Lawcover Insurance Pty Ltd v Leonardo Carlo Muriniti & Robert Duane Newell

These proceeding concern a dispute about whether Lawcover, the Plaintiff, is entitled not to pursue an appeal in respect of a personal costs order made against the Defendants by Sheahan J in the Land and Environment Court (LEC) in Young v King (No 11) [2017] NSWLEC 34 and whether the Defendants are prevented from conducting such appeal in person and without the consent of Lawcover.

Lawcover contends on a proper construction of the contract of insurance (the Policy) the Defendants are deemed to have consented to Lawcover’s decision not to appeal and that further Lawcover is not obliged to appeal and that the Defendants have no right to institute or conduct any appeal in their own right. As a result Lawcover seeks declaratory and other relief based on the terms of the Policy they say are the material facts.

Lawcover moves on its summons filed on 28 June 2017.

The Defendants by way of a cross summons filed on 23 August 2017 challenge Lawcover’s position and say Lawcover is not entitled to rely on its decision not to pursue an appeal and not entitled to prevent them from conducting the appeal themselves. They base that argument partly on matters of construction but also allege Lawcover has acted in bad faith thereby, preventing it from relying upon its decision not to appeal under the terms of the Policy.

On 14 April 2003, Ms Young (who owned a property at 35 Calca Crescent Forestville) commenced proceedings against her neighbours, Mr and Mrs King (the Kings) who owned the adjoining house at 37 Calca Crescent. The litigation concerned drainage on and around the boundary between their respective properties.

Between 16 and 19 February 2004, these proceedings were heard before McClellan J in the NSW Land and Environment Court (LEC). On 19 February the proceedings were finalised by consent orders which involved the Kings giving an undertaking to the Court on the basis that an agreement had been reached on a “solution” as the result of a conclave of experts. By consent Ms Young’s proceedings were dismissed but the Kings’ were ordered to pay her costs. Justice McClellan delivered judgment; Young v King [2004] NSWLEC 93 (Judgment No 1).

On 8 March 2004, McClellan J made amended orders again relying upon amended undertakings given by the Kings.

However, during 2004 Ms Young became unhappy with the resolution of her claim against the Kings and the consent orders that she had agreed to. She retained Mr Muriniti who in turn briefed Mr Newell. She has been represented by Mr Muriniti and Mr Newell in all her post 2004 proceedings.

On 23 May 2008, Ms Young filed a notice of motion (2008 NOM) seeking to set aside the consent orders and reopen her original proceedings against the Kings in the LEC. Sheahan J referred various issues to mediation on 31 July 2009; Young v King (No 2) [2009] NSWLEC 125 (Judgment No 2).

The proceedings in the LEC ran for about 9 years, with Sheahan J delivering 10 judgments. There have also been appeal proceedings in the New South Court of Appeal, special leave applications to the High Court, and most recently in in the Federal Circuit Court and the Federal Court of Australia (concerning Ms Young’s bankruptcy), many of which are summarised below.

In the meantime, on 15 February 2010, Ms Young brought Supreme Court proceedings against her professional advisors from the original proceedings in the LEC, namely (1) Jason Hones, (2) his firm, (3) Ian Hemmings, (4) expert Dr Stephen Perrens, and (5) Perrens’s firm (Hughes Trueman) (Young v Hones proceedings).

On 6 March 2012, Ms Young filed a motion seeking leave to amend the statement of claim in the Young v Hones proceedings. The respondents to the motion filed their own motion seeking to have the proceedings dismissed. Justice Garling heard the motions on 13 April 2012, delivering judgment on 17 May 2013; see [17] below.

On 14 March 2012, Sheahan J set the matter down for trial of Ms Young’s 2008 NOM to reopen; Young v King (No 3) [2012] NSWLEC 42 (Judgment No 3).

The matter was heard before Sheahan J on 17-19 September, with his Honour delivering judgment on 19 October 2012; Young v King (No 4) [2012] NSWLEC 236 (Judgment No 4). In the course of giving judgment, Sheahan J noted at [5]:

His Honour summarily dismissed Ms Young’s 2008 NOM on jurisdictional grounds finding Ms Young should have sought relief by way of prerogative type proceedings to the Supreme Court (at [392]), and/or on grounds Ms Young’s allegations of collusion, fraud and corruption had no evidentiary basis; see [400]-[402].

In December 2012, Ms Young filed an appeal from Judgment No 4 to the Court of Appeal and also initiated prerogative writ proceedings in the Supreme Court.

Justice Garling gave judgment in the Young v Hones proceedings on 17 May 2013 refusing both leave to amend the statement of claim and summary dismissal of the proceedings; Young v Hones [2013] NSWSC 580. Mr Newell, appearing for Ms Young, had provided a document to the various parties and the Court comprising 171 pages and 521 paragraphs in support of the motion to amend the statement of claim. The document was described by Mr Newell “as being a full explanation” of Ms Young’s case; see [32] and [33]. As a result of the attempted deployment of this document, Mr Newell had accepted his client’s then pleading needed reframing; see [36].

In this course of refusing leave to proceed upon the amended statement of claim, Garling J described the substance of the proposed pleading as Ms Young seeking to establish she had suffered damage to her property from ongoing inadequate drainage which was intended to be, but never was, rectified as a result of proceedings in the LEC. She sought to claim that her lawyers and an expert engineer were negligent and in breach of their respective retainers, leaving her without adequate remedy against the Kings; see [73]-[74].

Mr Newell further explained to Garling J that if the cause of action against Ms Young’s former advisors was in tort and/or contract she may face a claim for immunity from suit on the part of those concerned because their conduct arose in the course of and/or for the purpose of litigation. Accordingly, Mr Newell explained, Ms Young sought to plead causes of action alleging that each of the relevant defendants had acted mala fides and therefore should be denied the benefit of immunity from suit. The agenda was said to involve the unlawful agreement between the Kings and one or more unidentified officers in the employment of Warringah Council who had abrogated their statutory obligations and duties and deliberately misled Ms Young so as to cause significant financial advantage to the Kings; see [75]-[77].

His Honour examined separately the allegations sought to be made in the proposed amended pleading against each of the solicitors, the barrister and the expert engineers. Although he was not prepared to dismiss the proceedings, he refused leave to file the amended statement of claim and described it as embarrassing; see [104], [111], [115], [132], [137] and [152].

On 27 June 2013, Sheahan J published a judgment clarifying orders he made during the trial of Judgment No 4 on 17 September 2012; Young v King (No 5) [2012] NSWLEC 280 (Judgment No 5).

On 22 August 2013, two judges of the Court of Appeal (Leeming JA and Tobias AJA) granted Ms Young leave to appeal against Judgment No 4.

On 31 October 2013, Leeming JA (speaking for the Court of Appeal) published a judgment on the papers, covering both Ms Young’s appeal and her application for prerogative relief; Young v King [2013] NSWCA 364. Leeming JA upheld Ms Young’s appeal against Sheahan J’s summary dismissal of Ms Young’s 2008 NOM, ordering the matter be remitted to Sheahan J for re-determination.

