Bank of Queensland Ltd v Chartis Australia Insurance Ltd [2013] QCA 183

SUPREME COURT OF QUEENSLAND CITATION: Bank of Queensland Ltd v Chartis Australia Insurance Ltd [2013] QCA 183 PARTIES: BANK OF QUEENSLAND LTD ACN 009 656 740 (appellant) v CHARTIS AUSTRALIA INSURANCE LTD ACN 004 727 753 (respondent) FILE NO/S: Appeal No 54 of 2013 SC No 8719 of 2012 DIVISION: Court of Appeal PROCEEDING: General Civil Appeal ORIGINATING COURT: Supreme Court at Brisbane DELIVERED ON: 12 July 2013 DELIVERED AT: Brisbane HEARING DATE: 20 May 2013 JUDGES: Holmes and Gotterson JJA and Applegarth J Separate reasons for judgment of each member of the Court, each concurring as to the orders made ORDERS: 1. Grant leave to further amend the notice of appeal to delete sub-paragraph 3(a) and insert in its place: “(a) a declaration that, upon the proper construction of the Policy, the clause 3.9 exclusion does not apply to Defence Costs, as that term is defined in the Policy.” 2. Grant leave to the appellant to rely upon the affidavit of Russell Redsell sworn 20 May 2013. 3. Dismiss the appeal. 4. Order the appellant to pay the respondent’s costs of and incidental to the appeal to be assessed on the standard basis. CATCHWORDS: APPEAL AND NEW TRIAL – APPEAL – PRACTICE AND PROCEDURE – QUEENSLAND – POWERS OF COURT – AMENDMENT – where appellant sought leave to further amend its notice of appeal – where respondent opposed the granting of leave – where there is a real dispute between the parties concerning the proper construction of the policy – whether leave should be granted -- 1 of 20 -- 2 INSURANCE – THE POLICY – PRINCIPLES OF CONSTRUCTION – where respondent denied indemnity based on an exclusion in the insurance policy – where appellant claims exclusion only applies to the respondent‟s obligation to pay for Loss – where appellant claims an entitlement to be indemnified for Defence Costs – whether the insurance policy requires the respondent to pay Defence Costs where the claim for Loss is outside the cover of the policy Trade Practices Act 1974 (Cth), s 73 Adams v Lambert (2006) 228 CLR 409; [2006] HCA 10, cited AMP Fire & General Insurance Co Ltd v Maros Construction Co (Qld) Pty Ltd (1968) 62 QJPR 48; [1968] QWN 11, cited Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99; [1973] HCA 36, cited Fitzgerald v Masters (1956) 95 CLR 420; [1956] HCA 53, cited Johnson v American Home Assurance Company (1998) 192 CLR 266; [1998] HCA 14, cited McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579; [2000] HCA 65, cited National Australia Bank Ltd v Clowes [2013] NSWCA 179, cited Noon v Bondi Beach Astra Retirement Village Pty Ltd [2010] NSWCA 202, cited Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900; [2011] UKSC 50, cited Selected Seeds Pty Ltd v QBEMM Pty Ltd (2010) 242 CLR 336; [2010] HCA 37, cited Western Australian Bank v Royal Insurance Co (1908) 5 CLR 533; [1908] HCA 11, cited Westpac Banking Corporation v Tanzone Pty Ltd (2000) 9 BPR 17,521; [2000] NSWCA 25, cited Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522; [2005] HCA 17, cited COUNSEL: A B Crowe SC, with M O Jones, for the appellant R S Ashton for the respondent SOLICITORS: McCullough Robertson Lawyers for the appellant Moray & Agnew Solicitors for the respondent [1] HOLMES JA: I agree with the reasons of Applegarth J and the orders he proposes. [2] GOTTERSON JA: I agree with the orders proposed by Applegarth J and with the reasons given by his Honour. -- 2 of 20 -- 3 [3] APPLEGARTH J: The appellant, Bank of Queensland Ltd (“the bank”) is defending a proceeding in the Federal Court of Australia brought by the Australian Securities Investment Commission, Barry Doyle and Deanna Doyle (“the Doyle proceeding”). The bank notified its insurer, Chartis Australia Insurance Ltd (“Chartis”) of the claim and the allegations made in the Doyle proceeding. Chartis refused to indemnify the bank in respect of the claim on the grounds of an exclusion under cl 3.9 of the policy. Clause 3.9 provides that Chartis shall not be liable to make any payment for Loss “arising out of, based upon or attributable to any actual or alleged ... loan ... or extension of credit ...”. [4] The bank applied to a judge of the trial division for the following orders: “1. A declaration that, upon the proper construction of [the Policy], the Respondent is obliged to indemnify the Applicant in respect of any Loss (as defined in the Policy) in respect of [the Doyle proceedings]. 2. A declaration that, upon the proper construction of the Policy, the Respondent is obliged to indemnify the Applicant in respect of all sums reasonably paid and payable by it that are characterised as Defence Costs (as defined in the Policy) in respect of the Doyle Proceedings. 3. An order that the Respondent indemnify the Applicant in respect of all sums that it has reasonably paid that are characterised as Defence Costs (as defined by the Policy) in respect of the Doyle Proceedings. 4. An order that the Respondent pay the Applicant‟s costs of and incidental to this application.” [5] The learned primary judge declined to grant the declaration sought in paragraph 1 of the application as to the operation and application of cl 3.9 to the claim in the Doyle proceeding for “Loss” under the policy because such a declaration would be hypothetical1; and declined to grant the relief sought in paragraphs 2 and 3 of the application in respect of “Defence Costs”2. The essential reason for not granting the relief sought in respect of Defence Costs was that, on a proper construction of the policy, cl 3.9 permits Chartis, in a proper case, to deny indemnity for Defence Costs, and that, in a case such as the present, in which Chartis has denied indemnity for the claim, Chartis is not obliged to advance Defence Costs under cl 6.6, or to pay Defence Costs under cl 1 of the policy, until Chartis‟ denial of indemnity is determined to be wrong in proceedings between the bank and Chartis. [6] One of the grounds upon which the bank originally appealed was that the learned primary judge erred in finding that the declarations sought as to the operation and application of cl 3.9 were hypothetical. Shortly before the hearing of the appeal, the bank abandoned this ground of appeal, and accepted that it is premature for the Court to now make a declaration as to whether or not cl 3.9 applies. [7] The appeal was confined to the question of interpretation resolved against the bank concerning the operation of the exclusions in the policy, and exclusion in cl 3.9 in 1 BOQ Ltd v Chartis Aust Insurance Ltd [2012] QSC 319 at [40]. 