s submissions in relation to the duty of utmost good faith were focussed upon the character of exclusion clauses or exempting conditions. These submissions began with reference to the classic case of Thornton v Shoe Lane Parking Ltd [1971] 1 All ER 686 and the observation of Lord Denning MR, at 690, that –
I do not pause to enquire whether the exempting condition is void for unreasonableness. All I say is that it is so wide and so destructive of rights that the court should not hold any man bound by it unless it is drawn to his
attention in the most explicit way. ... In order to give sufficient notice, it would need to be printed in red ink with a red hand pointing to it, or something equally startling.
[127] Mr Johnstone noted that the approach taken in Thornton v Shoe Lane Parking Ltd (and in particular a further observation in Thornton v Shoe Lane Parking Ltd by McGaw LJ) had been approved and adopted in New Zealand. He referred to the judgment of Salmon J in ProNet Ltd v Clear Communications Ltd HC Auckland CP
123/98 13 September 2001 in which, at [40] – [45], his Honour adopted the decision of the English Court of Appeal in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1988] 1 All ER 348. In particular, Bingham LJ had at page 357 stated:
The tendency of the English authorities has, I think, been to look at the nature of the transaction in question and the character of the parties to it; to consider what notice the party alleged to be bound was given of the particular conditions said to bind him; and to resolve whether in all the circumstances, it is fair to hold them down by the condition in question.
[128] As Salmon J observed, Interfoto was a case of a delivery note containing conditions on the back, one of which was held to be unreasonable and extortionate and so was excluded from the contract because reasonable notice had not been given of it.
[129] The reasoning of Bingham LJ in Interfoto was again accepted (but in that case distinguished) by Wild J in Attorney General v Seven Electrical Ltd HC Wellington CIV 2000-485-787 8 October 2003. Wild J noted, at [43], that prominent in the reasoning of Bingham LJ in Interfoto (and also of Thomas J in Livingstone v Roskilly [1992] 3 NZLR 230) is an emphasis on good faith or “fair and open dealing” in all contracts.
[130] Mr Johnstone drew from a number of cases in this country and in England, including Attorney General v Seven Electrical Ltd, a sliding scale between the unreasonableness of an exempting clause and the notice required. Lord Denning‟s statement in J Spurling v Bradshaw [1956] 2 All ER 121 at paragraph [25] spoke of an obligation arising where provisions had been “so disproportionate in limiting value” and “timeframes so tight”.
[131] Drawing together these threads, Mr Johnstone submitted that it is then logical that the duty of utmost good faith in relation to the insurance contracts requires an insurer to draw the attention of the insured to an exclusion which severely erodes the policy cover in the insured‟s specific situation.
[132] Mr Johnstone particularly referred to two cases involving insurance contracts. First he referred to Dawson v Monarch Insurance Co of New Zealand Ltd [1977] 1
NZLR 372 – he submitted that this decision exemplifies the requirement for specific notice of the requirement upon an insurer to draw attention to a limitation, which has been recognised as an exception to the general rule that the terms and conditions of an insurer‟s usual policy are binding on the insured whether or not the insured has seen them or become acquainted with them. Secondly, Mr Johnstone referred to Braund v Mutual Life & Citizens’ Insurance Co Ltd [1926] NZLR 529 as illustrating the principle that if, when a policy is issued, it conflicts with or enlarges on the exemptions outlined in the original proposal documents, then the insurer should bring them to the attention of the insured if those policy provisions are to be binding.
[133] Mr Johnstone linked these New Zealand authorities to the observations of Farwell LJ in Re Bradley and Essex and Suffolk Accident Indemnity Society which I have referred to (above [122]). It was the observations of Farwell LJ which Stringer J adopted in Braund v Mutual Life & Citizens Insurance Co Ltd when concluding that the insured had not understood the new terms embodied in a policy. His Honour found that the introduced exemptions had been printed in exceptionally small type and contained technical terms; that they had been radically different to the terms of the proposal; and that the plaintiff had the right to assume that the policy conformed substantially to his proposal.
Reply submissions of QBE
[134] Mr Till replied in relation to two aspects of Mr Johnstone‟s submissions on
the duty of good faith.