On 9 July 2014, Mr Muriniti wrote to Yeldham Price O’Brien Lusk (YPOL) advising that he and Mr Newell had initiated a police investigation alleging that a number of parties had been conspiring to pervert the course of justice and damage Mr Newell’s ability to obtain insurance and increase Mr Muriniti’s premiums.

On 11 July 2014, Mr Muriniti wrote to YPOL in relation to a costs claim made against him by the Kings. He asserted such a move constituted part of an “insidious” scheme which amounted to an attack on the system of justice. He accused the Kings’ lawyers in the letter of bringing the application for an improper purpose. He requested Lawcover urgently to consider the filing of a motion to have the costs motion dismissed as it was having an impact on his premium and further it had caused immense damage.

On 9 - 12 September and 28 - 31 October 2014, Sheahan J heard the matters remitted to him from the Court of Appeal in Young v King [2013] NSWCA 364. Judgment was delivered on 9 July 2015; see [29] below.

On 1 October 2014, the Court of Appeal (Bathurst CJ, Ward and Emmett JJA) refused leave to appeal from the judgment of Garling J in the Young v Hones proceedings; Young v Hones (No 2) [2014] NSWCA 338. In doing so the Court observed at [119] that it was a serious matter to allege fraud and that it was incumbent on Ms Young’s advisors (Mr Newell and Mr Muriniti) not only to comply with their ethical obligations but in doing so, also to apply objectivity when advising Ms Young and in pleading such a cause of action. The Court expressed the view the text and tone of the correspondence and submissions made on Ms Young’s behalf did not give rise to a great deal of confidence in Ms Young’s legal advisers’ ability to comply with their ethical obligations and apply objectivity when advising Ms Young and in pleading fraud; see [119]. The Court refused leave to appeal against Garling J’s refusal to permit Ms Young to file the proposed amended statement of claim.

On 6 May 2015, the High Court dismissed Ms Young’s special leave application against the Court of Appeal’s decision in the Young v Hones proceedings; Young v Hones [2015] HCASL 73. In refusing leave, the High Court observed the Court of Appeal’s decision did not provide a suitable vehicle for reconsidering the question of advocate’s immunity.

On 9 July 2015, Sheahan J delivered judgment in the proceedings he had heard in September and October of 2014, refusing Ms Young’s 2008 NOM seeking to set aside McClellan J’s orders and re-open her primary proceedings; Young v King (No 6) [2015] NSWLEC 111 (Judgment No 6).

Central to Ms Young’s claim that the consent orders made should be set aside was that she had been subjected to a number of misrepresentations and other conduct amounting to a fraud. Sheahan J at [223] set out the basis upon which Mr Newell explained the existence and effect of the alleged misrepresentations. The effect of it was that “through statements made from the Bar table and allegedly from the witness box” it was conveyed or represented that the drainage solution suggested enabled the matter to be resolved without any orders for demolition of any relevant property. It was thereby contended that the solution proffered was known to be quite incorrect and/or false.

Sheahan J referred to the “plethora” of material tendered but observed that he was not taken to any evidence of any real probative value which would warrant a finding of fraudulent behaviour by anyone involved in the proceedings and as such said that it would be entirely inappropriate to make finding; see [227] and [229].

Sheahan J also made a number of comments critical of Ms Young but equally of Mr Newell and Mr Muriniti. In relation to their conduct during proceedings, Sheahan J observed:

Sheahan J also made remarks on Ms Young’s lawyers failure to comply with many pre-trial directions, the “many affidavits and voluminous annexures” Ms Young had before the Court (at [147]), the “irrelevant and unhelpful” submissions of Mr Newell (at [173]), and how Ms Young’s case was “full of insinuations” (at [227]). Sheahan J also made the following observation:

Sheahan J thereby dismissed the application to set aside the consent orders and observed the Kings would appear clearly to be entitled to an order for costs but observed they had earlier made an application for indemnity costs against Ms Young and a personal costs order against Mr Newell and Mr Muriniti as a result of the earlier summary dismissal application.

His Honour made a number of formal orders which included Ms Young pay the Kings’ costs on a party/party basis as agreed or assessed. However, he stayed that order for 42 days and directed that the parties should file any notices of motion seeking a different order by 20 August 2015.

On 6 August 2015, Ms Young filed a notice of appeal and an application for leave to appeal in relation to Judgment No 6.

On 20 August 2015, Ms Young filed a notice of motion in the LEC seeking orders in her favour for indemnity costs against the Kings and 16 non-parties (Young Costs Application). Those non-parties are identified in Young v King (No 9) [2016] NSWLEC 4 (Judgment No 9) at [27]. They included, for example, Ms Young’s former lawyers and various experts retained on her behalf, experts and lawyers retained by the Kings and Warringah Shire Council.

On 2 September 2015, in a letter from Mr Muriniti to Kennedys, solicitors for Stephen Perrens and Hughes Trueman Pty Limited, Mr Muriniti (with the assistance of Mr Newell) purported to set out in greater length the conspiracy as he saw it:

On 10 September 2015, there was a directions hearing before the Registrar in the LEC in relation to the Young Costs Application. In explaining his client’s position Mr Newell said:

On 10 September 2015, Lawcover was informed that some of the non-parties to the Young Costs Application were threatening to seek personal costs orders against Mr Muriniti and Mr Newell (CB1/188). These were ultimately filed and are referred to hereafter as the Personal Costs Applications.

On 29 September 2015, Mr Muriniti advised the Registrar of the LEC that there had been a delay in filing materials because of Mr Newell’s illness. However in the course of the letter he informed the Registrar that the volume of material that had been served was “monumental”. He indicated there were “15 arch lever folders of material to be served on each of the respondents”.

On 15 October 2015, Mr Muriniti wrote to YPOL. He informed them that “we have an almost complete, if not complete understanding of what was attempted and why and who was responsible.” He went on to explain that in his view his ethical obligation and his duty to the Court obliged him to persist in the allegations (CB2/437).

On 10 November 2015, Mr Newell filed an affidavit partly explaining his medical condition and reasons for delay in the preparation. In the course of that affidavit he further explained the conspiracy in the following terms:

On 11 November 2015, Sheahan J dismissed an application by Ms Young to defer the commencement of Ms Young’s Costs Application due to Mr Newell’s ill-health; Young v King (No 7) [2015] NSWLEC 178 (Judgment No 7).

On 17 November 2015, Mr Muriniti wrote to YPOL. He indicated that once Lawcover had the benefit of he and Mr Newell’s submission it would fully be appreciated that Ms Young had a proper and valid claim and that the attacks against him and Mr Newell were misconceived. He asserted such was the case that a full enquiry into the propriety of at least the legal practitioners for the Kings was warranted by the Legal Services Commissioner.

