Lambert Leasing Inc. v QBE Insurance Ltd (No 2)

1. [1]

   On 12 June 2015 I handed down my reasons for judgment in this matter which arises out of the sale by the first named plaintiff of an aircraft to the second and third defendants and a policy of insurance effected by those defendants with the first defendant, QBE, in which both plaintiffs were named as insureds ([2015] NSWSC 75). I did not express any concluded view on what was described as ‘the pay to be paid’ issue.

2. [2]

   I indicated that I had, in considering my judgment on the pay to be paid point, become aware of a Canadian Court of Appeal decision which contained wording very similar to the QBE wording and in which a view had been taken that supported QBE’s contention and was antagonistic to Lambert’s contentions. I also made reference to the case of Versicherungs und Transport A/G Daugava v Henderson (1934) 49 Ll L Rep 252 at p 254; [1934] All ER Rep 626 mentioned in Derrington’s ‘The Law of Liability Insurance’ (3rd ed, DK Derrington and RS Ashton, LexisNexis Butterworths, 2013) at 8-52 p 845. I indicated that if the parties still required a determination on this point I would give them an opportunity to provide further submissions. On being informed that Lambert wished to have a determination on the pay to be paid point and that QBE did not oppose that course, and that the defendants would be seeking an order that costs be paid on the indemnity basis, I directed submissions to be exchanged on the ‘pay to be paid’ clause and on the question of costs. I have received submissions on behalf of Lambert and QBE in respect of the pay to be paid point and from all parties on the question of costs.

3. [3]

   I shall in the balance of these reasons use the same definitions as were utilised in the judgment. These reasons should be read together with the reasons of 12 June 2015 but in an endeavour to make these reasons accessible I shall set out what I said at [130]- [138] on the pay to be paid point:

4. [4]

   In Conohan v Cooperators (2002) Fed Ct App 60 ; 2002 Fed Ct App LEXIS 45, the clause in question was in the following terms:

5. [5]

   QBE points out that Conohan followed Firma C notwithstanding Charter Re and notwithstanding that the policy in Conohan was not part of a mutual insurance scheme as was the case in Firma C. It submits that Conohan was correctly decided and that the construction for which it contends is the ordinary meaning of the words and also relies on what Derrington says of pay to be paid clauses at p 1640 ie:

6. [6]

   In Conohan Stone JA (with whom Evans and Malone JJA agreed) said of Charter Re

7. [7]

   QBE submits that Henderson merely recognises that there would be no good reason to require an insured to pay damages to the third party as a precondition to payment were there not a specific clause but that in this case there is a specific provision in which, according to the ordinary construction of the words, has that effect.

8. [8]

   Lambert contends that the expression used in Conohan is more easily read as a condition precedent than the words in the QBE Policy and also draws attention to the fact that conditions precedent are dealt with in a separate section of the QBE Policy. QBE submits that the word ‘shall’ is not merely a reference to future events but conveys the intention that payment is a requirement for indemnity.

9. [9]

   Lambert criticises the judgment in Conohan asserting that it

10. [10]

    Lambert draws attention to what Derrington said:

11. [11]

    It is important to bear in mind that Firma C was a case involving a protection and indemnity club where members were not only insureds but also insurers and the notion that there was some purpose in members being sufficiently solvent to meet liabilities was discussed at p 36 D-G per Lord Goff and p 42 C-E per Lord Jauncey and see ‘Sutton on Insurance Law’ (4th ed, RM Merkin and WIB Enright, Lawbook Co, 2015) para 15-680 fn 487.

12. [12]

    Baulderstone is a case relied on by QBE. The Court did not regard Charter Re as determinative of the problem before it. The clause in the reinsurance policy imposed liability on the reinsurer if the insurer had paid or admitted liability or been held liable. The insurer had not been held liable or admitted liability so the only basis on which the reinsurer could be liable was if the insurer had paid the insured’s claim. Allsop P (with whom Beazley and Campbell JJA concurred) said at [281]:

13. [13]

    Baulderstone demonstrates (as does Firma C) that a Court can construe a clause as being sufficiently clear to require payment out by an insured before liability is imposed on the insurer (or reinsurer). The construction advanced by QBE does not preclude a claim because it has not met any one of various specified criteria but rather requires its insured not only to have been found liable (or by settlement or by agreement to have accepted liability) but to also pay the amount of liability so adjudged (or agreed) before QBE need pay it.

14. [14]

    I note what Stirling J said in Eddystone Marine Insurance Co, Re Ex parte Western Insurance Co [1892] 2 Ch 423:

15. [15]

    It would, I think, be entirely surprising that an insured would have to meet a most significant claim or claims following an aviation crash before it could recover from the insurer with the real risk that it could not, out of its own resources, meet that liability and with the prospect that the insurer would be excused from payment under the policy because the insured, unable to pay, had become insolvent. Insurance of the kind involved here is designed to avert the risk of financial ruin.