[135] First Mr Till referred to the judgments of the High Court of Australia in the
CGU case (above [121]). He noted that there was a significant difference in the fact
situations of the CGU case and this. The CGU case had similarity in that the insured plaintiff‟s business was that of providing financial planning advice (to retail investors). Unsatisfactory advice led to claims by investors. The insurer denied liability to indemnify the insured under its insurance policy on the grounds that AMP had taken it upon itself to settle claims where no proceedings had been commenced. The event against which cover was provided in terms of the contract had not occurred. Mr Till submitted that it was important to note that while AMP had argued for both an estoppel and compensation for breach of a duty of utmost good faith, the High Court in allowing the appeal, found that CGU was not estopped from requiring the insured to establish against it that the insured was liable to the investors and that a breach of the obligation of utmost good faith, even if established, would not have resulted in CGU‟s being liable to indemnify the insured.
[136] Mr Till submitted that the discussions of the duty of utmost good faith in the CGU case are consistent with the specific aspects of a duty and are not to be taken as embracing a general duty of utmost good faith. On the facts of the CGU case, the arguable breach of duty arose out of the manner in which CGU dealt with the insured in relation to the settlement of claims. That, submits Mr Till, is the context of what Gleeson CJ and Crennan J said (at page 12) of their judgment (above [121]).
[137] The second area Mr Till addressed in reply was that of exclusions arising from the consideration of Thornton v Shoe Lane Parking Ltd and other cases. Mr Till submitted that the cases in this line of authority relate to issues of contract ual interpretation generally rather than involving consideration of duties arising specifically in the insurance contract context.
[138] He invited the Court to distinguish cases such as Thornton which involve exclusion provisions being added too late or arguably not at all and therefore not attaching to the contract. Mr Till submitted in the present case that there had been a very precise form of notification of the exclusion.
[139] Mr Till referred also to the concept of highlighting or red-inking unusual clauses as envisaged in cases such as Thornton and Interfoto. He submitted that this is a very different case from those, given the clear notice of the Investment Adviser‟s
Endorsement. To the extent that some cases might indicate a need not merely to highlight unusual clauses but also to explain their meanings, Mr Till submitted that Marsh‟s involvement as Broadbase‟s broker counted against any suggestion of a requirement to explain. Mr Till pointed to Marsh‟s role as a worldwide organisation and more particularly as a specialist adviser in relation to insurance needs.
Discussion
[140] There is no question as to the fact that a contract of insurance is one which imposes mutual duties of utmost good faith.
[141] I also recognise that the extent of the duty of utmost good faith in New Zealand remains unclear at this point – see Pegasus Group Ltd v QBE Insurance at [282].
[142] The application of the duty has been recognised in specific contexts. As Harrison J observed in Lovett v Crown Worldwide (NZ) Ltd the duty finds its most frequent expression in the obligation upon an insured party to make full disclosure of any or all circumstances relevant to the risk when applying for cover and a similar obligation exists on submission of a claim. On the other hand, there is the insurer‟s obligation to disclose all known material facts relating to the proposed risk or the recoverability of a claim under the policy that a prudent insured would take into account in deciding whether or not to place the risk with that insurer. After the contract has been entered into, there is for example a duty of good faith in relation to claims made.
[143] The Broadbase/Henderson pleading can in this regard be considered in two parts. The first particulars of breach suggest that QBE should never have underwritten policies unless it first highlighted or explained the correct interpretation of those policies. Similarly, the suggestion is that in the absence of expla nation or highlighting of the correct interpretation of the policies, QBE ought not to have accepted the premiums. The second category of particulars relates to QBE‟s adoption and maintenance of the interpretation which the Court finds to be correct (assuming that to be the case).
[144] Dealing with the second category first, I accept Mr Till‟s submission that it cannot be a breach of duty of good faith for an insurer to adopt or maintain the correct interpretation of the policy. In other words, the insurer is entitled (and indeed obliged) to act in accordance with the contract. There is scope for the invoking of other doctrines, such as Broadbase/Henderson have done in relation to estoppel and the Fair Trading Act, which might lead to the non-implementation of the contract in its terms. In such case a party may effectively be held to do something which the contract itself did not require. But there cannot be a duty of good faith which requires action which departs from the terms of the contract. Accordingly those particulars ought to be struck out of the claim.