On 20 November 2015, 235 pages of written submissions were filed in support of Ms Young’s Costs Application (CB8/3002-3234). In paragraph 12 of those submissions it was asserted a scheme had been devised “by or on behalf of Council” to place a drain and an easement in favour of the Council on the applicant’s land, the applicant being Ms Young. The scheme according to the submission involved the generation of a private dispute between the applicant and her neighbours which would lead to a visit by the neighbours to the community justice centre which in turn would lead to the agreement to appoint an independent expert. The independent expert apparently was to make the determination that the Council could not make without being held accountable for misconduct.

The misconduct underlying the “scheme” was that the Council should never had permitted an earlier subdivision of the land and a serious question as to whether houses should ever have been erected on the particular part of the subdivision given the drainage issues.

Mr Newell further alleged in his written submissions that along the way evidence had been destroyed and that the scheme was in fact a conspiracy, the purpose of which was to conceal the fact of the breach of the Water Act. The conspiracy was “initially confined but grew as matters developed in such a way as to complicate the plan”; CB8/3005 at [13].

On 25 November 2015, 23 pages of supplementary written submissions were proffered in support of Ms Young’s Costs Application.

On 30 November 2015, a hearing was conducted before Sheahan J in which various parties sought to have the Young Costs Application summarily dismissed. Mr Newell addressed the conspiracy allegations at some length (CB2/480-490).

On 1 December 2015, Sheahan J summarily dismissed the Young Costs Application against certain of the respondents (the 8th, 9th, 10th, 13th, 14th, 15th, 16th and 18th respondents) as an abuse of process; Young v King (No 8) [2015] NSWLEC 187 (Judgment No 8). In dismissing the application summarily, Sheahan J remarked at [2]:

On 1 November 2015 and following, the application continued with the remaining parties seeking to have the costs application dismissed.

On 2 November 2015, Mr Newell made the following submission before Sheahan J (CB2/573):

On 19 February 2016, Sheahan J gave judgment, finally dismissing the Young Costs Application against the remaining group of respondents as an abuse of process, and ordering Ms Young to pay the Kings costs of the proceedings on an indemnity basis; Young v King (No 9) [2016] NSWLEC 4 (Judgment No 9).

During the course of Judgment No 9, Sheahan J commented the case to set aside the consent orders was doomed from the start yet Ms Young had been “relentless” and that the Kings were clearly entitled to be compensated for all the expense it had caused them (at [106]). Further, his Honour commented the proceedings had been lengthy and costly and that by Ms Young’s own actions and those of her lawyers she had continued to pursue a case based on a conspiracy and/or some fraud where no probative evidence had been adduced (at [108]).

On 29 February 2016, YPOL on behalf of Lawcover wrote to Mr Muriniti confirming that Lawcover had agreed to indemnify him in relation to the Personal Costs Applications.

In early April 2016, YPOL communicated on a number of occasions with Mr Muriniti advising him on the status of appeals and the matters in connection with the various judgments of Sheahan J.

On 13 April 2016, submissions were received on behalf of several of the parties (Davies, Perrens and Hughes Trueman Pty Ltd) in support of the Personal Costs Applications.

In the meantime, on 29 April 2016, Smith J of the Federal Circuit Court dismissed an application to set aside a bankruptcy notice issued against Ms Young. Essentially it was argued she had a counter claim set off, or cross demand that exceeded the amount of judgment upon which the bankruptcy notice was based. Justice Smith observed that the underlying conspiracy allegation which was sought to be ventilated was unarguable and should never have been argued by members of the legal profession; Young v Hughes Trueman Pty Ltd [2016] FCCA 989 at [18]. His Honour further went on to describe the application as “ill conceived, ill prepared and poorly presented” (at [23]).

On 10 June 2016, Sheahan J delivered judgment refusing the Defendants’ application for a stay of the Personal Costs Applications pending the outcome of Ms Young’s appeal from Judgment No 6; Young v King (No 10) [2016] NSWLEC 70 (Judgment No 10). The Defendants were ordered to pay the costs of the application.

On 21 and 22 June 2016, the appeal from Judgment No 6 was heard in the Court of Appeal. Mr Newell appeared for the Appellant, Ms Young.

On 23 June 2016, notification was given to Mr Newell that indemnity costs would be sought against him in relation to the personal costs application. Lawcover agreed to provide indemnity.

On 28 June 2016, YPOL provided an advice to Lawcover by way of an update on the status of appeals from various judgments and personal costs applications against the Defendants. Lawcover was advised the stay application had been unsuccessful.

On the afternoon of 7 July 2016, Mr Lloyd of counsel sent to YPOL draft submissions in relation to the personal costs application in advance of a conference scheduled for the following day. A few minutes later YPOL forwarded to Mr Muriniti Mr Lloyd’s draft.

On 8 July 2016, a conference was conducted by Mr Lloyd with Mr Yeldham from YPOL, Messrs Muriniti and Newell in attendance to discuss the approach to the personal costs application. Mr Newell accepts he was provided with Mr Lloyd’s draft submissions either at the conference or the night before (T90/34-31, T91/30-92/20).

On the morning of 11 July 2016, Mr Lloyd’s submissions in final form were circulated to various parties together with an affidavit of Ms Vitalone (of YPOL).

On 11 July 2016 at 12.18pm, Mr Muriniti sent Ms Vitalone of YPOL an email, copying in Mr Yeldham, setting out what he considered to be “conspicuously unfair” findings in Judgment No 6.

Ms Vitalone replied at 1.00pm on 11 July, informing Mr Muriniti they had “discussed your observations with David” (being Mr Lloyd), but Mr Lloyd had decided to not include “any available argument” regarding the findings in Judgment No 6 in the submissions, instead leaving the matter for hearing. Ms Vitalone asked Mr Muriniti whether he was happy with the proposed final submissions, and Mr Muriniti replied by email at 1.20pm that same day, saying “I accept David’s advice and otherwise I am happy with David’s submissions” (Exhibit P2).

On 18 July 2016, YPOL sent a report to Lawcover on the conference between Messrs Lloyd, Yeldham, Muriniti and Newell on 8 July 2016. Paragraph 2.1 of that letter stated that Mr Muriniti and Mr Newell advised that they had every intention of continuing to pursue the fraud/conspiracy arguments and believed that they have an ethical obligation to do so. At paragraph 2.2 Mr Yeldham observed that the basis for alleging the conspiracy continues to evolve “but neither Mr Muriniti nor Mr Newell were able to provide a document to support the evolving conspiracy”. At paragraph 2.3, Mr Yeldham observed that he did not think “this Judge will allow any further evidence to support the alleged conspiracy, and even if the evidence was allowed it is unlikely to change the judge’s mind regarding his previous findings on the conspiracy allegations”.

At paragraph 2.4, Mr Yeldham observed that focus was never placed on the credible arguments available to defend the personal costs motions and “both Mr Muriniti and Mr Newell advised that they were comfortable with the approach to be taken, although noted that they will be approaching the matter on behalf of Ms Young in a different way.”