2 At [41] – [75]. -- 3 of 20 -- 4 particular, upon the obligation to pay Defence Costs. The bank contends that, even if cl 3.9 operates to exclude Chartis‟ liability to pay, on behalf of the bank and each Insured Entity, any “Loss” (being damages, judgment or settlement in the Doyle proceeding), it does not exclude Chartis‟ liability to pay Defence Costs resulting from the claims made in that proceeding. The Doyle proceeding [8] The bank is the first respondent in the Doyle proceeding. Senrac Pty Ltd (“Senrac”) is the second respondent. The applicants in the Doyle proceeding alleged that Senrac was authorised by the bank to operate its North Ward Branch pursuant to a Private Agency Agreement. The amended statement of claim in the Doyle proceeding consists of 186 pages and 328 paragraphs (not including attachments) and makes a variety of allegations about dealings by the Doyles with Storm Financial Services Ltd (“Storm”) and the entry by the Doyles into home loan contracts. The amended statement of claim in the Doyle proceeding seeks a variety of relief against the bank, including declarations that it engaged in unconscionable conduct that contravened provisions of the Australian Securities and Investments Commission Act 2001 (Cth) (“ASIC Act”) or the Fair Trading Act 1989 (Qld) (“QFTA”) by entering into the home loan contracts and a mortgage and making certain advances. The amended statement of claim seeks declarations that Senrac was knowingly concerned in such contraventions. It seeks orders under the ASIC Act or the QFTA directing the bank and Senrac to pay the Doyles the amount of loss and damage suffered by them because of the alleged contraventions. The amended statement of claim also seeks a declaration that the bank was a “linked credit provider” in relation to Storm within the meaning of s 73 of the Trade Practices Act 1974 (Cth) (“TPA”) and is liable under that section to pay the amount of loss and damage suffered by the Doyles. Refusal of indemnity [9] By letter dated 13 April 2011 Chartis informed the bank‟s insurance agent or broker that the claims made against the bank in respect of advances made by the bank to the Doyles under three separate home loan contracts essentially alleged against the bank: (a) breaches of express terms of each of the three home loan contracts; (b) that the conduct of the bank in respect of each of the three home loan contracts was unconscionable; and (c) that in respect of each of the three home loan contracts, the bank is liable to the Doyles as a “linked credit provider” pursuant to s 73 of the TPA for various alleged breaches of contract, warranties and misrepresentations on the part of Storm. [10] On that basis, Chartis concluded that the “Lender‟s liability” exclusion, namely cl 3.9, applied in respect of the alleged breaches of the home loan contracts, unconscionable conduct in respect of the home loan contracts and the bank being a “linked credit provider”. As for Senrac, which was alleged to be liable as the bank‟s agent for being knowingly concerned in the unconscionable conduct alleged against the bank, Chartis advised that as the unconscionable conduct allegations against the bank fell outside of cover by reason of the Lender‟s liability exclusion at cl 3.9, it followed that the allegations against Senrac similarly fell outside of cover. -- 4 of 20 -- 5 [11] By letter dated 24 May 2011 the bank disputed Chartis‟ position about the application of cl 3.9 of the policy and contended that, in any event, the bank was entitled to indemnity for Defence Costs because cl 3.9 only relates to Chartis‟ liability to pay in respect of “Loss”, as opposed to “Defence Costs”. Chartis responded by letter dated 22 June 2011 in respect of coverage generally and in respect of Defence Costs. Its position was that there was no cover for Defence Costs where the claim for Loss is excluded under the policy. It asserted that when considering a policy of this type as a whole, it is implicit that there is ordinarily no cover for the costs of defending a claim for Loss where the claim for Loss is excluded. The policy, not being a cost protection policy, did not provide an indemnity for the costs of defending any claim which may be brought against the bank. It was said to be incorrect, and contrary to a commercial and business-like meaning, to construe the policy as operating in that way. Chartis adhered to that position and the bank filed its application. The policy and its relevant terms [12] Although the correspondence between Chartis and the bank refers to notification of the Doyle proceedings under a professional indemnity policy, the relevant policy document is titled “FinancialGuard Professional Services Insurance Policy”. In general terms, it provides cover by which Chartis agrees to pay on behalf of each Insured Entity “all Loss and Defence Costs resulting from any Claim first made during the Policy Period for any Wrongful Act”. The expression “Wrongful Act” is broadly defined. Predictably, given the broad cover granted by cl 1, there are numerous exclusions contained in cl 3. In general terms they include:  bodily injury/property damage;  contractual liability;  fines, penalties, punitive or exemplary damages;  a loss arising out of, based upon or attributable to the insolvency of any Insured;  any claim made by an Insured against another Insured;  claims or circumstances which have been notified under a prior policy;  Wrongdoing by means of any fraudulent, dishonest, criminal, malicious or wilful act error or omission; and  the Lender‟s liability exclusion in cl 3.9. It will be necessary to return to some of these exclusions and their precise terms. [13] The indemnity clause of the policy provides: “1. Insuring Agreement The Insurer shall pay on behalf of each Insured all Loss and Defence Costs resulting from any Claim first made during the Policy Period for any Wrongful Act.” -- 5 of 20 -- 6 [14] Clause 2 contains various definitions. Of particular relevance are the following: “2. Definitions 2.1 … 2.2 Claim means: (i) any suit or proceeding, including any civil proceeding, third party proceeding, counter claim or arbitration proceeding (including proceeding before the Australian Banking Industry Ombudsman), brought by any person against an Insured for monetary damages or other relief, including non- pecuniary relief; … 2.3 Defence Costs means reasonable fees, costs and expenses incurred with the written consent of the Insurer (such consent not to be unreasonably delayed or withheld) resulting from the investigation, adjustment, defence and appeal of any Claim. Provided that Defence Costs are included in and are not in addition to the Limit of Liability and the Aggregate Limit of Liability. 