[145] The remaining category of particulars of breach of duty of utmost good faith (the first in order in the pleading) relates to the issuing of the policies and the acceptance of the premium.
[146] Initially I was attracted to Mr Till‟s submission, based on the traditional expectation that it is for an insured to inform itself as to the terms of the contract and the meaning of those terms, that there could be no relevant duty of utmost good faith in that context. Mr Till‟s submission is well encapsulated in the judgment of Fisher J in Gate v Sun Alliance Insurance Ltd (above [72]) at page 76. In response to submissions as to an insurer having a duty to warn the insured of particular obligations, his Honour said –
... it seems to me that short of any specific statutory intervention ... the absence of any duty to warn at common law will prevail. It would be difficult to impose such an obligation upon insurers at common law without founding it upon some broader principle which would potentially relate to other types of contract as well. At common law there is no general obligation upon contracting parties to advise each other as to the law. Even silence as to the proper interpretation of a contract, without more, does not constitute misleading or deceptive conduct: see Mander Forklifts Pty Ltd v Dairy Farmers Co-operative (1990) 80 PR (Digest) 53-227 at p 53-228 ...
The law has fashioned other remedies to deal with inappropriate conduct leading to a contract. The law of contract has also fashioned through principles of interpretation means by which intended provisions which have not been brought properly to the attention of the other party are found not to have become contractual terms. That is the context of a number of the cases to which Mr Johnstone referred me in the course
of his submissions. Such cases may well assume significance of trial in relation to the first cause of action when submissions are made for Broadbase/Henderson as to the correct interpretation of the contract.
[147] All that said, there is authority for Mr Johnstone‟s proposition that in this case the particular circumstances in which the policy was issued, premium accepted and endorsement issued, lend themselves to a sustainable argument as to breach of a duty of utmost good faith.
[148] In Re Bradley and Essex and Suffolk Accident Indemnity Society Ltd an insured had effected a policy of insurance with an insurance society against his liability for workman‟s compensation. He paid a premium. The policy contained a number of conditions which were declared by the policy to be conditions precedent to the liability thereunder. One condition (condition 5) included provisions which required the name of every employee and the amount of his wages to be duly recorded in a proper wages book, with the details to be supplied to the society. The record was not kept and the information was not supplied to the society. There was no adjustment of premium on renewal or at all.
[149] At first instance, Bray J approached the matter as one of interpretation and found that the requirements referred to were to be read in the entirety of the surrounding provisions (condition 5). When interpreted, the object of condition 5 was adjustment of the premium of the policy. The failure of the insured to comply with the recording and reporting requirements did not amount to breach of the condition precedent and did not disentitle the insured from recovering from the insurers.
[150] In the Court of Appeal, Cozens-Hardy MR upheld the decision of Bray J for the same reasons. His Lordship observed at 448, that –
A policy of this nature, in case of ambiguity or doubt, ought to be construed against the office and in favour of the policy holder...
[151] Fletcher Moulton LJ dissented, finding no ambiguity in the language of condition 5.
[152] The key judgment for present purposes is that of Farwell LJ, part of which Mr Johnstone cited in his submissions. The full judgment of Farwell LJ is illuminating in the present context. It begins thus, at 452 –
Contracts of insurance are contracts in which uberrima fidas is required not only from the assured but also from the company insuring. It is the universal practice for the companies to prepare both the forms of proposal and the form of policy. Both are issued by them on printed forms kept ready for use. It is their duty to make the policy accord with and not exceed the proposal, and to express both in clear and unambiguous terms, lest, as Fletcher Moulton LJ says, quoting Lord St Leonards in Joel v Law Union and Crown Insurance Co (2) [1908] 2 KB at p 886) provisions should be introduced into policies which
“unless they are fully explained to the parties will lead a vast number of persons to suppose that they had made a provision for their families by an insurance on their lives, and by payment of perhaps a very considerable portion of their income, when in point of fact from the very commencement the policy was not worth the paper on which it was written.”