On 20 July 2016, Mr Newell and Mr Muriniti circulated submissions on behalf of Ms Young in relation to the application. Mr Newell signed the submissions (CB2/715). Indeed Mr Newell submitted that no reasonable person would have thought that “there was no conspiracy case and certainly no case of fraud against Hemmings (and others)”. Mr Newell described it in his submissions as an open and shut case. Further it was submitted that there was no finding ever made that the applicant ought to have known that she had no real prospects of success.

On or about 26 July 2016, Mr Muriniti and/or Mr Newell prepared an affidavit for Ms Young to be used in connection with the hearing of the Personal Costs Applications. The affidavit in part indicated that Ms Young believed there had been a fraud but did not understand how it might operate (CB3/964 at [4]). The affidavit further went on to indicate that Ms Young believed that the actions taken by others were for the purpose of driving a wedge between herself and her lawyers so as to lead to her being denied legal assistance (CB3/965).

On 28 July 2016, YPOL wrote to Mr Muriniti recommending that Ms Young’s affidavit not be read or used. Mr Muriniti responded by saying that he would put considerable weight on the YPOL advice but would need to consult with Mr Newell.

On 2 August 2016, the Personal Costs Application commenced before Sheahan J. On 3 August, Mr Newell made submissions on behalf of Ms Young including submissions as to the underlying conspiracy allegations (CB2/808-829). The hearing concluded on 4 August 2016.

On 30 September 2016, Bromwich J dismissed an application by Ms Young for an extension of time to file a notice of appeal from Smith J of the Federal Circuit Court refusing to set aside the bankruptcy notice; Young v Hughes Trueman Pty Ltd [2016] FCA 1176. Justice Bromwich, in dismissing the application, made the following comments on the legal representation:

On 19 October 2016, the New South Wales Court of Appeal (Basten and Gleeson JJA and Emmett AJA) gave judgment, dismissing the appeal from Judgment No 6; Young v King [2016] NSWCA 282. Of the conspiracy theories, the Court observed:

On 1 March 2017, Gordon and Edelman JJ of the High Court refused special leave from the New South Wales Court of Appeal judgment of 19 October 2016.

On 27 March 2017, Sheahan J handed down judgment on the personal costs orders in which he made orders for personal costs against the Defendants: Young v King (No 11) [2017] NSWLEC 34 (Judgment No 11).

On 5 April 2017, Mr Muriniti wrote to YPOL setting out his views in relation to the appeal and seeking confirmation that a notice of intention of appeal had been filed.

On 6 April 2017, Mr Lloyd of counsel conducted a conference with Mr Yeldham and Ms Baxter from Lawcover to discuss the prospects of successfully appealing Judgment No 11. Mr Lloyd advised that there was less than a 50% prospect of any appeal succeeding.

On 5 April 2017, YPOL wrote to Mr Muriniti, indicating, amongst other things, they had received instructions to file a notice of intention to appeal to protect the position.

On 11 April 2017, Ms Baxter formed a view that Lawcover should not pursue an appeal from Sheahan J’s judgment of 27 March (CB2/854).

On 11 April 2017 at 10.19am, Mr Yeldham forwarded his advice to Ms Baxter as to the prospects of appeal (CB2/855-861).

At 11.04am on 11 April, Ms Baxter forwarded Mr Yeldham’s advice to Mr Muriniti and Mr Newell (YPOL Advice). Ms Baxter asserted she had formed a preliminary view Lawcover should not pursue an appeal. The communication to Mr Muriniti and Mr Newell sought their consent on the decision not to appeal. They were informed that if they did not agree then provided notification was received in 14 days, the opinion would be obtained from a lawyer pursuant to clause 33 of the Policy. They were invited to consider their position.

On 11 April 2017, YPOL filed a notice of intention to appeal on behalf of the Defendants.

On 24 April 2017, Mr Muriniti wrote to Lawcover opposing Lawcover’s “omission to appeal” and asserting bad faith by their invoking clause 21 of the Policy.

On 27 April 2017, Ms Baxter communicated with the Defendants confirming that Lawcover did not intend to appeal and extending the time for the Defendants to invoke clause 22 of the Policy to close of business on 4 May 2017.

On 3 May 2017, Mr Muriniti wrote to Lawcover advising that the Defendants did not consent to any settlement or to Lawcover’s decision not to appeal. The letter stated that the Defendants required the judgment to be appealed.

Meanwhile, on 5 May 2017, Lee J of the Federal Court granted an application for costs against Mr Newell and Mr Muriniti; Young v Hughes Trueman Pty Ltd (No 4) [2017] FCA 456. The learned judge made the following comments:

On 9 May 2017, Farrell J of the Federal Court dismissed an application for extension of time by Ms Young; Young v Hughes Trueman Pty Ltd [2017] FCA 470.

On 17 May 2017, Sparke Helmore on behalf of Lawcover wrote to Mr Muriniti again extending the time for the Defendants to invoke clause 22 to 24 May 2017.

On 24 May 2017, Mr Muriniti wrote to Sparke Helmore advising that Mr Newell intended to appeal the judgment in his own right and would be filing a notice of appeal with the Court on 24 or 25 May.

On 25 May 2017, Sparke Helmore wrote to Mr Muriniti noting that he had not invoked clause 22 and seeking further information as to the application for declaratory relief he had foreshadowed the previous day.

On 25 May 2017, Mr Muriniti wrote to Sparke Helmore indicating that he did not understand what the dispute or difference of opinion or occasion was that triggered clause 22.

On 26 May 2017, Sparke Helmore responded to Mr Muriniti explaining the nature of the dispute between the parties and the relevant provisions of the Policy.

On 29 May 2017, Sparke Helmore again wrote to Mr Newell allowing him till 1 June 2017 to invoke clause 22.

On 19 June 2017, Bromwich J handed down judgment in Young v Hughes Trueman Pty Ltd (No 5) [2017] FCA 690.

On 26 June 2017, Mr Muriniti wrote to Sparke Helmore advising that he would be commencing proceedings against Lawcover and would also file an appeal again Sheahan J’s judgment.

On 28 June 2017, Lawcover filed the summons commencing these proceedings.

On 17 July 2017, YPOL wrote to Mr Muriniti (CB2/886-887). Amongst other things YPOL explained that it had reviewed documents (7 folders) and could find no convincing evidence of conspiracy in the documents. The letter observed that counsel had observed the documents and come to the same view. The letter further asserted that in the past “you have given instructions that there is no direct evidence of these matters”.

On 21 July 2017, the Court of Appeal made orders staying Mr Newell’s appeal pending the determination of these proceedings.

On 23 August 2017, the Defendants filed their cross summons in these proceedings.