2.10 Loss means damages, judgments (including pre judgment and post judgment interest), settlements … 2.19 Wrongdoing means any fraudulent, dishonest, criminal, malicious or wilful act error or omission. 2.20 Wrongful Act means any (i) act or error or breach of duty or omission or conduct (including misleading or deceptive conduct) committed or attempted or allegedly committed or attempted by or of the Insured; … Without limiting its scope, Wrongful Act includes: (a) breach of contract for the provision of Professional Services (notwithstanding Exclusion 3.2); (b) breach of any State or Territory Fair Trading legislation; (c) breach of the Trade Practices Act 1974 (Cth) (as amended); … (j) breach of the Australian Securities and Investment Commission Act 2001 (Cth) (as amended); …” -- 6 of 20 -- 7 [15] The exclusions of the policy are contained in cl 3. They include the following: “3. Exclusions The Insurer shall not be liable to make any payment for Loss: 3.1 … 3.8 Wrongdoing arising out of, based upon, or attributable to any Wrongdoing committed by any Insured provided that: (i) … (iv) this exclusion shall only apply if it is established through a judgment or any other final adjudication adverse to the Insured against whom the Claim is made, or any admission by an Insured that the Wrongdoing did in fact occur. 3.9 Lenders‟ Liability arising out of, based upon or attributable to any actual or alleged: (i) loan, lease or extension of credit except to the extent such Claim arises out of a Wrongful Act in the administration of such loan, lease or extension of credit; or (ii) collection, foreclosure, or repossession in connection with any actual or alleged loan, lease or extension of credit.” [16] Clause 5.2 provides: “5.2 Defence and Settlement The Insurer does not assume any duty to defend any Claim brought against the Insured that is covered by this policy. The Insured shall defend and contest any Claim made against them, however the Insurer is entitled to effectively associate with the Insured in defence of any Claim. The Insured shall not admit liability for or settle any Claim or incur any Defence Costs without the written consent of the Insurer, such consent not to be unreasonably withheld. The Insurer shall have the right to make investigations, conduct negotiations and, with the written consent of the Insured, settle any Claim, on such terms and in such manner as the Insurer deems expedient. Subject to Condition 5.3, if the Insured refuses to consent to any settlement which is recommended by the Insurer and acceptable to the claimant, the Insurers liability for all Loss on -- 7 of 20 -- 8 account of that Claim shall not exceed the amount for which the Claim could have been settled if the Insurers recommendation had been consented to, plus Defence Costs incurred up to the date of the refusal.” [17] Clause 6.4 provides: “6.4 Retention The Insurer shall only be liable for the amount of Loss and Defence Costs arising from a Claim which is in excess of the greater of the Retention specified in the schedule. The Retention shall be borne by the Insured and shall remain uninsured, with regard to all Loss and Defence Costs for which the Insured shall be liable. Provided, however, that no Retention shall apply and the Insurer shall thereupon reimburse any Defence Costs paid by the Insured, in the event of: (i) a determination of No Liability of all Insureds; or (ii) a dismissal or a stipulation to dismiss the Claim without prejudice and without the payment of any consideration by any Insured. Provided, however, that in the case of (ii) above, such reimbursement shall occur 90 days after the date of dismissal or stipulation as long as the Claim is not re-brought (or any other Claim which is subject to the same single Retention by virtue of this General Condition 6.4 is not brought) within that time, and further subject to an undertaking by the Bank of Queensland Limited in a form acceptable to the Insurer that such reimbursement shall be paid back by the Bank of Queensland Limited to the Insurer in the event the Claim (or any other Claim which is subject to the same single Retention by virtue of this General Condition 6.4) is re-brought after such 90 day period.” [18] Clause 6.6 provides: “6.6 Advance Payment of Insured Defence Costs Except to the extent the Insurer has denied indemnity for any Claim, the Insurer shall advance Defence Costs in excess of the Retention, if applicable, promptly after sufficiently detailed invoices for those costs are received by the Insurer. The Insurer may not refuse to advance Defence Costs by reason only that the Insurer considers that conduct referred to in the „Wrongdoing‟ Exclusion has occurred, until such time as there is an admission by the Insured, or, a judgment, award -- 8 of 20 -- 9 or other finding by a court, tribunal or arbitrator with jurisdiction to finally determine the matter (including the outcome of any appeal in relation to such judgment, award or other finding) which establishes the foregoing. The Policyholder shall reimburse the Insurer for any payments which are ultimately determined not to be covered by this policy.” The decision of the primary judge [19] In considering paragraph 1 of the application, the primary judge applied the principles in Bass v Perpetual Trustee Co Ltd 3 and concluded that a declaration as to the operation and application of cl 3.9 to the claim in the Doyle proceeding for “Loss” under the policy should not be made because the declaration would be hypothetical. This was because a “Loss” within the meaning of the policy would not arise unless and until there had been a judgment, an award of damages or a settlement. [20] As to paragraph 2 of the application, Chartis contended that: (a) because it had denied indemnity for the Claim based on cl 3.9 of the policy, it was not obliged under cl 6.6 to advance any Defence Costs; (b) if an exclusion of liability under cl 3.9 of the policy applies, there is no obligation to pay Defence Costs resulting from a claim for any Wrongful Act; and (c) the application of cl 3.9 to the claim engaged the same considerations that warranted the refusal of relief in respect of the declarations sought by paragraph 1 of the application. [21] The bank contended that even if cl 3.9 applied to the claim, it did not exclude the obligation to pay Defence Costs. This was because the opening words of cl 3, namely “The Insurer shall not be liable to make any payment for Loss ...” confined the exclusions