It is especially incumbent on insurance companies to make clear both in their proposal forms and in their policies the conditions which are precedent to their liability to pay ... Accordingly, it has been established that the doctrine policies are to be construed contra proferentes applies strongly against the company: see Re Etherington & Lanchireshire and Yorkshire Accident and Insurance Co. It has been further held that if the proposal be in one form and the office draws up the policy in a different form, varying the rights of the assured, courts of equity would rectify the policy so as to make it accord with the proposal: Collett v Morrison; Griffiths v Fleming, and in cases like the present, where the proposal is “considered as incorporated” in the policy, the court will, on construction of the two documents read together, give effect to the proposal as overriding the policy where they differ. These considerations are particularly applicable to insurances under the Workmen‟s Compensation Act 1906. That Act has rendered it practically necessary for all who desire to avoid the risk of bankruptcy and cannot afford to be their own insurers to insure...
[153] Farwell LJ went on, at 453, to observe that there was no objection to insurance companies inserting conditions precedent to protect themselves –
so long as the intending assurer has full and fair notice of them and assents to them. This is can easily be done by stating them shortly in the proposal form with the addition that payment may be refused if they or any of them are not complied with.
[154] It is then that his Lordship added the passage which Mr Johnstone cited in his submissions –
But it is, in my opinion, scarcely honest to induce a man to propose on certain terms and then to accept that proposal and send a policy as in accordance with it when such policy contains numerous provisions not mentioned in the proposal which operate to defeat any claim under the policy, and all the more so when such provisions are couched in obscure terms.
[155] Significantly, while other judges both below and in the Court of Appeal approached the case purely as an interpretation exercise, Farwell LJ commenced his judgment by placing the case in the context of the duty of utmost good faith. His Lordship‟s judgment illustrates the fact that the application of principles of contractual interpretation and the application of the duty of good faith do not operate exclusively and may well overlap.
[156] In Braund v Mutual Life & Citizens Assurance Co Limited Stringer J adopted from Re Bradley and Essex and Suffolk Accident Indemnity Society observations of Farwell LJ in the Bradley and Essex case. His Honour did so with the introduction, at 533 –
It is the universal practice of insurance companies to prepare both the form of proposal and form of policy, which are on printed forms ready for use, and it is the duty of such companies to make the policy accord with and not exceed the proposal, and to express in both clear and unambiguous terms: In Re Bradley and Essex and Suffolk Accident Indemnity Society.
[157] His Honour‟s reference to the judgment of Farwell LJ and specific reference to a duty is entirely in keeping with the submissions made by Mr Johnstone that a duty of utmost good faith may, and indeed does, arise in this context.
[158] While there may be in the abstract a tension between this conclusion and the lack of obligation referred to in such cases as Gate v Sun Alliance, it is at least arguable on the pleaded facts of this case that the two approaches are reconcilable. In Gate v Sun Alliance Fisher J‟s observation was that “even silence as to the proper interpretation of the contract, without more, does not constitute misleading or deceptive conduct” (my emphasis). Mr Johnstone is entitled on the pleaded facts in this case to say that there is “more”.
[159] As Mr Till had himself urged upon me, the Court‟s focus in this case must be
upon the 2007 policy (rather than the whole series of policies). The 2007 policy
issued on or about 31 March 2007. The Endorsement was not issued until 2 May
2007. It was issued without recalculation of the premium. It was issued without any explanation as to whether or not the Endorsement effected a significant change to the nature of the risk insured in terms of the 2007 proposal documents submitted for the purposes of the issuing of the policy or of the 2007 policy itself.
[160] In relation to the particulars alleged at para 57(a) – (e) of the amended statement of claim (as constituting breach of the duty of utmost good faith), I find that Broadbase/Henderson have an arguable case which does not lend itself to strike out. As the judgment of Stringer J in Braund v Mutual Life & Citizens Insurance Co Ltd illustrates, an insured would then have a route to obtaining damages in that the Court in equity may interfere so as to rectify the contract and to make the policy conform with that which the Court considers the true contract between the parties to be.