The High Court (French CJ, Hayne, Crennan and Kiefel JJ) set out key principles of determining objectively the rights and liabilities of parties under a contract in Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 (Electricity Generation) at 656-657:

The High Court endorsed this statement of principle in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 (Mount Bruce Mining) at [46]-[49] per French CJ, Nettle and Gordon JJ, and [109] per Kiefel and Keane JJ. Adding to this, the majority noted at [50]:

Mount Bruce Mining was most recently approved by the High Court in Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [2017] HCA 12 (Ecosse) at [73] and cited by the New South Wales Court of Appeal in Jemena Gas Networks (NSW) Ltd v AGL Energy Limited [2017] NSWCA 266 at [22].

In Ecosse, the High Court (Kiefel, Bell and Gordon JJ) provided further guidance on the construction of commercial contracts at [16], citing Electricity Generation:

Earlier, Gibbs J also relevantly summarised principles on construction of contracts in Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 (ABC v Australasian Performing Right Association) at 109:

This passage was most recently cited by the New South Wales Court of Appeal in CSR Limited v Adecco (Australia) Pty Limited [2017] NSWCA 121 at [155] per McColl JA.

Gibbs CJ later articulated similar principles in Australian Casualty Co. Ltd v Federico (1986) 160 CLR 513 at 520-521, a case concerning the construction of an insurance policy:

In Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522, the majority (Gleeson CJ, McHugh, Gummow and Kirby JJ) held at [15]:

The New South Wales Court of Appeal also summarised principles of construction relevant particularly to insurance contracts in Zhang v ROC Services (NSW) Pty Ltd; National Transport Insurance by its manager NTI Ltd v Zhang (2016) 93 NSWLR 561 at [127]-[129], also citing Gibbs J’s passage from ABC v Australasian Performing Right Association at [129].

Carter v Boehm (1766) 3 Burr. 1905 is the seminal statement articulating the notion of good faith in insurance contracts. In summing up, Lord Mansfield stated at 1909-1910:

Section 13 of the Insurance Contracts Act 1984 (Cth) (Insurance Contracts Act) has now made the duty of good faith an implied statutory term in every general insurance contract in Australia. The section relevantly includes:

In TAL Life Ltd v Shuetrim (2016) 91 NSWLR 439 (TAL v Shuetrim), Leeming JA recorded the history of this obligation at [49]:

Section 13 was also considered by the Full Court of the Western Australian Supreme Court in Beverley v Tyndall Life Insurance Co Ltd [1999] WASCA 198 - a case cited in TAL v Sheutrim at [187] - where Malcom CJ stated at [6]:

Section 52 of the Insurance Contracts Act relevantly provides:

The approach to applying section 52 (in the context of a ‘contracting out’ of section 51(1)(c) of the Insurance Contracts Act) was described by the Western Australian Supreme Court (McLure P, with whom Newnes JA and Beech J agreed) in Hancock Family Memorial Foundation Ltd v Lowe [2015] WASCA 38 at [89]:

Section 52(1) was also considered, albeit briefly, by the High Court in Akai Pty Ltd v People's Insurance Co Ltd (1996) 188 CLR 418 at 426, where Dawson and McHugh JJ observed:

The Plaintiff submits clause 21, while “curiously drafted,” only becomes relevant once Lawcover has formed some view about pursuing an appeal or not. In other words, clause 21 presupposes Lawcover forming a view about how to proceed, and seeking the insured’s consent to that course before implementing the final decision (Plaintiff’s closing submissions [58]). The Plaintiff characterises this view as “preliminary,” since the final decision occurs only after the clause 33 process is offered to the insured and it elects either to pursue it or not (Plaintiff’s closing submission [61]).

The Defendants submit clause 21 requires the insurer to seek consent of the insured before making any decision, recognising the interests of the insured and the legitimate expectation of contextually reasonable consultation (Defendants’ closing submission [17]-[18]).

The Plaintiff submits Lawcover complied with the Policy as it made a preliminary decision not to appeal from Judgment No 11 on 11 April 2017, and notified Mr Newell and Mr Muriniti of that decision on the same day. The Plaintiff notes that had a clause 33 independent lawyer determined an appeal was appropriate, Lawcover would have been bound to appeal (Plaintiff’s closing submissions [62]).

In the alternative, the Plaintiff submits that even if the decision made by Lawcover is characterised as a final decision made prior to seeking Mr Newell and Mr Muriniti’s consent, it is of no consequence. According to the Plaintiff Mr Newell and Mr Muriniti never had any interest in invoking clause 33. The Plaintiff points to the numerous occasions Mr Newell and Mr Muriniti were granted extensions to invoke clause 33, and their “disingenuous and baseless assertion” there was no issue between the parties capable of invoking that clause. The Plaintiff notes both Mr Newell and Mr Muriniti conceded there was a dispute between the parties about whether to appeal, albeit a “sham dispute” according to Mr Newell. Mr Muriniti asserted he did not want to invoke clause 33 because he wanted to better understand Lawcover’s position, while Mr Newell asserted he did not want to invoke clause 33 as he believed from as early as 2015 the process would be corrupted (Plaintiff’s closing submissions [63]-[70]).

The Plaintiff submits, given the Defendants failure to exercise their clear contractual remedy for challenging Lawcover’s position to not appeal from Judgment No 11 within the required period, they are deemed to have consented to Lawcover’s stated position (Plaintiff’s closing submissions [71]).

In filing their own appeal from Judgment No 11, the Plaintiff submits Mr Newell and Mr Muriniti are in breach of clause 16 of the Policy containing an implied negative stipulation Mr Newell and Mr Muriniti as the insured would not act inconsistently with Lawcover’s conduct of the claim and the right and obligation to appoint lawyers and act in associated proceedings (Plaintiff’s closing submissions [72]).

The Defendants submit “[i]t is beyond sensible dispute that a decision by the Plaintiff not to appeal was conveyed by email on 11 April 2017.” The Defendants submit the email is a decision in unequivocal terms, rather than (as I understand it) an invitation for consultation, and thus clause 22 was never invoked because clause 21 was not adhered to (Defendants’ closing submissions [16]).

The Defendants also submit the Plaintiff has an obligation to indemnify the Defendants for the costs of the appeal even if they pursue the appeal themselves. The Defendants submit there is nothing to suggest the insured’s right to indemnity for costs abates by reason that the insured is compelled to appeal itself. The Defendants accept they have an obligation to act towards the Plaintiff with utmost good faith, but submit this means the Policy does not place the Plaintiff in an invidious position so far as it concerns the appeals filed by the Defendants (Defendants’ closing submissions [74]-[80]).

The Defendants also set out what they term the “inadequacy of Clause 33 solution,” in order, it seems, to justify why they did not seek to exercise their contractual right to invoke clause 33.