to the obligation to pay for Loss, but did not exclude an obligation to pay Defence Costs. [22] The primary judge examined a number of contextual factors, including the textual inconsistency between the operation of the opening words of cl 3 which are directed only to Loss and the operation of cl 6.6 which is directed to the obligation to make advances for Defence Costs in certain circumstances. There was said to be “no wholly satisfactory solution” to the conflicting text in the policy. [23] As to cl 6.6, the primary judge accepted that a denial of indemnity which would affect the obligation to advance Defence Costs pursuant to cl 6.6 may be based on matters which have nothing to do with any exclusion under cl 3. However, it was clear that it extended to the Wrongdoing exclusion under cl 3.8, subject to the requirement that the application of cl 3.8 be established. There was said to be nothing in the text of cl 6.6 which suggested that it was not intended to extend to cl 3.9.4 His Honour continued: 3 (1999) 198 CLR 334. 4 BOQ Ltd v Chartis Aust Insurance Ltd [2012] QSC 319 at [73]. -- 9 of 20 -- 10 “[74] As previously mentioned, the contrary contention comes down to the absence of any reference to Defence Costs in the opening words of cl 3; simply put, that the exclusions under cl 3 do not apply to Defence Costs at all. In the end, I prefer the contrary view, namely that if cl 3.9 applies to a Claim for Loss, and the insurer denies indemnity for the Claim, the insurer is not obliged to pay Defence Costs either, because: (a) the language of the insuring clause is that the insurer will pay „Loss and Defence Costs‟ resulting from any qualifying Claim; (b) it seems to be an unlikely commercial result that the insurer would be ultimately liable (not just by way of advances of Defence Costs) to pay Defence Costs in respect of a Claim which is not otherwise covered because of an exclusion under cl 3; (c) neither the subject matter of the policy nor the text supports the construction that it is intended that the policy deal with liability for Loss and Defence Costs differently, except for the opening words of cl 3; and (d) the second sentence of cl 6.6 is clearly inconsistent with that construction in relation to cl 3.8. [75] Once that point is reached, it seems to me that the proper construction of cl 3.9 and clause 6.6 are resolved in a consistent or harmonious manner, and the insurer would be entitled in a proper case to deny indemnity for a Claim including liability for Defence Costs in reliance on cl 3.9 of the policy. In those circumstances, the insurer is not obliged to advance Defence Costs under cl 6.6, or to pay Defence Costs under cl 1, until the insurer‟s denial of indemnity is determined to be wrong as between the insurer and insured.” [24] Having construed the policy, particularly cl 3 and cl 6.6, and having concluded that it would be open to the insurer in a proper case to deny indemnity for a claim including liability for Defence Costs in reliance on cl 3.9 of the policy, it followed that a declaration should not be made as to the operation and application of cl 3.9 in respect of any liability to pay Defence Costs resulting from the Doyle proceeding. This was because such a declaration would be hypothetical. The appeal [25] Having abandoned the ground of appeal that the learned primary judge erred in finding that a declaration as to the operation and application of cl 3.9 of the policy would be hypothetical, the remaining grounds of appeal are as follows: “(b) the learned primary judge erred in relying upon clause 6.6 of the Policy to support a construction of the opening words of clause 3 of the Policy which was contrary to the ordinary meaning of the language used in clause 3; -- 10 of 20 -- 11 (c) the learned primary judge erred in finding that „neither the subject matter of the [Policy] nor the text supports the construction that it is intended that the [Policy] deal with liability for Loss and Defence Costs differently, except for the opening words of clause 3‟, by failing to [take] into account that the terms „Loss‟ and „Defence Costs‟ are separately defined in the Policy and are treated separately in clause 1 of the Policy, or alternatively by failing to give adequate weight to those matters; and (d) the learned primary judge erred in failing to construe the Policy contra proferentem in order to resolve the tension which was found to exist between clauses 3 and 6.6 of the Policy.”5 [26] As to the factors identified by the primary judge at paragraph [74] of the judgment the bank contends: (a) the natural and ordinary meaning of the words used at cl 1 and cl 3 strongly favour the bank‟s construction; (b) the text of the policy and its subject matter treat Loss and Defence Costs separately; and (c) the proper construction of cl 6.6 favours the bank‟s construction. The bank submits that there was “insufficient lack of commerciality” in the construction for which it contended and hence the “commerciality” factor should not override the ordinary meaning of the words used. [27] In the supplementary outline of argument filed shortly before the hearing of the appeal, the bank shifted its position in relation to the operation of cl 6.6, and its significance to the proper construction of the policy. In its supplementary outline the bank accepted that as Chartis has denied indemnity under cl 3.9 of the policy, the bank is not, by operation of cl 6.6 of the policy, entitled to advance payment of Defence Costs. The bank noted that cl 6.6 is headed “Advance Payment of Insured Defence Costs”, and submitted that the clause deals with “advance payment” of Defence Costs. Clause 6.10 of the policy states that such headings are for convenience only and do not lend any meaning, and so the heading to cl 6.6 should be disregarded. Disregarding the heading assists the bank since the heading appears to recognise that not all Defence Costs are insured. In any event, the bank‟s supplementary submissions sought to make a distinction between an entitlement to be paid Defence Costs under cl 1 and an entitlement to be advanced Defence Costs pursuant to cl 6.6. The bank accepted that it was not entitled to have Chartis advance Defence Costs to it pursuant to cl 6.6, but submitted that it was entitled to be paid Defence Costs. [28] The bank sought leave to further amend its notice of appeal by including amongst the relief sought the following declaration: “(a) a declaration that, upon the proper construction of the Policy, the clause 3.9 exclusion does not apply to Defence Costs, as that term is defined in the Policy.” 