page 94 The new “contextual approach” to interpreting commercial contracts
Craig Carter BARRISTER page 99 The tortuous path to avoidance: Graham v Colonial
Mutual Life Assurance Society Ltd (No 2) [2014]
FCA 717
Ray Giblett and Nick Wiesener NORTON ROSE
FULBRIGHT page 102 Extending the application of the proportionate liability provisions beyond apportionable claims
Ingrid Lehmann MCINNES WILSON LAWYERS page 108 Case note: ABN AMRO Bank NV v Bathurst
Regional Council
Iain Freeman and Carina Tan-Van Baren
LAVAN LEGAL
2014 . Vol 30 No 7
Paul Baram Partner, Norton Rose
Fulbright
Linda Hamilton Principal, Notary
Public, Hamilton Lawyers & Advisors
Rehana Box Partner, Ashurst, Sydney
Iain Freeman Partner, Lavan Legal,
Perth
Debra Lane Partner, Mouldens
Solicitors, Adelaide
Dr Andrew Lu OAM Special
Counsel, Jarman McKenna, Perth
Paul Telford Barrister-at-Law, Inns of
Court, Brisbane; Faculty of Law,
Queensland University of Technology
Alexandra Golding Barrister, Owen
Dixon Chambers, West, Melbourne
Stanley Drummond Partner, HWL
Ebsworth Lawyers
Information contained in this newsletter is current as at September 2014

When faced with ambiguity in the language used in a contractual document, the Australian courts have, since the early 1980s, followed what Mason J set out in
Codelfa Construction Pty Ltd v State Rail Authority
(NSW) ( Codelfa ).
1
Since Codelfa , the law has witnessed an expansion of which relevant factors, if any, may be taken into account.
Recently, however, the High Court of Australia has decided to clarify what factors courts may, and may not, take into account when dealing with the construction of contractual documents (such as policies of insurance). In the decision of Electricity Generation Corp v Woodside
Energy Ltd ( Woodside ) 2 the High Court decided not to adopt or follow a 2011 decision
3 that it had made relating to the construction and interpretation of contractual documents.
The net effect of Woodside is that a new “contextual” approach to the construction of contracts is to be followed whereby there are three components relevant for consideration:
1. genesis of the transaction;
2. purpose of the transaction; and
3. context and market in which the parties are operating.
The long established parol evidence rule has operated to exclude extrinsic evidence, such as direct statements of intention and antecedent negotiations to add to, subtract from, vary or otherwise contradict the language used in a written instrument.
4
This was based upon the premise that a written instrument essentially says what is says. Accordingly, any recourse to extrinsic material was deemed superfluous. The only exception to this rule related to instances of latent ambiguity in the wording of the particular document.
In the first decade of the twentieth century, Australia adopted the English approach in the 1909 decision of
Issacs J Gordon v Macgregor .
5
Fifty years later the High
Court relevantly observed in Fitzgerald v Masters :
6
It is trite law that an instrument must be construed as a whole. Indeed it is the only method by which inconsistencies of expression may be reconciled …
The similar point was made by Gibbs J in Australian
Broadcasting Commission v Australasian Performing
Right Association Ltd 7 when the High Court held that the meaning of any one part of the contract may be revealed by other parts of the contract and “the words of every clause must if possible be construed so as to render them all harmonious one with another”.
During the 1970s the English courts started to adopt an expanded and what has been described as “modern” approach whereby a court could take into account the
“surrounding circumstances” and the “matrix of facts”.
This fundamental development stemmed from the decisions of Lord Wilberforce, firstly in 1971 in Prenn v Simmonds ( Prenn )
8 and then in 1975 in Reardon Smith
Line Ltd v Yngvar Hansen-Tangen ( Reardon ).
9
That said, the approach of Lord Wilberforce was not completely new as Lord Herschell had introduced the concept of “a business like operation” of a contract in the 1898 decision of Southland Frozen Meat & Produce
Export Co Ltd v Nelson Brothers Ltd .
10
Following the decisions in Prenn and Reardon , the
Australian courts embraced the modern approach to contractual interpretation in Codelfa
11 when Mason J (as he then was) relevantly said:
The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties...
It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract.
To the extent to which they have this tendency they are admissible.
But in so far as they consist of statements and actions of the parties which are reflective of their actual
94 australian insurance law bulletin September 2014

intentions and expectations they are not receivable . The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make.
They are superseded by, and merged in, the contract itself.
(Emphasis added)
Codelfa was subsequently applied in a number of
High Court decisions relating to insurance, including:
Khoury v Government Insurance Offıce (NSW) ;
12
Akai
Pty Ltd v People’s Insurance Co Ltd ;
13
Con-Stan Industries v Norwich Winterthur Insurance (Aust) Ltd ;
14 and
McCann v Switzerland Insurance Australia Ltd(Allens
Case) .
15
In Wilkie v Gordian Runoff Ltd
16 the joint judgment spoke of preferring a construction “supplying a congruent operation to the various components of the whole”.
The High Court continued to apply Codelfa in cases not relating to insurance, including in various well known decisions dealing with commercial contracts such as International Air Transport Association v Ansett
Australia Holdings Ltd ;
17
Pacific Carriers Ltd v BNP
Paribas 18 and Toll (FGCT) Pty Ltd v Alphapharm Pty
Ltd .
19
In 2011, in Western Export Services Inc v Jireh
International Pty Ltd ( Western Export Services ), 20 the
High Court (Gummow, Heydon and Bell JJ)
21 rejected an application for leave to appeal a decision of the NSW
Court of Appeal, observing, at [3]–[6]:
Acceptance of the applicant’s submission clearly would require reconsideration by this Court of what was said in
Codelfa Construction Pty Ltd v State Rail Authority of NSW by Mason J, with the concurrence of Stephen J and
Wilson J, to be the “true rule” as to the admission of evidence of surrounding circumstances. Until this Court embarks upon that exercise and disapproves or revises what was said in Codelfa , intermediate appellate courts are bound to follow that precedent. The same is true of primary judges, notwithstanding what may appear to have been said by intermediate appellate courts.
The position of Codelfa , as a binding authority, was made clear in the joint reasons of five Justices in Royal Botanic
Gardens and Domain Trust v South Sydney City Council and it should not have been necessary to reiterate the point here.
We do not read anything said in this Court in Pacific
Carriers Ltd v BNP Paribas ; Toll (FGCT) Pty Ltd v Alphapharm
Pty Ltd ; Wilkie v Gordian Runoff Ltd and International Air
Transport Association v Ansett Australia Holdings Ltd as operating inconsistently with what was said by Mason J in the passage in Codelfa to which we have referred.
However, the result reached by the Court of Appeal in this case was correct. Further, even if, as the applicant contends, cl 3 in the Letter of Agreement should be construed as understood by a reasonable person in the position of the parties, with knowledge of the surrounding circumstances and the object of the transaction, the result would have been no different. Accordingly, special leave is refused with costs. (Citations omitted)
This is where the law continued to lie for a further
3 years. In that time, the competing views of the intermediate appellate courts on the subject had been described as a “heated controversy” by McLure P of the
Western Australian Court of Appeal in Cape Lambert
Resources Ltd v MCC Australia Sanjin Mining Pty
Ltd .
22
Since the decision in Western Export Services , the constitution of the bench of the High Court has, however, changed.
23
In Woodside , the majority of the High Court, comprising French CJ, Hayne, Crennan and Kiefel JJ,
24 determined that a “contextual approach” was to be taken by a court when faced with interpreting commercial contracts, such as policies of insurance.
The matter concerned a long term contract for the supply of natural gas in Western Australia. The “seller”, namely Woodside, was required to supply gas to the
Western Australian Electricity Generation Corporation trading as Verve Energy ( Verve ). The contract was at arm’s length and with independent competing commercial interests operating.
25
One salient feature of the agreement was that in the event that Verve required additional or supplementary gas to be supplied, Woodside had to use “reasonable endeavours” to meet that further supply. As to that supplementary supply, the terms of the contract allowed
Woodside to take into account “all relevant commercial, economic and operational matters” when determining whether or not it was able to supply the supplemental gas requested of it by Verve. Of particular relevance was that the contract proscribed a fixed price for the supplementary supply of any additional gas to Verve in such circumstances.
While Woodside supplied the gas it did not process it.
Rather a third party, Apache Energy Limited ( Apache ), processed the gas on Varanus Island, located off the coast of Western Australia.
On 3 June 2008 there was an explosion at the processing plant on Varanus Island. The net effect was that there was a temporary reduction in the availability of gas to Apache’s general market, including to Woodside.
What gas was available to the market was at a higher price. In basic economic terms, Apache took advantage of the fact that demand outweighed the supply and thus charged all its customers more.
Verve notified Woodside that it needed additional gas and that Woodside was bound to the previously agreed fixed price. Woodside refused. It drafted a new agreement for the supply of additional gas requested by Verve australian insurance law bulletin September 2014 95