16. [16]

    The approach for which QBE contends seems to me to be inherently inimical to the concept of insurance and for such a claim to operate I think it would require the clearest language.

17. [17]

    Firma C and Conohan establish that if the Court regards the wording as imposing a requirement that the insured pay out the third party claimant first equity cannot override the contractual requirement. In Firma C the interpretation favoured was consistent with the mutual scheme but in Charter Re there was no mutual scheme. Their Lordships in Charter Re were clearly concerned to read the relevant words in a way that made commercial sense. The Court of Appeal of the Canadian Federal Court rejected the appellant's contention that the approach taken in Firma C should be restricted to mutual schemes and in my respectful view did not give adequate consideration to the question of whether the interpretation urged by the insurer made commercial sense in the context of a policy of insurance in the manner that exercised the minds of their Lordships in Charter Re.

18. [18]

    I think there is certainly a commercial justification for an insurer not wishing to be required to indemnify an insured for liability incurred where the insured has not been called on to pay any amount to the third party to whom the insured is liable as referred to above, and I accept that a reading of the phrase “shall pay” as requiring an insured to pay the claimant before being entitled to call for indemnity is very much open although not as obviously as the words “actually paid” were first understood by Lord Mustill in Charter Re but what Charter Re encourages is the need to consider the “landscape” of the contract as a whole (see Lord Mustill p 384) and the possibility that some other meaning was intended as a matter of objective interpretation when the reading contended for by one party produces a result that is inconsistent with the commercial realities and appears to have no obvious or sound rationale (Lord Mustill pp 386H- 387D and see Lord Hoffman at pp 394E- 396A).

19. [19]

    The phrase used is “shall pay” not “shall have been paid”. The words “shall pay” are amenable to an interpretation that does not require the insured to first pay out of its own money the amount of damages for which it has been adjudged liable (or agreed in a settlement to pay). The requirement that the insured shall “pay” is capable of being viewed as a requirement that the insurance money to be paid to the insured is to be used for the purpose of paying the claimant to avoid the problem identified in Henderson. Such a construction is consistent with the obvious underlying purpose of the contract of insurance, and precludes an insured claiming payment because of its liability to a third party without meeting that liability to the third party.

20. [20]

    I hesitate to depart from the conclusion in Conohan but the issue is, as was recognised in Conohan, a matter of construction and the QBE clause did not have the additional words to which the Court in Conohan referred at [26]. I feel more confident in treating the words in the manner I have indicated having regard to the decision in Charter Re, their Lordships agreeing with Mance J that it was “entirely inappropriate” for a pay to be paid clause to be considered to represent a condition precedent to indemnity outside a club mutual insurance arrangement (see p386G of Charter Re).

21. [21]

    My conclusion as to the meaning of the pay to be paid clause is that QBE is not entitled to require Lambert pay out any liability itself first to the claimant as a precondition of indemnity. What is required, however, is the imposition on Lambert of liability by a Court or agreement in settlement of a claim so that an amount is required to be paid by Lambert for which QBE is required to indemnify Lambert and to do so by paying the money to Lambert so that it can pay it to the claimant or more conveniently by paying that amount to the claimant directly on behalf of Lambert.

22. [22]

    Lambert pointed to Mr Beach-Nash’s evidence that QBE has never required any insured to pay out a judgment or settlement amount as a precondition of indemnity notwithstanding QBE’s frequent inclusion of the clause in its aviation policies: see T193- 194. That is not a matter relevant to construction of the clause but rather to the question of whether QBE’s reliance on the clause constitutes a breach of its duty of good faith, a matter which I do not need to determine.

Costs

1. [23]

   QBE and the Partnership seek indemnity costs orders against Lambert. There does not seem to be any contest by Lambert that it is liable to pay costs on the ordinary basis but it does dispute that an order for indemnity costs should be made.

2. [24]

   The claim for indemnity costs by QBE and the Partnership is based on two separate offers. The first was made on 5 June 2014 and was in the form of a Calderbank letter. The second was made on 15 January 2015 and was an offer expressed to be made under the Uniform Civil Procedure Rules (“UCPR”).

3. [25]

   The difference in approach to the two species of offer has been explained in Leichhardt Municipal Council v Green [2004] NSWCA 341 and Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344. In the case of unaccepted offers of compromise made in accordance with the UCPR the consequence is normally that indemnity costs will be ordered unless the offeree establishes some special basis that the normal rule should not apply, but in the case of Calderbank offers the offeror must establish that the offer was genuine and that the offeree acted unreasonably in not accepting the offer. Lack of genuineness of an offer is relevant to offers of compromise but the onus is on the offeree to establish that the offer made was not a genuine compromise or alternatively that the Court should exercise its discretion not to make an order for indemnity costs.