5 At [74] – [75]. -- 11 of 20 -- 12 This form of declaration was in addition to and a precursor to, the declaration that it had originally sought in its notice of appeal in respect of Defence Costs, namely: “(b) a declaration that upon the proper construction of the Policy, after exhaustion of the Retention, the Respondent is obliged to indemnify the Appellant in respect of all sums reasonably paid and payable by it that are characterised as Defence Costs (as defined in the Policy) in respect of the Doyle Proceedings.” The bank‟s notice of appeal also sought an order that Chartis indemnify it in respect of all sums that it has reasonably paid that are characterised as Defence Costs (as defined by the Policy) in respect of the Doyle proceeding. The making of an order of that kind would have the effect of entitling the bank to payment of the Defence Costs it has presently incurred in excess of the Retention Amount of $250,000 in circumstances in which the bank acknowledged that it was not entitled to have Defence Costs advanced to it. The odd result would be an entitlement to be paid Defence Costs in circumstances in which the bank has no entitlement to be advanced Defence Costs. Rather than confront the complexity of contending that the bank has a present entitlement to be paid Defence Costs but no entitlement to be advanced those costs, the bank did not press for an order that Chartis indemnify it in respect of sums that it has reasonably paid by way of Defence Costs. It seemingly was content to obtain the declaratory relief sought by it in the further amended notice of appeal and, in the event of success, await payment of the Defence Costs to which it was entitled once they had been fully incurred. [29] Chartis opposed leave being granted to the bank to further amend its notice of appeal to include the new declaration that was sought. It argued that in circumstances in which: (a) the bank conceded that it was premature to determine whether cl 3.9 applies to the “Loss” which might eventuate in the Doyle proceeding; (b) there were unresolved issues concerning Senrac (which is not a party to these proceedings); and (c) the bank did not seek a consequential order for payment of Defence Costs, there was no utility in making the declaration sought in the proposed amendment. It would have no practical benefit for the bank. [30] There is considerable force in these arguments. However, there is a concrete dispute between the parties concerning the proper construction of the policy, and whether cl 3.9 can apply to Defence Costs. The proposed new declaration addresses the issue of construction that arose prior to the filing of the application and which was argued before the primary judge. Defence Costs have been incurred, and will continue to be incurred. The bank is meeting Senrac‟s costs of defending the Doyle proceeding and both are being represented by the same firm. There may be an issue as to whether Senrac is an Insured Entity under the policy. Even if it is not, the bank‟s share of the costs of defending the Doyle proceeding appear to substantially exceed the Retention Amount. Leave to rely upon the affidavit of Mr Redsell sworn 20 May 2013 should be allowed to prove this. -- 12 of 20 -- 13 [31] The dispute over the bank‟s entitlement to be paid Defence Costs will not disappear in the event that the Doyle proceeding is unsuccessful so that there is no award of damages, judgment or settlement which constitutes “Loss” to which the bank might be entitled to indemnity. The preparedness of the bank to await payment of its Defence Costs is not a reason to regard the issue of construction concerning Defence Costs as being hypothetical or lacking utility. For these reasons, I would grant leave to further amend the notice of appeal by inserting the proposed new subparagraph 3(a) in lieu of the existing paragraph 3(a). Relevant principles of construction [32] As a commercial contract, a policy of insurance should be given a businesslike interpretation. Interpreting a commercial contract requires attention to “the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure.”6 [33] The interpretation should accord with what commercial people in the position of the parties would understand the words to mean. The interpretation should be “consistent with business common sense.”7 [34] The contract has to be considered in whole, since the meaning of any one part of it may be revealed by another part. The words of every clause must, if possible, be construed so as to render them harmonious one with another.8 [35] The principle that clauses must be construed, if possible, so as to render them all harmonious means that where there is apparent inconsistency, regard must be had to the object of the contract so as to seek to resolve the inconsistency in a way that takes account of the commercial purpose of the policy. [36] If the words used are unambiguous, the court must give effect to them, notwithstanding the result may appear unreasonable, unless the literal meaning would lead to an absurd result. As was stated by Dixon CJ and Fullagar J in Fitzgerald v Masters “[w]ords may generally be supplied, omitted or corrected, in an instrument, where it is clearly necessary in order to avoid absurdity or inconsistency”.9 This principle is not limited to the correction of obvious and minor errors. It extends to a case in which absurd consequences follow from the application of the literal meaning.10 The process of supplying words may bring a marked divergence from the text. But it is a consequence of “the rule that the intention of the parties is to be ascertained from the instrument as a whole and that this intention when ascertained will govern its construction.”11 [37] If, however, the contract is open to two possible constructions, the preferred construction is the one which “will avoid consequences which appear to be 6 McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579, 589 [22]; Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522, 528 - 529 [15]. 7 Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, 2911 [29] – [30]. 8 Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99, 109. 9 (1956) 95 CLR 420, 426-427; National Australia Bank Ltd v Clowes [2013] NSWCA 179 at [38]. 10 Westpac Banking Corporation v Tanzone Pty Ltd (2000) 9 BPR 17,521; [2000] NSWCA 25 at [19] – [21]; Adams v Lambert (2006) 228 CLR 409, 417 [21]. 