but at a higher price than that in the head contract. Under protest, Verve agreed to purchase gas from Woodside at the higher price, which was the prevailing market price for gas in Western Australia at the time.
One of the issues for determination in the proceedings was whether or not Woodside had breached its obligation under the agreement to use its “reasonable endeavours” to supply the supplemental gas to the buyer.
The relevant period for consideration was between June and September 2008 when the Apache plant was returned to pre-incident levels of production.
In March 2009 Verve commenced proceedings in the
Western Australian Supreme Court for both breach of contract and the tort of duress. At first instance the primary judge 26 found that Woodside had not breached their contractual obligation to use its “best endeavours” to supply the gas. Nor was it found that Woodside had used illegitimate pressure to have Verve sign the June
2008 agreement. Verve successfully appealed to the
Western Australian Court of Appeal, 27 which held, among other things, that Woodside had breached its obligation to use its best endeavours to supply gas at the prescribed cost and that it had exerted illegitimate pressure on Verve. Woodside sought special leave which was granted and then appealed to the High Court.
In their joint decision French CJ, Hayne, Crennan and
Kiefel JJ reaffirmed the “reasonable businessperson test” test to be adopted when interpreting the construction of contracts in a commercial setting.
28
However, they departed from what was said by Gummow, Heydon and
Bell JJ in Western Export Services .
Citing Mason J in Codelfa , their Honours relevantly held, at [35]:
Both [the parties] recognised that this court has reaffirmed the objective approach to be adopted in determining the rights and liabilities of parties to a contract. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar.
As reaffırmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding “of the genesis of the transaction, the background, the context
[and] the market in which the parties are operating” .
(Emphasis added)
The court then went on to refer to the decision in Re
Golden Key Ltd ,
29 where Lord Justice Arden held that unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption “that the parties … intended to produce a commercial result”.
This approach was consistent with other Australian High
Court authorities on the subject that required a court to avoid “making commercial nonsense or working commercial inconvenience”.
30
The High Court held that three obligations flow from the inclusion of a “reasonable” or “best” endeavours phrase in a commercial contract.
First, referring to Dawson J in Hospital Products Ltd v United States Surgical Corp ,
31 the court confirmed that such an obligation is neither an absolute nor an unconditional obligation.
32
Second, the nature and extent of the obligations imposed by the inclusion of such a term is subject to what is “reasonable in the circumstances, which can include circumstances that may affect an obligee’s business”.
33
Accordingly, an obligee is not required to
“sacrifice its own business interests” or the interests of its shareholders in order to comply with or achieve the object of a particular contract.
Third, the court identified
34 that some commercial contracts contain their own particular standard as to what is considered reasonable with some express reference to the business interests of the relevant obligee. It was with this third category that the High Court was concerned in respect of the contract between Woodside and Verve.
The relevant clause provided, among other things, that Woodside, “in determining whether they are able to supply (additional gas) on a day … may take into account all relevant commercial, economic and operational matters”. Further relevant terms of the contract required quantities of gas that “must be delivered” by
Woodside and “which must be paid for” by Verve, whether taken or not.
35
The court identified that the practical effect was that the minimum amounts of gas had to be delivered by
Woodside and paid for by Verve. In respect of the additional or supplementary amounts of gas supplied these had to be paid for by Verve (whether taken or not) at the fixed contractual price. The court held
36 that the additional or supplementary supply arrangements had the effect of insulating the parties from respective risks of fluctuations in demand and price in the domestic and commercial market. Further, the court accepted Woodside’s argument that the word “able” imposed a qualifying operation on the obligations to supply the additional or supplementary gas. The court held that properly understood the relevant clause did not oblige Woodside to supply the additional or supplementary gas to Verve when the Apache incident occurred which lead to a conflict between Woodside business interests and Verves
96 australian insurance law bulletin September 2014