The Defendants note clause 33 requires the lawyer to only take into account the legal issues in the claim and the costs, but not the interests of the insured. Further, the lawyer, unlike the insurer, is not required to act in utmost good faith. The Defendants also highlight the fact there is no basis to challenge the lawyer’s determination under clause 33 except on terms of the contract and thus the lawyer’s decision is the final word. According to the Defendants, if the lawyer’s decision on whether persons are “likely to be held liable to the claimant” is based on “utterances in collateral judgments” then “the Clause 22 regime is a prescription for arriving at perverse outcomes with legal impunity” (Defendants’ closing submissions [44]-[51]).

The Defendants further submit the Policy does not provide for any right to prevent the appeal, and if it did it would be void by reason of public policy. According to the Defendants, whether or not Lawcover is obliged to pursue an appeal has nothing to say about whether the insured should be prevented from conducting the appeal which Lawcover itself is no longer obliged to pursue (Defendants’ closing submissions [71]-[73]).

The Plaintiff also provides a list of reasons why discretionary considerations do not weigh against the Defendants being restrained from appealing.

The Plaintiff submits Lawcover will be required to bear the financial consequences of the appeal as there does not appear to be an effective mechanism to allow the Defendants to run the appeal themselves at no risk to Lawcover. An indemnity has been granted, clause 34 means Lawcover cannot cancel or avoid the Policy and there is no ability to come to an arrangement between Lawcover and the Defendants which would protect Lawcover against direct claims by the successful costs claims since under section 4 of the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW), those costs claimants may make claims directly against Lawcover (Plaintiff’s closing submissions [73]-[74]).

The Plaintiff also submits an appeal is very unlikely to assist in improving the Defendants’ reputations, and would in fact more likely result in causing additional harm to their reputations, and the possibility of a further referral for disciplinary action. The Plaintiff also points to the numerous judgments making adverse findings against the Defendants in submitting there is little by way of reputation to rescue (Plaintiff’s closing submissions [75]-[79]).

Thirdly, the Plaintiff submits the Defendants lost their appeal rights by embarking on a “facile, disingenuous approach” to whether there was a dispute with Lawcover. The Plaintiff notes Lawcover drew the Defendants’ attention to their Policy rights on numerous occasions, and they simply decided to run the risk of loss of ability to run the appeal (Plaintiff’s closing submissions [80]).

The Defendants plead in paragraphs 1(c) and 1(e) of the cross summons Lawcover acted in bad faith such that it is prevented from relying on its decision not to appeal from Judgment No 11. The Defendants set out the particular allegations of bad faith at Exhibit P1, which are primarily premised on the Defendants asserting their prospects for success on appeal are excellent.

In summary, as I understand it, the Defendants’ bad faith allegations are:

The Defendants expanded upon several of these allegations in closing submissions.

The Defendants submit Lawcover breached its duty of utmost good faith in failing and later refusing to provide any real reasons for their decision not to pursue an appeal. The Defendants characterise Lawcover’s reasons as “illusory” as they turned on whether the appeal was hopeless and or had no reasonable prospects of success (Defendants’ closing submissions [19]-[20]).

The Defendants also submit they were kept in the dark as material information was never provided to them by Lawcover’s lawyers for the purposes of the personal costs applications and there was never any explanation as to why this was the case (Defendants’ closing submission [22]-[23]).

The Defendants submit they have “reasonable apprehensions” that the process under clause 33 can be corrupted given there is “a large range of powerful people” who “are lined up against the progression of the claim” (Defendants’ closing submissions [24]). Further, the Defendants note the decision of the parties to bring personal costs applications was a “bewildering decision” and the fact Lawcover’s lawyers “did not lift a finger to defend the Defendants” explains why the Defendants are anxious in relation the appointment of an independent lawyer under clause 33 (Defendants’ closing submissions [24]-[27]).

The Defendants also summarise their case to “dispel the glibly submitted idea that the notion of the conspiracy can be a “fevered imagining”” and submits Lawcover has a vested interest in the conspiracy allegation disappearing if for no other reason than it has to pay for it (Defendants’ closing submissions [29]-[43]).

The Defendants further extensively set out reasons for why an appeal is viable to support their claim for why they should not be restrained in pursuing the appeal. The Defendants rely on Michael Wilson & Partners Limited v Nicholls (2011) 244 CLR 427 (Michael Wilson & Partners) in asserting the principles of Rippon v Chilcotin (2001) 53 NSWLR 198 (Rippon v Chilcotin) do not apply to their appeal, and even if the principles might apply, they would need to be subjected to a rehearing giving the factually dense analysis required to invoke the principles in Rippon v Chilcotin (Defendants’ closing submissions [55]-[58]).

The Defendants also detail why Mr Faulkner’s position on whether Rippon v Chilcotin would sustain an abuse of process (preclusion) finding was “entirely misguided” and Lawcover’s decision not to appeal on 11 April 2016 was “fundamentally flawed” (Defendants’ closing submissions [59]-[64]).

The Plaintiff dismisses the Defendants’ allegations of bad faith largely as baseless. The Plaintiff sets out multiple grounds sufficient to justify the Court’s exercise of a discretion in favour of a personal costs order in rejecting the Defendants’ contention they have strong prospects of success on appeal (Plaintiff’s closing submissions [87]; [91]-[93]).

In dismissing the further allegations of bad faith, the Plaintiff submits the Personal Costs Applications were properly brought and involved no impropriety as is plain from Sheahan J’s judgment and orders in Judgment No 11, with no suggestion Lawcover or Lawcover’s lawyers acted inappropriately. In addition, the Plaintiff relies, among other documents, on Mr Yeldham’s letter to Mr Muriniti of 17 July 2017 as showing there is no basis for the Defendants alleging Lawcover never examined their conspiracy allegations (Plaintiff’s closing submissions [94]-[98]).

The Plaintiff further submits Mr Lloyd made reasonable and appropriate submissions in defence of the Personal Costs Applications, and Mr Newell sat at the bar table and took no issue with Mr Lloyd while he made oral submissions. The Plaintiff also notes there is no evidence of any bias or recklessness on the part of Lawcover’s lawyer’s, Mr Yeldham or Mr Lloyd, nor was the matter put to Ms Baxter in cross-examination. Further, the Plaintiff maintains the Policy does not require Lawcover to “consult,” canvas or exchange views, and in any case Lawcover did provide a copy of the advice on which its views were based (Plaintiff’s closing submissions [99]-[102]).

The Plaintiff submits there is also no basis for any allegation Lawcover kept the Defendants in the dark, and on the contrary they were well informed about the conduct of their defence of the Personal Costs Applications, with Mr Lloyd making it clear to the Defendants he would not be advancing the conspiracy case in defence of the costs claims. Further, Ms Baxter came to a proper, reasonable and considered view as to whether to appeal, and there was no need, nor requirement, for the Defendants to be engaged in a continued consultation, or receive even more detailed explanations regarding the appeal decision (Plaintiff’s closing submissions [103]-[104]).