11 Fitzgerald v Masters (1956) 95 CLR 420, 437; Noon v Bondi Beach Astra Retirement Village Pty Ltd [2010] NSWCA 202 at [46]. -- 13 of 20 -- 14 capricious, unreasonable, inconvenient or unjust”.12 This is so even though the construction is not the most obvious.13 In such a case, it is generally appropriate to adopt the interpretation “which is most consistent with business common sense”.14 [38] The contra proferentem rule is that if a term is ambiguous, it should be construed against the party by or in whose interest it was included. This rule is applied in some contexts, including contracts of insurance.15 Traditionally, such an approach has been applied to the construction of exclusion clauses. However, modern authority is to the effect that exclusion clauses are construed in the same way as other types of contractual provisions, and the contra proferentem rule applies “only when, having applied all other aids to construction, ambiguity remains”.16 In this regard, in Darlington Futures Ltd v Delco Australia Pty Ltd the High Court stated: “[T]he interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in case of ambiguity.”17 The contra proferentem rule has been described as secondary to the primary rule of construing the contract for the purpose of inferring the parties‟ intention, and as generally no more than a rule of thumb.18 It also has been described as a rule of last resort19 where other rules of construction fail.20 [39] The essential point of reference is upon the text of the contract, giving weight to the context in which a clause appears, and the nature and object of the contract. In Selected Seeds Pty Ltd v QBEMM Pty Ltd the High Court confirmed that whilst regard must be had to the language used in an exclusion clause, such a clause must be read in light of the contract of insurance as a whole, thereby giving due weight to the context in which the clause appears.21 An unlikely commercial result [40] The bank argues that, even if cl 3.9 applies so that it is not covered in respect of any damages, judgment (including any award of interest) or settlement in respect of the Doyle proceeding, it still is entitled to payment of Defence Costs in respect of that proceeding. Its argument relies upon the opening words of cl 3, and so the same argument would be available in respect of other exclusions. Simply put, the bank claims to be entitled to be paid Defence Costs in defending a claim which seeks damages and other relief that is not covered by the policy. 12 Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99, 109. 13 At 109. 14 Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, 2908 [21]. 15 Johnson v American Home Assurance Company (1998) 192 CLR 266, 274-275; McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579, 602. 16 G L Nederland (Asia) Pty Ltd v Expertise Events Pty Ltd [1999] NSWCA 62 at [27]. 17 (1986) 161 CLR 500, 510. 18 Johnson v American Home Assurance Company (1998) 192 CLR 266; Carter JW, Contract Law in Australia 6th ed, LexisNexis, Chatswood, 2012 at [14-03]-[14-04]. 19 Western Australian Bank v Royal Insurance Co (1908) 5 CLR 533, 554; Johnson v American Home Assurance Company (1998) 192 CLR 266, 274- 275. 20 AMP Fire & General Insurance Co Ltd v Maros Construction Co (Qld) Pty Ltd [1968] QWN 11. 21 (2010) 242 CLR 336, 344 [29]. -- 14 of 20 -- 15 [41] If the bank‟s construction is correct, then the policy would not be one in which the insurer simply agreed to pay any damages award along with Defence Costs in the event of an unsuccessful defence of a claim that was not excluded by the terms of the policy, or to pay Defence Costs in the event of a successful defence of such a claim. Instead, there would be, in effect, two policies. The first would indemnify the bank for “Loss” (in the form of a damages award, judgment or settlement) that was not excluded by cl 3. The second would be a form of legal costs insurance which extended to the costs of defending virtually any claim brought against the bank. This would extend to the costs of defending a personal injury claim, even though the insurer and the bank agreed that the bank would not be indemnified for liability in respect of such a claim by reason of the exclusion for bodily injury in cl 3.1. The same would be true of a claim for property damage by reason of the same exclusion or a claim for breach of contract notwithstanding the contractual liability exclusion in cl 3.2. [42] Remarkably, if the bank‟s construction of cl 3 and the policy is correct, Chartis would be obliged to pay the costs of defending a claim that had been notified under a previous policy of insurance with another insurer, being a claim which, if successful and culminating in a judgment would be excluded by cl 3.7. The construction urged by the bank would lead to obviously unintended results. The insurer would effectively be providing legal costs insurance in respect of claims that were clearly excluded from coverage under cl 3, including some claims which are indemnified by compulsory insurance. Such unlikely commercial results do not accord with a businesslike interpretation.22 [43] The bank‟s submissions acknowledged that it would be an uncommon commercial result for an insurer to be ultimately liable (not just by way of advance of Defence Costs) to pay Defence Costs in respect of a claim which is not otherwise covered because of an exclusion. However, it submits that the construction for which it contends is neither absurd nor unjust. There is said to be a commercial logic in a policy of insurance providing “the wherewithal to an insured to defend a claim made against it, particularly in the event that the claim is successfully defended.” So much may be accepted in respect of those claims which, if successful, would result in Loss in the form of a damages award or other form of judgment in respect of which the bank is entitled to be indemnified under the policy. It is not apparent why a professional services policy of insurance would be interpreted so as to provide a party with the costs of defending a claim that falls outside the terms of the policy. Such an interpretation is not consistent with business common sense. There is no commercial logic in an insurer paying (not just by way of advance) to defend a claim which is excluded from the policy. The position might be otherwise if the terms of the policy or its subject matter indicated that it was intended to provide a broad form of legal costs insurance, unrelated to claims in respect of which the insurer agreed to provide indemnity against liability to third parties for damages. [44] The bank‟s construction would lead to apparently unintended and absurd results. Textual separation of Loss and Defence Costs [45] The primary judge is said to have erred in observing that: 22 McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579, 589 [22]; McCarthy v St Paul International Insurance (2007) 157 FCR 402, 425 [69]. -- 15 of 20 -- 16 “neither the subject matter of the policy nor the text supports the construction that it is intended that the policy deal with liability for Loss and Defence Costs differently, except for the opening words of cl 3.”23 In its context, this observation should not be taken to mean that the policy ordained that there should be either a liability to pay both Loss and Defence Costs or no liability to indemnify at all. The judgment proceeds on the correct basis that: (a) in certain circumstances Chartis might be liable to pay both Loss and Defence Costs; (b) in certain circumstances it might not be liable to pay either Loss or Defence Costs; and (c) in other circumstances, such as a successful defence of a claim, Chartis might be liable to pay Defence Costs but there would be no liability for Loss, there being no Loss. [46] The judgment noted and appreciated that there were separate definitions of “Loss” and “Defence Costs”. The point being made in paragraph 74(c) of the judgment was that the insuring clause imposed an obligation to pay “all Loss and Defence Costs”. There were not separate insuring clauses. The subject matter of the policy was the bank‟s potential liability to pay damages, have a judgment entered against it or to reach a settlement resulting from a claim for a “Wrongful Act”, and the costs resulting from defence of a claim. [47] The text of the policy made specific provision for Defence Costs, for example in cl 5.2 and cl 6.6, and these were quoted and considered by the primary judge. But the policy generally treated Loss and Defence Costs together. For example, the Limits of Liability as stated in cl 6.3 were in respect of Loss and Defence Costs for any one claim and the Aggregate Limit of Liability was in respect of Loss and Defence Costs for all claims. There were not separate limits of liability in respect of Loss and Defence Costs. A denial of indemnity, if valid, would preclude payment of both Loss and Defence Costs. [48] The primary judge‟s observation that the subject matter of the policy and its text did not support the construction that it was intended that the policy deal with liability for Loss and Defence Costs differently, except for the opening words of cl 3, was not in error. Ground of appeal (c) is not established. Tension between cl 3 and cl 6.6 [49] The primary judge identified a tension between cl 6.6, which permits Chartis not to advance Defence Costs in a case in which it has denied indemnity, and cl 3, which, on a literal interpretation, does not permit Chartis to refuse to pay Defence Costs if one or more of the exclusions contained in cl 3 apply. [50] The bank submits that the first sentence of cl 6.6 is not inconsistent with its construction of the policy. It notes that under the policy Chartis may deny indemnity for a claim on grounds other than the applicability of an exclusion, for 23 BOQ Ltd v Chartis Aust Insurance Ltd [2012] QSC 319 at [74(c)]. -- 16 of 20 -- 17 example, because the claim may be notified out of time, the claim may not meet the definition of “Wrongful Act” or there may have been a non-disclosure entitling the insured to avoid the policy. [51] Whilst it is true that the first sentence of cl 6.6 allows Chartis to deny indemnity for a claim on grounds other than the applicability of an exclusion, the clause does not preclude Chartis from denying indemnity by reason of an exclusion. The words of cl 6.6 leave open the grounds upon which Chartis might deny indemnity. The primary judge was correct in stating that there is nothing in the text of cl 6.6 which suggests that it is not intended to extend to cl 3.9. The words of cl 6.6 permit Chartis to refuse to advance Defence Costs when it has denied indemnity for a claim on any ground, save for the special provision made in the second sentence of cl 6.6 which provides that it may not refuse to advance Defence Costs “by reason only” that the insurer considers that conduct referred to in the Wrongdoing exclusion has occurred, until certain events occur. [52] The fact that cl 6.6 makes specific provision with respect to Defence Costs when the Wrongdoing exclusion under cl 3.8 is involved suggests that cl 6.6 permits the insurer to refuse to advance Defence Costs when it has denied indemnity for a claim on the basis of an exclusion other than cl 3.8. [53] If the bank‟s original argument about the construction of cl 6.6 is correct, then notwithstanding a valid denial of indemnity on the grounds of an exclusion, such as the Bodily Injury/Property Damage exclusion in cl 3.1, the insurer still would be obliged to advance Defence Costs resulting from a claim for damages, such as personal injury damages, that is excluded from indemnity. Such an interpretation is uncommercial. [54] Such an interpretation of cl 6.6 also requires words to be read into it as though it stated: “Except to the extent the Insurer has denied indemnity for any Claim by reason of matters other than in reliance on cl 3, the Insurer shall advance Defence Costs in excess of the Retention, if applicable, promptly after sufficiently detailed invoices for those costs are received by the Insurer.” No textual considerations explain why cl 6.6 should be construed so as to permit a refusal of Defence Costs on the ground of one exclusion under cl 3, namely cl 3.8 subject to the requirement stated in the second sentence of cl 6.6 and which is reflected in cl 3.8 (iv), but not on the ground of other exclusions, such as cl 3.9. The terms of cl 6.6 permit a refusal to advance Defence Costs in reliance upon cl 3.9. [55] Clause 6.6 is inconsistent with the bank‟s construction of the policy. [56] The bank‟s new argument that, although it is not entitled to have Defence Costs advanced to it since Chartis has denied indemnity under cl 3.9, it is still entitled to be paid such Defence Costs, does not avoid the point that cl 6.6, and therefore the policy as a whole, envisages that an exclusion affects the obligation to pay Defence Costs, not simply the obligation to pay Loss. [57] The bank‟s submissions do not explain why the policy should be construed to permit the insurer to refuse to advance Defence Costs in respect of which there is an existing entitlement to payment. -- 17 of 20 -- 18 [58] Clause 6.6 should be interpreted in accordance with its terms and the commercial purpose of obliging the insurer in a case in which it has not denied indemnity for a claim (or denied indemnity only on the basis