interest in securing the additional gas at a nominated price. Their Honours held that such a construction was consistent with the surrounding circumstances known to the parties at the time of entering into the contract.
37
As such, Woodside’s appeal was allowed.
In his dissenting judgment, Gageler J was of the view that the arguments mounted by Woodside (and accepted by the majority) as to the meaning of reasonable endeavours rendered cl 3.3 of the agreement “elusive, if not illusory”.
38
His Honour believed the approach of the
Western Australian Supreme Court had been the correct one.
Following the decision of the High Court, both the
NSW Court of Appeal and the Full Federal Court have applied the relevant principles and held that the decision of the High Court in Woodside is inconsistent with its earlier decision in Western Export Services . In Mainteck
Services Pty Ltd v Stein Heurtey SA
39
( Mainteck ) the
NSW Court of Appeal observed, at [71]:
The judgment confirms that not only will the language used
“require consideration” but so too will the surrounding circumstances and the commercial purpose or objects. … It cannot be that the mandatory words “will require consideration” used by four Justices of the High Court were chosen lightly, or should be “understood as being some incautious or inaccurate use of language”.
In Kosciuszko Thredbo Pty Ltd v ThredboNet Marketing Pty Ltd 40 the Full Federal Court constituted by
Siopis, Rares and Katzmann JJ also noted the change in approach to the construction of contractual terms ushered in by Woodside which required the court “to consider the language used by the parties, the surrounding circumstances known to them and the purpose or object secured by the contract”.
41
Most recently, the Full Federal Court (constituted by
Allsop CJ and Siopis & Flick JJ) in Stratton Finance Pty
Ltd v Webb
42 has made it abundantly clear that Woodside clarified what may, and may not, be taken into account when construing the meaning of a contractual term. The court observed, at [36], that “[t]he above reasons are presupposed upon legitimate contextual surrounding circumstances being available for consideration in the process of contractual construction and the agreement alone”.
The court also made reference to the decision of the
NSW Court of Appeal in Mainteck and agreed that
Western Export Services no longer represented the position in Australia on the topic.
43
That said, the court was also of the view that Woodside may not have finally resolved what may be a relevant “issue” for consideration when determining all of the surrounding “circumstances”.
44
On 3 September 2014, the Western Australian Court of Appeal handed down a decision in Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations
Pty .
45
At [45], McLure P, with whom Newnes JA agreed, favoured the approach taken in Hancock Prospecting
Pty Ltd v Wright Prospecting Pty Ltd ,
46 whereby regard may be had to some surrounding circumstances for construction purposes, even in the absence of ambiguity.
47
McLure P proposed that this rule be applied until the High Court expressly states otherwise. In a separate judgment, Murphy JA observed that in Woodside the question of whether evidence of surrounding circumstances is inadmissible in the absence of ambiguity does not appear to have been canvassed by the High Court nor isolated for later determination.
48 On this basis, his
Honour concluded at [216] “that it is not correct to say that in all cases where there is a contest as to the proper construction of a written contract, any evidence from the parties of surrounding circumstances is always admissible on the question of construction, irrespective of ambiguity in the absence of such evidence”.
The recasting by the High Court of the interpretation of contractual relationships confirms that the courts should strive to achieve a businesslike and commercially sensible outcome between parties to a particular contract. The courts should not strain the meaning or import of the words used in a particular document.
Importantly, evidence of what the parties sought to achieve by entering into the contract, as well as relevant market conditions, all form part of the approach relevant to establishing the context of what the parties were seeking to achieve by their contractual dealings. The probing for such evidence is now a necessary step in any such piece of litigation.
Craig Carter
Barrister
3 St James’ Hall Chambers
Sydney
1.
Codelfa Construction Pty Ltd v State Rail Authority (NSW)
2.
3.
(1982) 149 CLR 337; 41 ALR 367; 56 ALJR 459; BC8200083.
Electricity Generation Corp v Woodside Energy Ltd (2014) 306
ALR 25; 88 ALJR 447; [2014] HCA 7; BC201401090.
Western Export Services Inc v Jireh International Pty Ltd
(2011) 282 ALR 604; 86 ALJR 1; [2011] HCA 45; BC201108359 per Gummow, Heydon and Bell JJ; a short six paragraph judgment given during an application for special leave.
australian insurance law bulletin September 2014 97

4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
See for instance Goss v Lord Nugent (1833) 5 B & Ad 58; 110
ER 713 at 716.
Gordon v Macgregor (1909) 8 CLR 316 at 323–4; 15 ALR
274; [1909] HCA 26; BC0900046.
Fitzgerald v Masters (1956) 95 CLR 420 at 437; 30 ALJR 412;
BC5600420 per McTiernan, Webb and Taylor JJ.
Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109; 47 ALJR
526 per Gibbs J.
Prenn v Simmonds [1971] 3 All ER 237; [1971] 1 WLR 1381 at 384.
Reardon Smith Line Ltd v Hansen-Tangen [1976] 3 All ER 570;
[1976] 1 WLR 989 at 997; [1976] 2 Lloyd’s Rep 621.
Southland Frozen Meat & Produce Export Co Ltd v Nelson
Brothers Ltd [1898] AC 442 at 444.
Above n 1, at 352.
Khoury v Government Insurance Offıce (NSW) (1984) 165
CLR 622; 54 ALR 639; 58 ALJR 502; BC8400510.
Akai Pty Ltd v People’s Insurance Co Ltd (1996) 188 CLR
418; 141 ALR 374; 71 ALJR 156; BC9606281.
Con-Stan Industries v Norwich Winterthur Insurance (Aust)
Ltd (1986) 160 CLR 226 at 241; (1986) 64 ALR 481; (1986) 60
ALJR 294; (1986) 4 ANZ Ins Cas 60-700.
McCann v Switzerland Insurance Australia Ltd(Allens Case)
(2000) 203 CLR 579; 176 ALR 711; [2000] HCA 65; BC200007594 at [22] per Gleeson CJ.
Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522; 214 ALR
410; [2005] HCA 17; BC200501807 at [16].
International Air Transport Association v Ansett Australia
Holdings Ltd (2008) 234 CLR 151; 242 ALR 47; [2008] HCA
3; BC200800357 at [8].
Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; 208
ALR 213; [2004] HCA 35; BC200404838 at [22].
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR
165; 211 ALR 342; [2004] HCA 52; BC200407463 at [38].
Above, n 3.
All three judges being notably Sydney based.
Cape Lambert Resources Ltd v MCC Australia Sanjin Mining
Pty Ltd [2013] WASCA 66; BC201302422 at [107], and see also Hon K Lindgren “The ambiguity of ‘ambiguity’ in the construction of contracts” (2014) 38 Aust Bar Rev 153.
Both Gummow J and Heydon J had retired. Bell J did not sit on the bench for the matter.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
Gageler J handed down a separate dissenting judgment.
Clause 31(4)(1) of the contract.
Le Miere J.
McLure P, Newnes and Murphy JJA.
Endorsing McCann v Switzerland Insurance Australia Ltd
(2000) 203 CLR 579; 176 ALR 711; [2000] HCA 65; BC200007594.
Re Golden Key Ltd [2009] All ER (D) 18 (Jul); [2009] EWCA
Civ 636 at [28].
See Zhu v Treasurer of New South Wales (2004) 218 CLR 530;
211 ALR 159; [2004] HCA 56; BC200407561 at [82] and
Gollin & Co Ltd v Karenlee Nominees Pty Ltd (1983) 153 CLR
455 at 464; 49 ALR 135; 57 ALJR 711; BC8300100.
Hospital Products Ltd v United States Surgical Corp (1984)
156 CLR 41 at 144; 55 ALR 417; 58 ALJR 587; BC8400480.
Above, n 2, at [41].
Above, n 2, at [41], citing Transfield Pty Ltd v Arlo International Ltd (1980) 144 CLR 83 at 101; 30 ALR 201; 54 ALJR
323; BC8000079 per Mason J.
Above, n 2, at [43]
Clause 3.3 of the contract.
Above, n 2, at [45].
Above, n 2, at [48].
Above, n 2, at [60].
Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA
184; BC201404487 per Ward JA, Emmett JA, Leeming JA.
Kosciuszko Thredbo Pty Ltd v ThredboNet Marketing Pty Ltd
(2014) 106 IPR 434; [2014] FCAFC 87; BC201405639.
Above, n 40, at [66], citing Woodside , above, n 2, at [35].
Stratton Finance Pty Ltd v Webb [2014] FCAFC 110; BC201407172
(2 September 2014). See [36]–[41].
Above, n 42, at [40].
Above, n 42, at [41], citing QBE Insurance Australia Ltd v Vasic [2010] NSWCA 166; BC201004923 at [20]–[35] and
Kimberley Securities Ltd v Esber (2008) 14 BPR 26,121;
[2008] NSWCA 301; BC200810316 at [4]–[5].
Technomin Australia Pty Ltd v Xstrata Nickel Australasia
Operations Pty [2014] WASCA 164; BC201407218.
Hancock Prospecting Pty Ltd v Wright Prospecting Pty Ltd
(2012) 294 ALR 550; [2012] WASCA 216; BC201208263.
Above, n 46, at [81].
Above, n 45, at [215]. See, generally, [117]–[217] for a review of the development of the law since Codelfa, including in
Mainteck.
98 australian insurance law bulletin September 2014