Orders
[161] I order –
1. Paragraph 57f and paragraph 57g of the Amended Statement of Claim dated 23 November 2009 are struck out;
2. Except to that extent, the third party‟s application for an order striking
out the claim against the third party is dismissed.
3. The defendants are within 20 working days to file and serve a second Amended Statement of Claim against the third party having regard to this order and such other amendments as the defendants intend to make;
4. Costs are reserved.
Costs
[162] The third party has been largely unsuccessful on this proceeding in that all four causes of action against it remain, albeit with some particulars of the fourth cause of action struck out. My present view is that costs must follow the event. In the circumstances, I tentatively view a certificate for second counsel and 2B award the appropriate, subject to an adjustment of 10% of the normal award to allow for the third party‟s modest success. If counsel or the parties cannot agree on costs the defendants are to file and serve a Memorandum to be following within five working days by the third party. I would then deal with costs on the papers unless a hearing
is requested.
Associate Judge Osborne
Solicitors:
GCA Lawyers, Christchurch, for Plaintiffs (Counsel: T Sissons)
Wynn Williams & Co, Christchurch, for First and Second Defendants at the hearing (Counsel: C R Johnstone)
Duncan Cotterill, Christchurch for Third Party (Counsel: N Till QC)
SCHEDULE A
2002 Policy – 1 April 2002-1 April 2003
Financial Conditions:
a. Limited indemnity: $2,500,000.00 in the aggregate. b. Excess: $5,000.00 each and every claim.
c. Agreed (group) premium: $21,000.00 plus GST.
2003 Policy – 1 April 2003-1 April 2004
Financial Conditions:
a. Limited indemnity: $1,500,000.00 in the aggregate.
b. Excess: $5,000.00 each and every claim/costs inclusive. c. Agreed (group) premium: $29,000.00 plus GST.
16 April 2003 Investment Advisers Endorsement
It is noted and agreed that QBE shall not indemnify the Insured for any Claims alleging, arising out of, based upon or attributable to, or in any way involving, directly or indirectly:
...
(iii) Diminution in value of money, securities, property, or any other item of value, unless such diminution is value is caused by any act, error or omission of the Insured in the execution or implementation or investment advice or investment decisions.
2004 Policy – 1 April 2004-1 April 2005
Financial Conditions:
a. Limited indemnity: $1,500,000.00 in the aggregate.
b. Excess: $5,000.00 each and every claim/costs inclusive. c. Agreed (group) premium: $35,702.00 plus GST.
27 May 2004 Investment Advisers Endorsement
It is noted and agreed that QBE shall not indemnify the Insured against any Claims alleging, arising out of, based upon or attributed to, or in any way involving, directly or indirectly-
a) depreciation or failure to appreciate in value of any investments, including but not limited to securities, commodities, currencies, options and future transactions; or
b) any actual or alleged representations, advice or guarantee provided by or on behalf of the Insured as to the performance of any such investments; or
...
Provided always that this exclusion does not apply to any Claim or Circumstance arising directly out of the Insured’s failure to effect a specific investment transaction pursuant to a specific instruction from a client of the Insured.
2005 Policy – 1 April 2005-1 April 2006
Financial Conditions:
a. Limited indemnity: $2,000,000.00 in the aggregate.
b. Excess: $5,000.00 each and every claim/costs inclusive. c. Agreed (group) premium: $35,000.00 plus GST.
22 June 2005 Investment Advisers Endorsement:
QBE shall not be liable in respect of any Claim alleging or relating to:
...
3. diminution in value of money, securities, property or any other item of value, unless such diminution in value is caused by any act, error or omission of the Insured in the execution or implementation of investment advice or investment decisions.
...
5. failure of any investment to;
(a) perform as stated within any prospectus, product brochure or advertising, or
(b) meet any product forecast, interest rate yield or dividend increase; or
(c) increase in any promised or stated way.