The Plaintiff also highlights how clause 33 would have enabled both parties to put in submissions they wanted the independent lawyer to consider in response to the Defendants’ assertion the 11 April Advice required explanation which had not been given by Lawcover making the parties’ disagreement “incomprehensible.” Further, the Plaintiff submits there is no basis for the allegation an appeal was bound to succeed, as is evident in the cogent and compelling reasons set out in Judgment No 11 (Plaintiff’s closing submissions [105]-[106]).

In response to the Defendants’ specific attack on Judgment No 11 regarding the application of Rippon v Chilcotin, the Plaintiff submits the points of distinction in Michael Wilson do not apply in this case as the Defendants were seeking to set up essentially the same conspiracy allegations as had already been determined, and were seeking to do so in the very same proceeding. Further, an extended re-litigation abuse of process was still open even if the Rippon v Chilcotin re-litigation type abuse of process was incorrectly found, as the findings of abuse of process went much further than mere reliance on that case (Plaintiff’s closing submissions [107]-[114]).

In response to the Defendants’ other main attack on Judgment No 11 regarding the Young Costs Application having a proper basis and evidentiary foundation, the Plaintiff cites passages from various of the Judgments which show there was no proper evidentiary and legal basis for the conspiracy claims (Plaintiff’s closing submissions [115]-[117]).

The Plaintiff also relies on multiple grounds in response more generally to the Defendants’ allegations of bad faith set out at [120] in its closing submissions, which include the following. The Plaintiff submits Lawcover conducted the defence in a professional, competent manner, with no adverse comment made about the conduct of the Defendants’ defence by Lawcover’s lawyers and Mr Lloyd (in contrast to the adverse comments made by the LEC, Court of Appeal and Federal Court of Mr Newell and Mr Muriniti). Similarly there is no substance to the Defendants’ allegation Lawcover’s defence of the Personal Costs Applications was inadequate, especially in light of the unorthodox, highly ambitious and misconceived nature of the Young Costs Applications. If the Defendants sought to raise an issue about the defence conducted by Lawcover, they could have done so during the hearing.

Further, the Plaintiff submits Judgment No 11 resulted from the Defendants’ own conduct while acting for Mrs Young, and the Defendants’ arguments fail to recognise the principles of finality and the binding effect of earlier judgments. The Plaintiff also submits it is not appropriate for the Court to revisit any findings by Sheahan J in these proceedings.

While only raised in closing submissions, the Defendants also submit the regime in clauses 21-23 is unenforceable as an impermissible attempt to contract out of the provisions of the Insurance Contracts Act. The Defendants submit in so far as the clauses 21-23 regime contemplates the sub-contracting of decisions to a party with no real duty to the insured (being the clause 33 lawyer), and no adequate exposure to review, the clauses are unenforceable and void by reason of section 52 of the Insurance Contracts Act (Defendants’ closing submissions [65]-[70]).

Ms Elissa Baxter was called for the Plaintiff, and Mr Newell and Mr Muriniti were called by the Defendants. However, in my view, much of the evidence was irrelevant. The main issue in this case is one of objective construction, and the particulars of bad faith go to documents and Lawcover’s conduct rather than witness testimony and Mr Newell and Mr Muriniti’s perception of this conduct. On these grounds, I do not propose to rehearse the oral or written evidence given by each witness, but will simply make references to such evidence where relevant.

At the heart of this case is the construction of the Lawcover Policy. With one not unimportant exception, the terms of the Policy are clear enough.

No question arises here as to whether the Policy responds to the relevant claim. Lawcover has, right from the outset, accepted its liability to the Defendants under the Policy and has accordingly provided indemnity.

The precise issue between the parties is what their respective rights are under the Policy if in particular circumstances the insured is able to exercise a right of appeal. That situation will arise obviously where there has been a decision of the Court adverse to the insured.

In return for the grant of indemnity, the insured incurs a number of important contractual obligations. Clause 15, 16 and 18 provide as follows:

Clause 15 precludes the insured from making any admissions in relation to a claim, settling it, or importantly incurring any expenses in connection with the claim without the consent of the insurer. Leaving aside expenses which the insured is responsible for (clause 18) the insurer is placed in total control of all expenditure associated with any claim. This would involve the payment of any monetary compensation awarded against the insured and legal costs associated therewith, less the relevant excess.

Clause 16 identifies other important elements of the insurer’s control over the conduct of the claim. The use of the term “conduct” in clause 16 makes it plain that at all stages, especially if litigation ensues, the insurer controls all aspects of it. This is further made clear by clause 16 (a). However, the reference to “clauses 20 to 23” provides an important qualification which I will turn to now.

Before determining the objective meaning of these clauses, it is also important to note the following clauses:

Clause 20 provides the insurer will not settle any claim against the insured without the insured’s prior consent. The clause is clearly intended to operate in circumstances where the insurer has formed a view the claim should be settled and settled on particular terms and conditions, which it presents to the insured as a “recommendation.” It follows that having recommended settlement occur on those terms and conditions, the insured has a choice to either accept or reject that recommendation. The clause then provides an internal mechanism for when the insured does not accept the insurer’s recommendation, effectively limiting Lawcover’s obligations by capping its indemnity.

For perhaps obvious reasons, reputational being one of them, clause 20 provides a degree of autonomy to the insured, but at a cost which may not be insignificant. As Lawcover, by providing indemnity, becomes responsible for the financial outcome of an adverse result, it is permitted contractually, pursuant to this clause, to restrict its financial exposure if the insured rejects its recommendation. Equally however, Lawcover is given the ability to make that decision pursuant to the Policy, and in the event the recommendation is rejected, limit its exposure.

Clauses 21, 22 and 23 deal with the decision making process concerned with an appeal. These provisions operate where there has been a decision adverse to the insured at first instance.

On its face, clause 21 would appear to require the insurer to seek the insured’s consent before making any decision in relation to whether or not to appeal. In other words, it may be thought to require the insurer to seek the insured’s consent before embarking on any decision making process before pursuing the appeal, or alternatively, as the Defendants appear to construe it “consult with the insured” before reaching a decision whether or not to pursue an appeal (T12/11-20 of Transcript dated 1 November 2017). In my view, both positions are highly unlikely to be the intended construction. Clause 21 needs to be viewed in the immediate context of clauses 20, 22 and 23, and also of course in the context of the Policy as a whole.

Clause 22 proceeds upon the basis the insurer has made a decision whether or not to appeal. It is intended to deal with the situation where the insured does not consent to the insurer’s “decision as to whether or not to pursue an appeal.” In that event the insured is able to invoke the process envisaged by clause 33 by notifying the insurer within 14 days of its rejection of the insurer’s decision to appeal or not, that it requires a lawyer’s opinion under clause 33. However, pursuant to clause 23, if in full knowledge of the fact the insurer has made a decision and even in circumstances where the insured may not agree with that decision, a failure to provide the insurer with the requisite notification deems the insured to have consented to the insurer’s decision.