Recent amendments to the Insurance Contracts Act 1984
(Cth) ( ICA ) provide some relief to life insurers, particularly in relation to the remedies available for nondisclosure. Amendments to s 29 and other consequential changes go some way to addressing a regime that many considered to be unduly weighted in favour of insureds.
In the interim, the Western Australian decision in
Graham v Colonial Mutual Life Assurance Society Ltd
(No 2)
1 highlights the difficulties insurers face in obtaining redress for seemingly blatant non-disclosure. Many of the difficulties encountered by the insurers in this case will also remain under the new ICA regime.
On 16 January 2010, Mr Elwaly of Wattle Grove,
Western Australia, died in unfortunate circumstances and as an unintentional consequence of his own seemingly deliberate actions. Elwaly’s accounting business was experiencing financial difficulties and, in an apparent attempt to destroy computer and business records, he set fire to the premises. Elwaly subsequently perished in the blaze with the deputy state coroner later determining the cause of death to be “smoke inhalation and burns that arose by way of misadventure”.
Several years earlier, Elwaly applied for a Total Care
Plan policy with Comminsure (the Policy ). Elwaly was required to fill out an application, which included a number of questions. At the time he had a long medical history
2 which included medical consultations in respect to alcohol consumption (albeit as an incidental issue to obesity), depression (he had been prescribed antidepressants on several occasions) and numerous fainting episodes (some of which required hospitalisation).
Notwithstanding his medical history, Elwaly answered the following questions (and others regarding any other condition or prescribed medication) in his application in the negative:
Have you ever used or injected yourself with any drug not prescribed by a doctor or received counselling or treatment for the use of alcohol or drugs?
Have you ever had or sought advice or treatment, experienced symptoms or suffered from any of the following: …
Depression or mental disorder (Including but not limited to stress , anxiety, panic attacks, behavioural or nervous disorders)?
Have you ever had or sought advice or treatment, experienced symptoms or suffered from any of the following:
Epilepsy, fits of any kind, fainting episodes or recurring headaches or migraines? … (Emphasis added)
A period of approximately 5 months passed before the Policy was entered into. Elwaly signed a “Declaration of Continued Good Health” on 12 May 2007, prior to the issue of the Policy. Elwaly had continued to seek medical advice from his doctor during this period in respect of depression and anxiety, as recently before the declaration as 7 May 2007.
Following his death, Elwaly’s wife brought a claim for the Life Care Benefit under the Policy. Comminsure declined the claim and avoided the Policy under s 29(2) of the ICA on the basis that Elwaly had fraudulently breached his duty of disclosure in respect of his medical history. Comminsure asserted it would never have entered into the Policy had Elwaly disclosed the extent of his medical history.
Ms Graham commenced proceedings against Comminsure.
Section 21 of the ICA provides:
(1) Subject to this Act, an insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured , being a matter that:
(a) The insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or
(b) A reasonable person in the circumstances could be expected to know to be a matter so relevant. … (Emphasis added)
In assessing whether Elwaly had breached his duty of disclosure, McKerracher J assessed the relevant medical history in light of the questions extracted above. His australian insurance law bulletin September 2014 99

Honour paid particular attention to what was “known” by the life insured. His Honour noted the majority decision of the High Court in Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (in liq)
3 to the effect that “knows” means more than “believes”, “suspects” or even “strongly suspects”.
4
Applying this reasoning, McKerracher J considered
Elwaly had not failed to disclose his medical consultations concerning alcohol consumption as alcohol consumption was only an incidental issue to the primary purpose of the consultations — his obesity. Elwaly’s drinking was only ever raised in the context of other consultations or counselling (marriage counselling) and it was not affecting his health. The evidence adduced by
Comminsure in this regard was therefore considered inadequate.
5
In respect to Elwaly’s representation that he had never suffered depression, McKerracher J held Elwaly was not fraudulent as the question was directed to
“disorders”. In any event, his Honour determined that, based on the medical evidence put forward by Ms Graham, Elwaly had not suffered from “depression” per se but instead experienced “reactive depression” from stress and anxiety based on life events (such as business troubles and having a new baby). Elwaly’s general practitioner gave evidence that he had only prescribed
Elwaly anti-depressants in a low dose intended to ease stress.
In these circumstances, his Honour concluded that
Elwaly would not have “known” that this aspect of his medical history was relevant to Comminsure.
6
This was despite “depression” being clearly differentiated from
“mental disorder” in the application form (including separate references to mere “stress” or “anxiety”) and
Elwaly being prescribed anti-depressant medication on numerous occasions.
In contrast, Elwaly was held to have made a fraudulent misrepresentation regarding whether he had ever experienced symptoms or suffered from fainting. Elwaly had suffered numerous fainting episodes in the previous decade, a number of which required hospitalisation.
McKerracher J held that Elwaly’s failure to disclose this aspect of his history was “at the very least careless, but given the specific nature of the question and his history,
… his answer was reckless and therefore fraudulent within the meaning of s 29(2) ICA”.
7
For Comminsure to avoid the Policy under s 29(2) it needed to also establish that it would not have entered into it had the duty of disclosure been complied with.
Section 29 of the ICA provides:
(1) This section… does not apply where:
(c) the insurer would have entered into the contract even if the insured had not failed to comply with the duty of disclosure or had not made the misrepresentation before the contract was entered into; or …
Insurer may avoid contract
(2) If the failure was fraudulent or the misrepresentation was made fraudulently, the insurer may avoid the contract… (Emphasis added)
Given his Honour’s findings regarding nondisclosure, the only relevant aspect of Elwaly’s medical history remaining was his fainting episodes. Comminsure asserted it would not have entered into the
Policy had it known the full extent of such episodes.
However, McKerracher J considered that Comminsure’s actual underwriting process (including evidence from the relevant underwriter) and internal correspondence did not support this assertion. Comminsure had failed to request a full medical history despite obvious shortcomings in the medical information initially provided (the medical report only covered the past 2–3 years). Further, obvious errors in the “Declaration of Continued Good
Health” were not followed up leading to the conclusion that Comminsure was already satisfied with the risk.
8
Given his Honour’s finding that Comminsure would have entered into the Policy even if Elwaly’s fainting episodes had been fully disclosed, the notorious “little bit of fraud” provision (s 31 of the ICA) did not come into play.
Finally, Comminsure contended that Elwaly’s death arose during his commission of a serious crime and the court should not assist a party who founds his cause of action on an immoral or illegal act. McKerracher J adopted a narrow view, finding that the death was not the result of arson (if established), but rather the subsequent entrapment resulting in asphyxiation from smoke inhalation. This outcome was unforeseen, unexpected and unintentional.
Further, his Honour noted the Policy did not contain a general exclusion for death caused by deliberate or criminal acts and held that no such exclusion could be implied into the Policy. The Policy merely contained the common exclusion in relation to suicide within a year from commencement. Accordingly, his Honour dismissed Comminsure’s assertion that the claim should not be allowed for public policy reasons.
The judgment of McKerracher J demonstrates the myriad of issues that must be overcome (or avoided) before a life insurer can avoid a policy, particularly prior to the ICA amendments. The insurer must first establish
100 australian insurance law bulletin September 2014