The Offer of 5 June 2014

1. [26]

   In relation to the offer of 5 June 2014 (see Annexure A to the affidavit of Mr Henry Holland of 21 July 2015) the offer was that all previous costs orders would be vacated and each party was to pay its own costs, that the proceedings would be dismissed as against all defendants and Lambert would covenant not to bring any further proceedings arising out of the circumstances pleaded. No evidence was tendered of what costs orders had been made against whom or what costs had been incurred by QBE as at the date of that offer but there is evidence that by 13 January 2015 QBE had incurred costs of approximately $307,000 exclusive of GST (see para 5 of Mr Holland’s affidavit).

2. [27]

   The letter by which the offer was made pointed out what QBE contended were significant problems in the plaintiffs’ case:

3. [28]

   The letter pointed out that QBE’s solicitors “anticipated” that the Partnership would agree and that QBE would obtain the Partnerships’ agreement. That confidence may well have been connected to the fact that the Partnership was an insured under the QBE Policy.

4. [29]

   Lambert attacks the Calderbank letter on two bases. The first basis is that the offer was really a “walk away” offer and did not involve any genuine compromise on the part of QBE or the Partnership. The second basis is that it was not unreasonable for Lambert not to accept the offer.

5. [30]

   It is relevant in viewing these questions to consider what the offeree would gain by accepting the offer. The less that it would receive the more difficult it is to establish that failure to accept the offer was not reasonable. All that Lambert would receive was relief from a costs order that QBE and the Partnership might obtain against it for costs incurred by the defendants up to that point in time.

6. [31]

   Whilst I have found against Lambert in those latter claims, Lambert had a claim against the Partnership that was not frivolous or ridiculous. I do not think it was unreasonable for Lambert to reject the offer from QBE that required Lambert to drop all of its claims including the claims against the Partnership, nor do I think that the offer was a genuine compromise of the claims against all defendants.

7. [32]

   In my view it is not appropriate to make an indemnity costs order against Lambert based on the offer of 5 June 2014.

The Offer of 15 January 2015

1. [33]

   It is not disputed by Lambert that the January 2015 offer, in the same terms as the June 2014 offer, was one made in accordance with the procedural requirements of UCPR Rule 26. What is disputed is that the offer was genuine.

2. [34]

   UCPR Rule 42 requires the offeror to have obtained a result equal to or better than the offer of compromise. In one sense QBE has not done better because Lambert obtained a decision in its favour on the wording of the policy both in respect of the pay to be paid and the nervous shock issue and also a conclusion that QBE could not insist on the provision to it of privileged reports as a precondition for providing a response on the issue of indemnity: see [169]- [171]. The problem with these conclusions however is that they do not as a practical matter assist Lambert because of my conclusion that Lambert will not have to pay money to the claimants because Global has agreed to do so and that these proceedings were really proceedings brought at the behest of Global: see [193]- [199].

3. [35]

   Once again Lambert attacks the genuineness of the defendant’s offer. The position in relation to offers of compromise is explained in Dean v Stockland Property Management Pty Ltd (No 2) [2010] NSWCA 141 per Giles JA, Handley AJA and Whealy J:

4. [36]

   It appears that walk away offers are more likely to be viewed as not involving any real element of compromise (see Robb Evans of Robb Evans & Associates v European Bank Ltd (No 2) [2009] NSWCA 170 and Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 368) but this is not always the case as is demonstrated by Roads and Traffic Authority of New South Wales v Refrigerated Roadways Pty Ltd (No 2) [2009] NSWCA 336 and Bennette v Cohen (No 2) [2009] NSWCA 162.

5. [37]

   I readily accept this the case was one in which it was difficult for QBE to fashion an offer that involved some genuine compromise with Lambert having regard to QBE’s contentions, but what was in fact offered to Lambert by QBE was of very limited benefit and required Lambert to completely abandon not only its claim against QBE but also its claim against the Partnership which involved a question of construction of the Sale Agreements’ indemnity clause and application to the facts of the case. Although Lambert was unsuccessful in that claim against the Partnership its claim was not frivolous or vexatious, a relevant matter when all that is offered is a walk away offer: see Evans.

6. [38]

   I do not think that there was any compromise even disregarding the issues surrounding Lambert’s claims against QBE and regarding those as problematic and it appears to me that the offer was one sent simply in order to trigger a costs outcome.

7. [39]

   It follows that the order that should be made in respect of costs is that the plaintiffs pay the costs of the defendant on the ordinary basis.