Can defence costs extend to challenging the lawfulness of an underlying inquiry?

Legal Directions

Introduction

In Hird v Chubb Insurance Company of Australia Ltd [2016] VSC 174, the Supreme Court of Victoria has ruled that former Essendon football coach James Hird was not entitled to be indemnified for his legal costs of challenging the lawfulness of a joint investigation between Australian Sports Anti-Doping Authority (‘ASADA’) and the Australian Football League (the ‘AFL’).

Background and Federal Court proceedings

James Hird was a player for the Essendon Football Club (‘Essendon’) in the AFL. Between September 2010 and August 2015, Mr Hird was the coach for Essendon.

In February 2013, AFL and ASADA commenced a joint investigation into an allegation that AFL athletes and support persons may have used prohibited substances and prohibited methods (‘joint investigation’).

Mr Hird was notified that he was required to attend an interview and produce documents as part of the joint investigation (the interview notice). Mr Hird attended the interview and produced relevant documents. The AFL used the investigation to lay a disciplinary charge against Mr Hird. The AFL and Mr Hird settled this charge on various terms, including a 12 month suspension for Mr Hird.

In March 2014, Mr Hird became concerned Essendon employees in 2012 could be issued show cause notices by ASADA. Mr Hird’s counsel provided him with an opinion to the effect that ASADA had exceeded its powers by conducting the joint investigation and that, as a consequence, Mr Hird had grounds for seeking relief against ASADA in the Federal Court. In June 2014, ASADA served 34 Essendon players with show cause notices.

Essendon and Mr Hird then sued ASADA in the Federal Court. Mr Hird claimed that ASADA lacked any power to conduct the joint investigation with the AFL, to rely on information collected during the joint investigation as a basis for any show cause notice, or to refer show cause notices to the Anti-Doping Rule Violation Panel for consideration. He claimed declarations of invalidity, and injunctions restraining the issue of a show cause notice to him, or any further notices to other Essendon players.

In September 2014, the Federal Court dismissed Essendon and Mr Hird’s applications. Mr Hird’s appeal was dismissed by the Full Federal Court in October 2014. Mr Hird incurred defence costs of $659,519.82 as a result of these actions.

Supreme Court

In the Supreme Court, Mr Hird claimed his defence costs (and further costs he was ordered to pay) (the ‘challenge costs’) in the Federal Court proceedings from the defendant, Chubb Insurance Company of Australia Ltd, under the terms of the Directors & Officers Liability Coverage Section of a policy of insurance issued to Essendon (‘the policy’).

Mr Hird claimed Chubb was liable to indemnify him for the challenge costs under Insuring Clauses (A) and (C) of the policy.

Insuring Clause (A) provided relevantly as follows:

‘[Chubb] shall pay, on behalf of each Insured Person, Loss for which the Insured Person is not indemnified by [Essendon] on account of any Executive Claim first made during the Policy Period … for a Wrongful Act occurring before or during the Policy Period…’

Insuring Clause (C) provided relevantly as follows:

‘[Chubb] shall pay, on behalf of each Insured Person, Legal Representation Expenses on account of any Formal Investigation commenced during the Policy Period…’

Mr Hird contended that the interview notice constituted an Executive Claim. He relied on authorities from the United States of America to argue that the an interview notice is included within subparagraph (a)(i) of the definition of Executive Claim of the policy which required a ‘demand for non-pecuniary relief’ . This argument was rejected by Justice Hargrave, who held that the words in subparagraph (a)(i) must be interpreted by reference to their plain meaning in the context of the policy as a whole. He held that the words referred to demands for legal relief other than damages such as specific performance or a declaration and did not include the interview notice.

Mr Hird also argued that the interview notice constituted formal administrative or regulative proceedings within the meaning of subparagraph (a)(vi) of the definition of Executive Claim. ‘Proceeding’ was defined in the policy to be commenced by filing a notice of charges or similar document. Justice Hargrave found no evidence that such a document had been filed and, accordingly, found that the requirements of subparagraph (a)(vi) had not been met.

Justice Hargrave also considered whether Mr Hird had established the existence of a ‘Wrongful Act’. ‘Wrongful Act’ was defined in the policy to include alleged acts or omissions. His Honour held that an allegation of a Wrongful Act required an assertion of fact against Mr Hird which involved a positive statement that the fact was true. Mr Hird alleged that various statements from the AFL and ASADA contained allegations of a wrongful act. Justice Hargrave found that none of these statements:

‘contain[ed] a positive statement that any person in fact used prohibited substances or engaged in prohibited methods.

Accordingly, His Honour held that Chubb was not liable to indemnify Mr Hird under Insuring Clause (A).

Justice Hargrave then considered Mr Hird’s claim for indemnification under Insuring Clause (C).

Justice Hargrave considered whether the costs of challenging the legality of the underlying investigation were incorporated within the meaning of Defence Costs in the policy. Justice Hargrave construed Insuring Clause (C) in the context of the policy as a whole. Justice Hargrave discussed authorities in which forms of positive defensive action – for example, applications to strike out allegations in the context of a proceeding – were found to fall within the context of defending a proceeding. He found that Defence Costs in the policy should be interpreted as including positive defensive action provided it was on account of attendance or provision of information to a formal investigation. His Honour held that ‘Provided [challenges to the legality of the proceeding] are reasonable applications to make, they fall naturally within the concept of ‘defending’ a civil proceeding.’

Justice Hargrave then considered whether the costs incurred were ‘on account of’ the investigation. Justice Hargrave set out the following principles:

‘The primary meaning of the phrase ‘on account of’ is ‘because of…[on account of] relates to the state of mind of the doer of the act, namely, his motive’

‘For action to be taken on account of a specified matter, there must be a causal link between the matter and the action.’

Justice Hargrave accepted Chubb’s contention that Mr Hird had not proved a causal link between his attendance at the interview, or his production of information to the joint investigation, and his decision to commence and maintain the Federal Court proceedings in which he incurred the challenge costs.

On the contrary, Justice Hargrave found that Mr Hird had given evidence that his motive in commencing the Federal Court proceedings was ‘to protect [his] reputation and position as coach of [Essendon]’, to protect or advance his ‘continued employment related to the AFL’, and thus to protect his primary source of income at that time and in the future.

Accordingly, Justice Hargrave dismissed Mr Hird’s claim.

Comments

This decision shows that defence costs can extend to challenging the lawfulness of an underlying inquiry. The ability of an insured to be indemnified for these costs will depend upon the specific terms of the policy and how it is construed as a whole. Further, in order to establish that defence costs were incurred on account of’ an event, such as the underlying inquiry, the insured must show that there was a causal link between the defence costs incurred and the inquiry. Here, Mr Hird failed to show this causal link and consequently was unsuccessful in his claim under the policy for indemnification by Chubb.

Authored by Stephanie Young, Associate, Melbourne.


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