non-disclosure and often fraud (given the 3 year timeframe to rely on innocent non-disclosure to avoid a contract in s 29 of the ICA).
9 This may be a difficult task following the approach in this instance as to what is known by an insured and known to be a matter relevant to the insurer.
Even where fraudulent non-disclosure is established, the insurer must still establish that it would not have entered into the Policy if proper disclosure had been made. This can be difficult if the insurer cannot establish both clear underwriting guidelines or procedures and a practice of following them. Section 31 also remains as a final avenue for a “little bit of fraud” to be forgiven.
In light of these difficulties, which will remain a legacy issue and in any event continue to be pertinent to many aspects of a claim despite changes to the ICA, this decision serves as a timely reminder for insurers to ensure:
• underwriting guidelines clearly set out what risks are, and are not, acceptable;
• guidelines and procedures are followed (including documenting compliance)
• all application forms are checked to ensure they are correctly completed and executed (to the extent this can be determined)
• any gaps in medical histories or other questions arising during the underwriting process are diligently followed up.
Ray Giblett
Partner
Norton Rose Fulbright
Nick Wiesener
Associate
Norton Rose Fulbright
5.
6.
7.
1.
Graham v Colonial Mutual Life Assurance Society Ltd (No 2)
[2014] FCA 717; BC201405259.
2.
3.
4.
8.
9.
Too detailed to reproduce here, but extracted in the judgment at [82] and [93].
Permanent Trustee Australia Ltd v FAI General Insurance Co
Ltd (in liq) (2003) 214 CLR 514; 197 ALR 364; [2003] HCA
25; BC200302168.
At [21]. See also CIC Insurance Ltd v Midaz [1998] QCA 21;
Commercial Union Co of Australia v Beard (1999) 47 NSWLR
735; (2000) 11 ANZ Ins Cas 61-458; [1999] NSWCA 422;
BC9907760.
At [125].
At [126]–[127].
At [149], applying Plasteel Windows Australia Pty Ltd v CE
Heath Underwriting Agencies (1989) 5 ANZ Ins Cas 60-926;
BC8902004; Burns v MMI-CMI Insurance Ltd (1994) 8 ANZ
Ins Cas 61-287; 8 ANZ Ins Cas 61-228; Von Braun v Australian Associated Motor Insurers Ltd (1998) 135 ACTR 1; (1998)
10 ANZ Ins Cas 61-419; [1998] ACTSC 122; BC9806188; and
Tyndall Life Insurance Co Ltd v Chisholm (1999) 205 LSJS 54;
(2000) 11 ANZ Ins Cas 90-104; [1999] SASC 445; BC9907013.
For a recent general insurance decision where fraudulent non-disclosure was rejected, see Prepaid Services Pty Ltd v Atradius Credit Insurance NV (2013) 302 ALR 732; [2013]
NSWCA 252; BC201311774.
At [155]-160]. For a recent general insurance example where the court held that the insurer would not have entered into the policy, see Prepaid v Atradius (No 2) [2014] NSWSC 21;
BC201400342.
This requirement is to some extent addressed by s 29(6) of the amended ICA.
australian insurance law bulletin September 2014 101

There has been much case law on the application of the various Commonwealth and State/Territory proportionate liability provisions. However, very few of these cases have addressed the significant issue of the application of those provisions when more than one cause of action has been pleaded by a plaintiff, but only one of them comes within the definition of “apportionable claim”.
Two decisions of the Full Court of the Federal Court,
Wealthsure Pty Ltd v Selig
1 and ABN Amro Bank NV v Bathurst Regional Council ,
2 have put this issue in the spotlight. These decisions were delivered seven days apart and had different outcomes. Both cases concerned the application of s 1041L(2) of the Corporations
Act 2001 (Cth) ( Corporations Act ),
3 which outlines when there will be a single apportionable claim for the purpose of the proportionate liability provisions. Following these decisions, the Trade Practices Act 1974 (Cth)
( TPA ) equivalent of this provision, s 87CB(2), was considered by the Queensland Court of Appeal in
Hadgelias Holdings Pty Ltd and Waight v Seirlis .
4
Section 1041L(2) provides:
For the purpose of this Division, there is a single apportionable claim in the proceedings in respect of the same loss or damage even if the claim for the loss or damage is based on more than one cause of action (whether or not of the same or a different kind).
A provision similar to this is found in the Competition and Consumer Act 2010 (Cth) ( CCA ) (previously the TPA),
5 the Australian Securities and Investments
Commission Act 2001 (Cth) ( ASIC Act ),
6 the Civil
Liability Act 2002 (NSW),
(WA),
8
7 the Civil Liability Act 2002 the Civil Liability Act 2002 (Tas),
9 and the Civil
Law (Wrongs) Act 2002 (ACT).
10
Queensland, Victoria and the Northern Territory, on the other hand, limit what will be a “single apportionable claim” to apportionable claims only.
11 South Australia remains silent.
12
Section 1041L(1) of the Corporations Act provides:
This Division applies to a claim (an apportionable claim ) if the claim is a claim for damages made under section 1041I for:
(a) economic loss; or
(b) damage to property; caused by conduct that was done in contravention of section 1041H.
13
The issue is whether s 1041L(2) was limited to apportionable claims as defined in subs (1), or whether it required a literal interpretation whereby there would be a single apportionable claim irrespective of the causes of action pleaded so long as one of them was an apportionable claim within the meaning of subs (1) and they all caused the same loss or damage.
Wealthsure , ABN Amro and Hadgelias are not the first cases to consider this issue.
The first case to identify the issue was the Victorian
Supreme Court decision of Hollingworth J in Woods v De Gabrielle .
14
As that case was only an interlocutory application,
Her Honour was not required to make a final decision on the issue, but observed that s 1041L(2) may ultimately be held to apply to apportionable claims only.
15
The next case was also a decision of the Victorian
Supreme Court in Rod Investments (Vic) Pty Ltd v Abeyratne
(No 2) .
16 Hansen J observed that s 1041L(2) may be invoked so long as there is at least one apportionable claim within the meaning of s 1014L(1), and that this same analysis applied to the ASIC Act and the TPA.
17
In that case, the proportionate liability provisions did not apply because the claims that came within the definition of an apportionable claim arose before the commencement of those provisions on 26 July 2004.
18
The third case is the Federal Court decision of Gray J in Miletich v Murchie .
19
This case concerned the TPA equivalent to s 1041L(2), s 87CB(2), as the applicants
102 australian insurance law bulletin September 2014