of cl 3.8) to make “advance payments of Defence Costs at times when, by hypothesis, the liability to indemnify in respect of the Claim may be uncertain because it awaits adjudication”.24 The position is otherwise when the insurer has denied indemnity, including a denial of indemnity based on cl 3.9. [59] The relevance of cl 6.6 is that it affects the payment of Defence Costs (in the form of an advance payment) in a case in which an exclusion under cl 3 is relied upon. This is the clear meaning of the clause and this meaning accords with business common sense. [60] Clause 6.6 is not an exclusion clause. If it was ambiguous as to whether its opening words meant a denial of indemnity by reason of matters other than the exclusions in cl 3 then there may have been some scope to interpret cl 6.6 contra proferentem. But cl 6.6 is not ambiguous in this regard. The bank‟s new argument concedes that Chartis‟ denial of indemnity on the basis of cl 3.9 means that it is not entitled to have Defence Costs advanced to it. [61] The primary judge was correct in his consideration of cl 6.6, and in detecting an inconsistency between cl 6.6 and a literal reading of cl 3. [62] Clause 6.6 provided a basis not to construe the policy in the manner contended for by the bank. The primary judge did not err in relying upon cl 6.6 in construing the policy. Ground of appeal (b) is not established. The application of the principles of construction in this case [63] The bank has failed to establish that the primary judge erred in the findings reached in sub-paragraphs 74(b), (c), and (d) of the reasons for judgment. Those matters and the language of the insuring clause (which was uncontroversial and addressed in sub-paragraph 74(a)) supported the construction that “if cl 3.9 applies to a Claim for Loss, and the insurer denies indemnity for the Claim, the insurer is not obliged to pay Defence Costs”.25 [64] The issue then is whether that construction should have been favoured over the competing construction, which essentially relied on the absence of any reference to Defence Costs in the opening words of cl 3. [65] In construing the policy as a whole it is appropriate to: (a) have regard to cl 6.6 and conclude that it contemplates that a denial of indemnity on the basis of an exclusion, such as cl 3.9, affects the payment of Defence Costs; (b) observe that the opening words of cl 3, viewed in isolation, support the bank‟s construction; (c) note that otherwise the policy tends to treat liability to pay “Loss and Defence Costs” under the insuring clause as subject to the same provisions in the 24 Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522, 533 [34]. 25 BOQ Ltd v Chartis Aust Insurance Ltd [2012] QSC 319 at [74]. -- 18 of 20 -- 19 policy, rather than deal with a liability to pay Loss and a liability to pay Defence Costs differently; (d) seek to resolve the inconsistency between a literal reading of cl 3 and other provisions of the policy; (e) have regard to the subject matter of the policy, which in essence is insurance against liability for the bank‟s professional services and the costs of defending claims that asserted such a liability; and (f) give the policy a businesslike interpretation, and, in choosing between competing constructions prefer the construction that avoids an unlikely commercial result. This was the approach of the primary judge. [66] The bank‟s literal interpretation of cl 3 gives rise to apparently unintended and absurd consequences. It requires the insurer to pay the costs of defending claims that clearly fall outside the terms of cover because the damages and other relief they claim are excluded by cl 3. Such a literal interpretation of cl 3 with such absurd consequences might be avoided in favour of an interpretation which supplied the words “or Defence Costs” after “Loss” in the opening words of cl 3. This is because “words may be supplied, omitted or corrected in order to avoid absurdity or inconsistency”.26 [67] The bank submits the primary judge erred in failing to construe the policy contra proferentem in order to resolve the tension which was found to exist between cl 3 and cl 6.6 of the policy. I do not agree. [68] As to the construction of the exclusion clause itself, on one view, there was no ambiguity in the clause itself, and, as the primary judge found, the opening words of cl 3 favoured the bank‟s construction. On this view, there was no real need to resort to the contra proferentem rule in construing cl 3 since its literal meaning was against Chartis‟ construction. [69] Such a literal interpretation of cl 3, however, gave rise to an inconsistency with cl 6.6, and was not justified when, in accordance with the principles of construction, the clause was read in light of the contract as a whole. The inconsistency between a literal interpretation of cl 3 and cl 6.6, the context in which cl 3 appeared, the text of the remainder of the policy (particularly the insuring clause) and the policy‟s subject matter gave rise to a construction that competed with the bank‟s literal interpretation of cl 3. This competing view interprets cl 3 as qualifying the liability to pay Loss and Defence Costs, not simply a liability to pay for Loss. [70] The policy being open to two constructions, the preferred construction was one that avoids capricious, unreasonable, inconvenient, or unjust consequences. This was the construction preferred by the primary judge. [71] The primary judge applied principles of construction to the proper interpretation of cl 3 in its context. Any ambiguity was resolved and no basis remained to apply the contra proferentem rule which applies “only when, having applied all other aids to construction, ambiguity remains”.27 26 Fitzgerald v Masters (1956) 95 CLR 420, 426-427. 27 G L Nederland (Asia) Pty Ltd v Expertise Events Pty Ltd [1999] NSWCA 62 at [27]. -- 19 of 20 -- 20 [72] Ground of appeal (d), which concerns the contra proferentem rule, is not established. Conclusion and orders [73] The bank has failed to establish any of its grounds of appeal. I would: 1. Grant leave to further amend the notice of appeal to delete sub-paragraph 3(a) and insert in its place: “(a) a declaration that, upon the proper construction of the Policy, the clause 3.9 exclusion does not apply to Defence Costs, as that term is defined in the Policy.” 2. Grant leave to the appellant to rely upon the affidavit of Russell Redsell sworn 20 May 2013. 3. Dismiss the appeal. 4. Order the appellant to pay the respondent‟s costs of and incidental to the appeal to be assessed on the standard basis. -- 20 of 20 --