Joinder of insurer by plaintiff for declaratory relief

Legal Directions

Introduction

In CGU Insurance Limited v Blakeley [2016] HCA 2 the High Court of Australia upheld a decision from the Court of Appeal in Victoria that liquidators of a company, who were not party to an insurance contract, had a proper basis for joining an insurer as a defendant to a proceeding for the purposes of seeking declaratory relief.

Background and lower Court decisions

The liquidators of Akron Roads Pty Ltd (in Liquidation) (‘Akron’) brought an action in the Supreme Court of Victoria against its former directors. Those directors included Trevor Crewe and Crewe Sharp Pty Ltd (‘Crewe Sharp’); the latter was deemed to be a director under section 9 of the Corporations Act 2001 (Cth) (‘the Act’). In the proceedings, Akron claimed that its directors breached sections 588G and 588M of the Act because they allowed it to trade and incur debts of $14,657,189.05 while it was insolvent.

Crewe Sharp subsequently entered into voluntary liquidation. At the time of the allegedly insolvent trading, Crewe Sharp held a professional indemnity policy with CGU. Mr Crewe, as a former director of Crewe Sharp, was also an insured under this policy. Crewe Sharp made a claim on this policy for indemnity in relation to the claim brought against it by the liquidators. CGU denied indemnity to Crewe Sharp on the basis that the policy did not provide cover in respect of the claims made against Crewe Sharp.

Akron sought an order to join CGU to the proceedings. In relation to Crewe Sharp, the liquidators based their application on the priority which section 562 of the Act would afford them in respect of any amount payable by CGU to Crewe Sharp under the insurance policy. In relation to Mr Crewe, the liquidators based their application on the fact that, if the claim succeeded and resulted in Mr Crewe being declared bankrupt, the liquidators would have priority under section 117 of the Bankruptcy Act 1966 (Cth) (‘BA’) in respect of any amount payable by CGU to Mr Crewe under the policy.

Joinder was sought on the basis that Akron had a right to seek a declaration that CGU must indemnify the insureds for their liability to compensate Akron for its claimed loss up to the policy limit of $5 million.

The primary court allowed the application and this was upheld on appeal. CGU applied for special leave to the High Court which was granted. CGU argued that the Court of Appeal had erred in finding (among other things) that s 562 of the Act and s 117 of the Bankruptcy Act operate as an exception to the privity rule and provide the basis upon which an outsider may seek declaratory relief about the meaning and effect of a contract.

High Court

The High Court was unanimous in its decision to dismiss CGU’s appeal. Justices French, Kiefel, Bell and Keane delivered a joint judgment, with Justice Nettle providing separate reasons.

Conflicting Authorities regarding declaratory relief

The majority in a Queensland Court of Appeal case, Interchase Corporation Ltd (in liq) v FAI General Insurance Co Ltd [2000] 2 Qd R 301 (‘Interchase’), considered whether a declaration could be sought in similar circumstances. Justice Byrne, who was in the majority, held that since the declaration sought by the plaintiff related exclusively to the insurer’s liability to the insured, it could not directly affect any property, legal right or obligation of the plaintiff and therefore the subject of the declaration would be theoretical and not able to be considered by the Court. Associate Justice Davies in dissent held that the declaratory relief was not hypothetical and should be allowed as it had utility to ‘effectively determine the question of [the insurer’s] liability to the valuers as between those parties’.

In the Federal Court’s decision of Ashmere Cove Pty Ltd v Beekink (No 2) [2007] FCA 1421 (‘Ashmere’), Justice French allowed the joinder of an insurer on the basis of the plaintiff’s claim for declaratory relief, which was affirmed by the Full Court on appeal. Justice French held that section 562 of the Act confers a right of priority in respect of the proceeds of any successful claim by the defendant against the insurer, which gives the plaintiff liquidator a real interest in having the insurer’s obligations to the defendant determined by way of declaration in the course of the proceeding in which the defendant’s liability to the liquidator is determined.

The High Court held that the approaches of Justice Davies in Interchase and Justice French in Ashmere are to be preferred and went on to consider whether declaratory relief was available to Akron.

Justiciable controversy

The key issue was whether the judicial power of the Commonwealth (invested in the Supreme Court of Victoria) was enlivened by the claim for declaratory relief against CGU. The answer to this question depended on whether that claim involved a justiciable controversy.

All Justices held that there was a justiciable controversy. The joint judgment at [67]:

The interest upon which the claim for declaratory relief is based and CGU’s denial of liability under the policy are sufficient to constitute a justiciable controversy between the Akron liquidators and CGU involving a question arising under a law of the Commonwealth. Because of these statutory provisions [s. 562 of the Act and s. 117 of the BA], it is the Akron liquidators who stand to benefit (to the exclusion of Crewe Sharp and Mr Crewe) from the making of the declaration sought…

Justice Nettle at [89]:

…[I]n a case of this kind the core of the justiciable controversy is the dispute between the liquidators and the directors. There is also a controversy between the directors and the insurer as to whether the insurer is liable to indemnify the directors against the liquidators’ claims, which forms part of the single controversy arising out of the liquidators’ claims against the directors. The success of the liquidators’ claims against the directors is an essential prerequisite to the determination of any claim by the directors against the insurer. The liquidators’ claim that the insurer is bound to indemnify the directors arises out of the same substratum of facts as the liquidators’ claims against the directors. And the liquidators have a real interest in establishing that the insurer is liable to indemnify the directors. That is sufficient to comprise a justiciable controversy for the purposes of identifying a matter that attracts jurisdiction.

1. CGU raised three factors which it argued the High Court should consider in allowing its appeal. These were not directly addressed in the joint judgment; however. Justice Nettle considered them in his judgment. These factors were:CGU argued that the question that Akron was asking to be answered in the declaration was purely hypothetical and, accordingly, declaratory relief should not be granted. Justice Nettle dismissed this argument stating at [166]:

[t]he object of joining CGU as a defendant is to enable the question of CGU’s liability to indemnify the directors to be determined at the same time as the directors’ liability to the liquidators. When and if the Supreme Court makes a declaration that CGU is liable to indemnify the directors against their liabilities to the liquidators, it will be because the Court has determined that the directors are liable to the liquidators.

2.CGU raised the argument there was a difference in circumstances between the claim that CGU is liable to indemnify Crewe Sharp, and the claim that it is liable to indemnify Mr Crewe. It argued that Crewe Sharp was in liquidation and therefore section 562 of the Act clearly applied. However, Mr Crewe was not bankrupt and therefore section 117 of the BA was not yet triggered.

[t]he object of joining CGU as a defendant is to enable the question of CGU’s liability to indemnify the directors to be determined at the same time as the directors’ liability to the liquidators. When and if the Supreme Court makes a declaration that CGU is liable to indemnify the directors against their liabilities to the liquidators, it will be because the Court has determined that the directors are liable to the liquidators.

Justice Nettle dismissed this argument indicating that it was a matter for the trial judge to determine whether a claim under the BA was likely to occur.

3. CGU argued it was unlikely that the directors of Crewe Sharp would actively participate in the proceeding and since it had pleaded non-disclosure defences, it was not possible to know the extent to which CGU would be estopped in any subsequent proceeding. Justice Nettle dismissed this argument, stating that the non-participation of the directors of Crewe Sharp did not mean that the issues between the directors, Akron and CGU, respectively, could not be determined in the proceeding and be binding on CGU.

Comments

In this judgment, the High Court has provided authority that declaratory relief is a mechanism by which a third party claimant can take action directly against another party’s insurer in an appropriate case.

Authored by Anthony Scott, Partner and Stephanie Young, Associate, Melbourne.


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