had brought claims pursuant to both s 52 of the TPA and the equivalent claim in s 9 of the Fair Trading Act 1999
(Vic). His Honour held that:
20
… by s 87CB, there is a single apportionable claim, even though the claim for that loss and damage is based on more than one cause of action, whether or not of the same or a different kind. Thus, Pt VIA of the Trade Practices Act applies to the entirety of the claim for the applicants’ loss and damage, even though that claim is based in part, or in the alternative, on a cause of action pursuant to the state legislation.
In that case, the proportionate liability provisions were inapplicable because neither of the potential concurrent wrongdoers had pleaded the proportionate liability provisions in their defences. Further, one of the concurrent wrongdoers was vicariously liable for the acts or omissions of the other and s 87CI(a) of the TPA and s 24AP(a) of the Wrongs Act 1958 (Vic) precluded that first concurrent wrongdoer from casting a portion of its liability onto the other.
21
The fourth case was another Federal Court decision, this time by Rares J, in Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in liq) .
22 This case concerned the ASIC Act equivalent to s 1041L(2), s 12GP(2). His Honour stated that pursuant to that section “[t]here will be a single apportionable claim for all causes of action in the proceedings in respect of the same economic loss”.
23
Rares J found that the plaintiffs’ claims for breach of fiduciary duty, breach of duty in tort and breach of contract against Grange Securities Ltd (as Lehman
Brothers Australia Ltd (in liq) was then known) caused the same economic loss as Grange’s contravention of s 12DA(1) of the ASIC Act for misleading and deceptive conduct. Therefore, there was a single apportionable claim.
24
The first of the Full Court of the Federal Court decisions was the majority decision of Besanko and
Mansfield JJ (White J dissenting) in Wealthsure . The primary judge
25 had found that only apportionable claims came within the operation of s 1041L(2).
On appeal, the majority disagreed. Besanko J said that s 1041L(2) was critical and that its important features were the identity of the loss or damage (the key consideration) and more than one cause of action, whether or not of the same or a different kind.
26
His Honour considered that the parliament had used the concept of the same loss or damage and made it clear that different kinds of causes of action were included.
27
He also held that the reference to a proceeding involving a claim that is both apportionable and non-apportionable in s 1041N(2) meant a proceeding involving claims for different loss or damage, and that any claims for different loss or damage are not part of an apportionable claim, which was not the case here.
28
Therefore, the proportionate liability applied to all of the plaintiffs’ claims including the non-apportionable claims.
29
This position was not affected by two arguments raised by the plaintiffs.
First, they argued that it would not make sense if causes of action specifically excluded from s 1041H(1) by s 1041H(3) (of which the defendants had been found liable) could be held to be subject to the proportionate liability provisions where the precondition for the operation of those provisions is conduct in contravention of s 1041H(1).
Justice Besanko rejected this argument because it failed to “recognise the distinction between the conduct which gives rise to liability on the one hand, and the critical importance of the concept of the same loss and damage for the purposes of the proportionate liability provisions on the other”.
30
As the primary judge had found that all the causes of action had contributed to the same loss or damage, the proportionate liability provisions were engaged.
31
Second, they argued that, if the broad interpretation was accepted, it would lead to different results for no apparent reason in the application of the contributory negligence provisions in s 1041I(1B),
32 depending on whether or not the proportionate liability provisions applied. If there was a single defendant and no concurrent wrongdoers, s 1041I(1B) would apply only to the claim for damages for contravention of s 1041H(1), not any other cause of action. If, on the other hand, the proportionate liability provisions apply and s 1041L(2) is engaged, s 1041I(1B) would apply to all claims by operation of s 1041N(3).
33
Justice Besanko agreed that there was no apparent reason for these different results, and that was a factor against the broad interpretation of s 1041L(2). However, the effect of the wording of that section was too clear to be outweighed by this factor.
34
Justice Mansfield’s conclusion on the issue accorded with that of Besanko J, though His Honour otherwise adopted and agreed with the reasons for judgment of
White J.
35
In addition to identifying that the focus of s 1041L(2) was on the nature of the loss or damage for which relief is sought, rather than upon the nature of the cause/s of action, 36 Mansfield J held that there was nothing in the definition of “apportionable claim” in s
1041L to prevent other causes of action from being included if they have caused the same loss and damage as caused by a contravention of s 1041H(1).
37 australian insurance law bulletin September 2014 103

His Honour also held that a narrow interpretation of s 1041L(2) would largely dissipate or frustrate the legislative purpose of the proportionate liability provisions. That purpose was to prevent the “deep pocket syndrome”, whereby plaintiffs would target only those with the deepest pockets, and enable insurers to more accurately assess and price risk.
38
Justice White’s dissenting judgment will be dealt with in the discussion of the decision in ABN Amro below.
This case was a unanimous judgment of Jacobson,
Gilmour and Gordon JJ.
The primary judge 39 had found that, as the nonapportionable claims arose from the same facts and related to the same loss as the apportionable claim, the whole claim became apportionable.
40
On appeal the court held that s 1041L(2) applied to apportionable claims only 41 and as the plaintiffs had succeeded on both an apportionable claim and a nonapportionable claim, they were entitled to elect the remedy they wanted.
42
Therefore, the plaintiffs were able to elect the remedy available for the nonapportionable claim, which allowed them to recover
100% from the defendant with the deepest pockets.
There are a couple of issues with this decision.
First, the only mention of s 1041L(2) was at [1573] where the court stated:
With respect to Mansfield and Besanko JJ, for the reasons just stated we agree with the conclusion reached by White J in Wealthsure on appeal that the expression in s 1041L that
“the claim for loss and damage is based on more than one cause of action (whether or not of the same or a different kind)” refers only to causes of action which are themselves apportionable.
Second, the preceding paragraphs referred to by the court
43 are actually a discussion as to why s 1041L(1)
(and not s 1041L(2)) does not have the meaning submitted by the defendants. That is, the defendants had submitted that the definition of an “apportionable claim” in s 1041L(1) focused on a claim that is “caused by conduct that was done in contravention of s 1041H”. It followed that the use of the word “conduct” was significant as it focused attention on the physical acts giving rise to a claim for damages under s 1041I, rather than the legal label attached to that conduct. Therefore, claims for contraventions of ss 1041E, 1041F and
1041G would also come within the definition of an apportionable claim in s 1041L(1).
44
Finally, the judgment of White J in Wealthsure that the court agreed with is questionable as His Honour did not address the inclusion of the words “more than one cause of action (whether or not of the same or a different kind )” at the end of s 1041L(2). Instead, his Honour focused on the wording of ss 1041L(1), 1041L(4),
45
1041H(3) and 1041I(1B), and the definition of “cause of action”, to conclude that s 1041L(2) only applied to apportionable claims as defined in s 1041L(1).
46
Further,
White J distinguished the decision of Gray J in Miletich solely because His Honour “did not advert to” the matters White J had considered.
As stated above, this decision involved the TPA equivalent of s 1041L(2), s 87CB(2). The primary issue in this case was whether vendors and their agents were concurrent wrongdoers. It was ultimately held that they had performed a single set of acts which caused the purchaser’s loss, and were, therefore, not concurrent wrongdoers so as to attract the application of the proportionate liability provisions.
47
However, Holmes JA (with whom Gotterson and
Morrison JJA agreed) observed
48 that if it had been found that the vendors and agents were concurrent wrongdoers, the fact that the conduct which contravened s 52 of the TPA also contravened s 53A of that Act would not have precluded the claim from being treated as an apportionable claim. This is because s 87CB(2) provides for a single apportionable claim where the proceeding is for the same loss or damage, even though it may be based on more than one cause of action. It did not alter the character of the claim as apportionable that it also constituted a contravention of s 53A of the TPA.
As stated above, Queensland, Victoria and the Northern Territory have limited a “single apportionable claim” to apportionable claims only and South Australia remains silent on the issue. But what about New South Wales,
Western Australia, Tasmania and the Australian Capital
Territory?
In Bathurst , Jagot J relied on the reasoning of
Barrett J in Reinhold v New South Wales Lotteries Corp
(No 2) ,
49 which concerned the NSW proportionate liability provisions, to come to the conclusion Her
Honour did as set out above. However, nowhere in
Reinhold does Barrett J actually deal with the application and effect of s 34(1A) of the Civil Liability
Act 2002 (NSW) ( CLA ), the NSW equivalent to s 1041L(2).
In Wealthsure , White J identified the material difference between s 34(1) of the CLA and s 1041L(2). That difference is s 34(1) of the CLA defines an apportionable claim to include claims for economic loss or damage to property in an action for damages, whether in contract, tort or otherwise, arising from a failure to take reasonable care (other than claims for personal injury), and claims for damages for contravention of s 42 of the Fair
104 australian insurance law bulletin September 2014