10 March 2006 Investment Advisers Endorsement Deleted and Replaced with the
Following:
Investment Advisers Endorsement (Sentinel and Lifestyle Security Reverse
Mortgage Amendment)
QBE shall not be liable under this Policy to provide indemnity in respect of any Claim alleging, arising out of, based upon or attributed to, or in any way involving, directly or indirectly:
a. depreciation or failure to appreciate, in value of any investments, including but not limited to securities, commodities, currencies, options and futures transactions; or
b. any actual or alleged representation, advice or guarantee provided by or on behalf of the Insured as to the performance of any such investments; or
c. the sale or promotion of any investment that is not compliant with all statutory requirements; or
d. the sale or promotion of any contributory mortgage or contributory scheme including acting as promoters, acting as a broker, and any advice in relation to investment in a contributory mortgage or contributory scheme; or
e. the sale or promotion of any reverse mortgage or reverse mortgage scheme, including acting as a broker in respect of such scheme and any advice in relation to the release of any equity as part of a reverse mortgage product.
In respect of Sentinel and Lifestyle Security Investment Products only, it is agreed that where the investment adviser has advised the client that they require separate legal advice prior to the transaction being carried out and that the investment adviser receives from the solicitor confirmation that the advice has been given in writing, sub-paragraph (e) is deleted subject to a minimum excess of $25,000 each and every claim.
Provided always that this exclusion does not apply to any Claim or Circumstance arising directly out of the Insured’s failure to effect a specific investment transaction pursuant to a specific instruction from a client of the Insured.
2006 Policy - 1 April 2006-1 April 2007
Financial Conditions:
a. Limited indemnity: $2,000,000.00 in the aggregate.
b. Excess: $5,000.00 each and every claim/costs inclusive. c. Agreed (group) premium: $28,000.00 plus GST.
7 June 2006 Investment Advisers Endorsement
(Identical to 10 March 2006 endorsement above)
2007 policy – 1 April 2007-1 April 2008
Introductory Provisions:
The terms and conditions of the 2007 policy are pleaded as though set out in full, but specifically, it provided that:
In consideration of the payment of the premium to QBE insurance
(International) Limited (“QBE”) and in reliance on the written proposal,
declaration and any other underwriting information provided, which shall be deemed to be incorporated into and be the basis of this Policy, QBE shall indemnify the Insured as follows:
INSURING CLAUSES
1 Civil Liability
QBE shall indemnify the Insured for any Valid Claim subject to the terms of this Policy.
2 Costs and Expenses
In addition, QBE shall pay Costs and Expenses incurred with the written consent of QBE in the defence or settlement of any Valid Claim, up to the Limit of Indemnity or $2,000,000 whichever is the lesser.
(“the Insuring Clauses”)
Definitions included:
a. “Claim” as
2.1 legal proceedings instituted and served on the Insured claiming damages; or
2.2 any allegation of wrongdoing by the Insured or for which the Insured is legally liable, together with a demand for damages; or
2.3 any threat or intimation that legal proceedings will be issued
against the Insured.”
b. “Valid Claim” as:
“Any Claim
15.1 first made against the Insured during the Period of
Insurance; and
15.2 notified in writing by the Insured to QBE during the Period of Insurance; and
15.3 alleging civil liability, by any act, error, omission or conduct that occurred subsequent to the Retroactive Date in connection with the Insured’s Professional Business Practice.
Claims that do not satisfy 15.1, 15.2 and 15.3 of this definition shall
not be covered under this Policy”
Financial Conditions:
a. Limited indemnity: $2,000,000.00 in the aggregate.
b. Excess: $5,000.00 each and every claim/costs inclusive. c. Agreed (group) premium: $20,000.00 plus GST.
2 May 2007 Investment Advisers Endorsement
(Identical to 10 March 2006 endorsement as above)
2008 Policy – 1 April 2008-1 April 2009
Financial Conditions:
a. Limited indemnity: $1,000,000.00 in the aggregate.
b. Excess: $10,000.00 each and every claim/costs inclusive but $25,000 for
Broadbase Christchurch Ltd.
c. Agreed (group) premium: $124,000.00 plus GST.
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URL: http://www.nzlii.org/nz/cases/NZHC/2011/751.html