Trading Act 1987 (NSW) (and now s 18 of the Australian Consumer Law (NSW) ( ACL )). It therefore already contemplates that more than one kind of cause of action could amount to an apportionable claim. Arguably, for this reason, s 34(1A) of the CLA would be limited to apportionable claims only. That was the view of White J in Wealthsure .
50
Given the issues with the decision in ABN Amro , and the subsequent decision in Hadgelias , the writer prefers the decisions in Wealthsure and Hadgelias , particularly given the following:
1. The history of case law seems to favour the position in those cases.
2. Had the narrow interpretation of s 1041L(2) been the intention of the parliament it could have:
(a) limited the operation of that subsection to apportionable claims only as has occurred in
Queensland, Victoria and the Northern Territory;
(b) not included the words “(whether or not of the same or a different kind)”; or
(c) not included that subsection like South Australia.
3. For a person to be a concurrent wrongdoer, they need only to have caused the same loss or damage the subject of the claim.
51
While it has been held that the plaintiff must also have a cause of action against all concurrent wrongdoers,
52 there is no requirement that those causes of action all be apportionable claims. The effect of the proportionate liability provisions in circumstances where only one of the concurrent wrongdoers has an apportionable claim against it will be to cause the non-apportionable claims to be apportionable. This is unless the plaintiff is able to recover the whole amount of its loss from the concurrent wrongdoer with the non-apportionable claim.
Only time will tell whether a court will apply the same reasoning to cases involving State legislation containing provisions similar to s 1041L(2).
It is ultimately an issue that requires determination by the High Court. Although there would be grounds for both Wealthsure and ABN Amro to be appealed to the
High Court, at the time of writing this has not occurred.
Ingrid Lehmann
Solicitor
McInnes Wilson Lawyers
1.
Wealthsure Pty Ltd v Selig [2014] FCAFC 64; BC201404200,
2.
3.
4.
delivered 30 May 2014 ( Wealthsure ).
ABN Amro Bank NV v Bathurst Regional Council (2014) 309
ALR 445; 99 ACSR 336; [2014] FCAFC 65; BC201404937, delivered 6 June 2014 ( ABN AMRO ).
All references to sections/subsections will be to those from the
Corporations Act unless otherwise stated.
Hadgelias Holdings Pty Ltd and Waight v Seirlis [2014] QCA
177; BC201405896, delivered 29 July 2014 ( Hadgelias ).
5.
6.
7.
8.
Section 87CB(2).
Section 12GP(2).
Section 34(1A).
Section 5AJ(4).
9.
Section 43A(9).
10.
Section 107B(6).
11.
See Civil Liability Act 2003 (Qld), s 28(2); Wrongs Act 1958
(Vic), s 24AF(2); and Proportionate Liability Act 2005 (NT), s 8.
12.
See Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA).
13.
Section 1041H is the prohibition on misleading or deceptive conduct.
14.
Woods v De Gabrielle [2007] VSC 177; BC200704554.
15.
Above, n 14, at [37].
16.
Rod Investments (Vic) Pty Ltd v Abeyratne (No 2) [2009] VSC
278; BC200905824.
17.
Above, n 16, at [43].
18.
Above, n 16, at [38]–[39].
19.
Miletich v Murchie (2012) 297 ALR 566; [2012] FCA 1013;
BC201207083.
20.
Above, n 19, at [107] and [108].
21.
Above, n 19, at [119].
22.
Wingecarribee Shire Council v Lehman Brothers Australia Ltd
(in liq) (2012) 301 ALR 1; [2012] FCA 1028; BC201207287.
23.
Above, n 22, at [1082].
24.
Above, n 22, at [1084].
25.
Lander J in Selig v Wealthsure Pty Ltd (2013) 94 ACSR 308;
[2013] FCA 348; BC201302512.
26.
Above, n 25, at [77].
australian insurance law bulletin September 2014 105

27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
Above, n 25, at [84].
Above, n 25, at [77].
Above, n 25, at [85].
Above, n 25, at [79].
Above n 25.
See also s 82(1B) of the TPA (now s 137B of the CCA) and s 12GF(1B) of the ASIC Act.
Above, n 1, at [80]–[82].
Above, n 1, at [83].
Above, n 1, at [1] and [16].
Above, n 1, at [10].
Above, n 1, at [12]–[13].
Above, n 1, at [14]–[15].
Jagot J in Bathurst Regional Council v Local Government
Financial Services Pty Ltd (No 5) [2012] FCA 1200; BC201208415
( Bathurst ).
46.
47.
48.
49.
40.
41.
42.
43.
44.
45.
50.
51.
52.
Above, n 39, at [3495].
Above, n 2, at [1573].
Above, n 2, at [1608]–[1610].
Above, n 2, at [1560] – [1572].
Above, n 2, at [1557]–[1559], [1561].
This subsection limits apportionable claims to those defined in subs 1041L(1).
Above, n 1, at [348], [349], [353]–[358], [361]–[364].
Above, n 4, at [24].
Above, n 4, at [25].
Reinhold v New South Wales Lotteries Corp (No 2) (2008) 82
NSWLR 762; [2008] NSWSC 187; BC200801327 ( Reinhold ).
Above, n 1, at [336].
Section 1041L(3).
Shrimp v Landmark Operations Limited (2007) 163 FCR 510;
[2007] FCA 1468; BC200708057 at [59], [62], [63].
106 australian insurance law bulletin September 2014

australian insurance law bulletin September 2014 107

cil 1
In ABN AMRO Bank NV v Bathurst Regional Coun-
( ABN AMRO ), the Full Federal Court has confirmed a landmark decision in which ratings agencies were found to hold a duty of care to potential investors.
It has done so with some qualifications, the most significant of which muddy the waters in relation to proportionate liability under the Corporations Act 2001
(Cth) ( Corporations Act ) and narrow the disclosure obligations of insured subsidiaries under the Insurance
Contracts Act 1984 (Cth) (ICA).
Justice Jagot’s decision in Bathurst Regional Council v Local Government Financial Services Pty Ltd (No 5)
2 is believed to be the first by a superior court in which a ratings agency has been held liable to investors for an incorrect credit rating. Its confirmation on appeal will likely have implications in other common law jurisdictions.
Justice Jagot found the ratings agency Standard &
Poors ( S&P ) to be jointly liable with ABN AMRO Bank
NV ( ABN AMRO ) and Local Government Financial
Services ( LGFS ) for losses suffered by 13 New South
Wales local councils which had invested in a structured financial product marketed by ABN AMRO and given a
AAA rating by S&P.
Key findings in the 1475-page judgment included that:
• S&P’s AAA rating was misleading and deceptive;
• Each of S&P, ABN AMRO and LGFS engaged in misleading and deceptive conduct, publication of information or statements false in material particulars, and otherwise made negligent misrepresentations;
• LGFS breached conditions of its Australian Financial Services Licence and its fiduciary obligations to each council;
• The 13 councils were entitled to damages from
S&P, ABN AMRO and LGFS for losses incurred, with each proportionally liable for one-third; and
• LGFS was entitled to indemnity under the contract of insurance between FuturePlus Financial Services Pty Ltd and American Home Assurance
Company ( AHAC ).
Following Jagot J’s decision, 10 separate appeal proceedings were brought, with ABN AMRO, S&P and
LGFS putting in issue “just about every finding of fact and conclusion of law made by the primary judge”.
3
The appeals were heard together and, subject to some qualification, the primary decision was upheld. However, the Full Court departed from Jagot J in relation to the treatment of damages under the proportionate liability provisions of the Corporations Act and the ASIC
Act 2001 (Cth) ( ASIC Act ) and the obligations of insured subsidiaries under the ICA.
Among the Full Court’s few qualifications to Jagot J’s decision was its rejection of her finding that damages claimable in this case were apportionable. In doing so,
Jacobson, Gilmour and Gordon JJ contradicted the majority reasoning in another recent decision by the Full
Federal Court, Wealthsure Pty Ltd v Selig
4
( Wealthsure ) and threw into doubt the future treatment of damages arising from multiple causes of action under the Corporations Act.
Jagot J found that S&P, ABN AMRO and LGFS had contravened ss 1041E and 1041H of the Corporations
Act as well as s 12DA of the ASIC Act and that the resulting damages claimed by the councils were apportionable at one-third each.
As damages arising under s 1041E are nonapportionable and those under s 1041H apportionable,
Jagot J’s decision was consistent with that of the majority in Wealthsure . In that case, the majority comprising Mansfield and Besanko JJ interpreted s 1041L(2) of the Corporations Act to mean that, where one claim in respect of loss or damage is apportionable, all other claims in respect of the same loss or damage are also apportionable, even if they are not otherwise subject to apportionment as individual claims.
108 australian insurance law bulletin September 2014

On appeal in ABN AMRO , the Full Court preferred the more restrictive reading of White J in Wealthsure that the words “there is a single apportionable claim in proceedings in respect of the same loss or damage even if the claim for the loss or damage is based on more than one cause of action (whether or not of the same or a different kind)” referred only to causes of action which were themselves apportionable claims.
It followed that S&P, ABN AMRO and LGFS were held jointly and severally liable for damages flowing from contraventions of s 1041E, while damages in respect of s 1041H contraventions were apportioned.
Another departure from Jagot J’s decision was the
Full Court’s finding that a named beneficiary of an insurance contract is not subject to any duty of disclosure to the underwriter under s 21 of the ICA if that beneficiary is not a party to the contract.
For the relevant period, LGFS was insured under a claims notified contract of insurance between AHAC and FuturePlus, of which LGFS is a subsidiary. AHAC denied liability under the insurance contract on the basis that LGFS had failed to comply with its duty of disclosure under s 21 of the ICA.
AHAC claimed that, before entering into the insurance contract, LGFS knew that its Australian Financial
Services Licence did not permit LGFS to deal in or give advice in respect of derivatives, that the financial products in question were or might have been derivatives and that there had been no attempt to determine whether they were or might have been derivatives.
AHAC further contended that LGFS knew these matters were relevant to AHAC’s decision as to whether to accept the insurance risk in relation to LGFS and that
LGFS did not disclose them. Alternatively, a reasonable person in the circumstances would be expected to know that such matters were relevant.
Justice Jagot found that, under s 48(2) of the ICA, as a beneficiary of the insurance contract, LGFS was subject to the same disclosure requirements as FirstPlus even though it was not a party to the contract. However, on the facts, she concluded that AHAC was nevertheless liable to indemnify LGFS.
On appeal, the Full Court rejected AHAC’s contention that LGFS was a “party” to the insurance contract because FuturePlus acted as its agent and that LGFS was therefore subject to the s 21 obligations.
Contrary to Jagot J’s interpretation, the Full Court said s 48(2) confined a person’s obligations to those which were “in relation to the person’s claim” and that these did not include the pre-contractual obligations of
FuturePlus under s 21.
On this point, Jacobson, Gilmour and Gordon JJ said that, before entering the insurance contract, AHAC knew which entities were to be covered by it, including
LGFS. However, it chose only to deal with FuturePlus as the putative policy-holder. The Full Court said:
It [AHAC] could easily have required that all of the subsidiaries, including LGFS, which were intended to be covered become parties to the contract and therefore liable to the s 21 disclosure regime. It did not do so.
5
AHAC also sought to rely on various exclusions in the insurance contract and that the settlement of StateCover’s claim against LGFS, for which Jagot J found AHAC liable to indemnify LGFS, was unreasonable. These contentions were also rejected by the Full Court.
In any event, AHAC remained liable to indemnify
LGFS.
• Ratings agencies hold a duty of care to potential investors and may be held liable for incorrect credit ratings. They will no longer be protected by disclaimers characterising the ratings as mere opinions or indicators. This is likely to have significant implications in other common law jurisdictions.
• The contradictory decisions in ABN AMRO and
Wealthsure leave open the question of how courts will deal with damages resulting from multiple causes of action under the Corporations Act. The clear direction may be required from the High
Court.
• The Full Court’s observation in relation to the disclosure obligations of beneficiaries who are not parties to insurance contracts puts insurers on notice of this potential avenue of exposure. Insurers should review their underwriting practices to ensure disclosure requirements apply to all subsidiary companies of insured parties.
Iain Freeman
Partner
Lavan Legal, Perth
Carina Tan-Van Baren
Solicitor
Lavan Legal, Perth australian insurance law bulletin September 2014 109

1.
ABN AMRO Bank NV v Bathurst Regional Council (2014) 309
2.
ALR 445; 99 ACSR 336; [2014] FCAFC 65; BC201404937.
Bathurst Regional Council v Local Government Financial
Services Pty Ltd (No 5) [2012] FCA 1200; BC201208415.
3.
4.
5.
Above, n 1, at [4].
Wealthsure Pty Ltd v Selig [2014] FCAFC 64; BC201404200.
Above, n 1, at [1647].
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