The question is, therefore, what clause 21 contemplates. Does it contemplate the insured being “consulted” or asked to give permission to embark upon a decision making process? I think not. On such a construction, clause 21 envisages the insured consenting to a different decision to the decision referred to in clause 22. The insurer would therefore not only need to seek the insured’s consent to embark on a decision making process as to whether or not to appeal, but, assuming that consent was granted, would also need to seek the insured’s consent under clause 22 to pursue the decision they reached. Such a construction, in my view, is unreasonable, inconvenient, and contrary to a businesslike interpretation of the Policy.

Further, on this literal reading, it is difficult to conceive what reasonable grounds the insured may have for thwarting the insurer’s desire to consider whether to appeal or not. In addition, if the insured was to withhold consent at this stage, the Policy has no provision dealing with the consequences of such a position. Such a construction would also leave it open to the insured to hold out the process of an appeal being lodged while costs are ticking over and time limitations on the drafting of notices of appeal are running. This reading would be contrary to the rules of the Court where it is incumbent on each party to move efficiently for a just, quick and cheap resolution of the issues; see sections 56-58 of the Civil Procedure Act 2005 (NSW).

Further, this construction sits awkwardly against other related clauses. Clause 20 (read together with clauses 15 and 16) makes plain the insurer does not owe a fiduciary duty to the insured and can take into account its own commercial interests. Further, clauses 22 and 23 which sit under the same heading as clause 21 (“Deciding Whether To Appeal”), clearly deal with the insured not consenting or staying silent on the insurer’s decision to appeal or not, and not the insured consenting to the insurer’s decision on whether to embark on a decision making process as to whether to appeal or not.

It seems to me while clause 21 is inelegantly worded, the most sensible construction is that the clause is predicated, at least by implication, upon the basis the insurer has made a decision as to whether or not to appeal, but that it will not actively pursue (by continuing or proceeding with) that course without giving the insured an opportunity to consent, or not, to that course. If the insured consents, then the insurer’s decision is pursued. If the insured does not consent, clauses 22 and 23 will operate according to their terms.

In this respect, I do not agree with the Plaintiff’s primary construction of clause 21 involving a “preliminary” decision. In my respectful view, there is only one decision the insurer must make. The insurer is entitled to decide whether to appeal or not without the consent of the insured, but the insurer is not entitled to act on or pursue that view before seeking consent of the insured. That construction in my view and in the words of Gibbs J “renders the clauses harmonious with each other,” with clause 21 taking a similar pattern from clause 20, and operating consistently and cohesively with clauses 22 and 23, as well as the insurer’s overriding control of the claim as outlined in clauses 15 and 16.

In passing, in my view nothing under clause 21 precludes the insurer from protecting its own interests and filing a notice of intention to appeal, pursuant to Division 3 of Part 51 of the UCPR prior to undertaking the process under clauses 21-23. Indeed, in my view arguably the duty to act in utmost good faith requires the insurer to file a notice of intention to appeal, irrespective of whether they decided to appeal or not. This point does not arise as a matter of fact in these proceedings, as Lawcover, pursuant to Mr Muriniti’s instructions, filed a notice of intention to appeal on 11 April 2017. Further, the filing of a notice of intention to appeal is simply a temporary measure preserving the position of the parties should either of them wish to pursue an appeal, and does not in my view affect the operation of clauses 21-23.

On the above construction, which, as I have said in my view is the only workable construction that can be given to clause 21, the Defendants’ must be deemed to have consented to Lawcover’s decision not to pursue an appeal, pursuant to clause 23.

Ms Baxter’s email of 11 April 2017 to Mr Muriniti and Mr Newell (CB1/119-120) forwarded the advice of Mr Yeldham and expressly sought their consent on Lawcover’s decision not to appeal Judgment No 11. On what in my view is the correct construction of the Policy, this email amounted to seeking the insured’s consent under clause 21.

Mr Muriniti informed Lawcover by letter (sent by email) on 24 April 2017 they did not have his or Mr Newell’s consent to not pursue an appeal (CB1/130-131), however he rejected there being any occasion for Lawcover to invoke either clause 22 of 33. Similarly on 3 May 2017, after being invited by Lawcover to invoke clause 22 and 33 by 4 May 2017 (CB2/868/869), Mr Muriniti again declined the offer, maintaining there was still no occasion for Lawcover to invoke the clause (CB1/130-131). Lawcover (via its solicitors Sparke Helmore) again extended the time for the Defendants to invoke clause 22 and 33 on 17 May 2017 (CB1/132-138). Rather than invoking clause 22 and 33, the Defendants by letter dated 24 May 2017 advised Lawcover Mr Newell intended to appeal Judgment No 11 in his own right, and Mr Muriniti did not intend to appeal but would seek appropriate declarations from the Supreme Court (CB1/132-138).

In my view, the Defendants’ failure to notify Lawcover that they required an opinion from a lawyer under clause 33, engaged clause 23 and deemed the Defendants to consent to Lawcover’s decision not to pursue the appeal.

As I understand it, the Defendants maintain there are several reasons beyond the issue of construction that they cannot have been deemed to consent to Lawcover’s decision not to appeal. The Defendants allege (i) Lawcover engaged in bad faith on numerous grounds by seeking to invoke clause 33, (ii) clauses 20 to 23 and 33 of the Policy offend sections 13, 14 and 52 of the Insurance Contracts Act, and (iii) they are also entitled to run the appeal on their own costs.

The allegations of bad faith raised by the Defendants are wide reaching and somewhat unstructured. For the purposes of my findings, I will address the allegations in terms of those going to (a) concern about corruption of the independent lawyer process, (b) the conduct of Lawcover during and in the lead up to the Personal Costs Application, (c) the failure to give reasons and (d) the merits of the appeal.

In the course of the proceedings, one of the real reasons for the Defendants not wanting to invoke clause 33 of the Policy was revealed as being due to “reasonable apprehensions” Lawcover and the independent lawyer would corrupt the process. Although this concern was not raised in the correspondence with Lawcover at the time they were seeking to invoke clause 22 and 33, Mr Newell expressed his concern about the independent lawyer process in cross-examination (T130/39-44) that he had apparently held from as early as 2015 (T122/20-21), and persisted in asserting the claim in closing written submissions at [24] and following. Without rehearsing these allegations in full, the Defendants submit “a large range of powerful people are lined up against the progression of the claim” (at [24]) and that “the motivation to shut [the conspiracy allegation] down would be expected to be overwhelming” (at [26]).

There is simply no evidence to support the Defendants’ “reasonable apprehensions” the independent lawyer regime would be corrupted. So far, the Defendants’ conspiracy allegations - all routed in some allegation regarding the corruptness of Warringah Council but extending to different persons depending on the proceedings - have been dismissed on every occasion. Different variations of the conspiracy allegations have been labelled by Bromwich J as “fevered imaginings” (Young v Hughes Trueman Pty Ltd [2016] FCA 117 at [93]), by the Court of Appeal (Emmett AJA with whom Basten and Gleeson JJA agreed) as “completely without foundation” (Young v King [2016] NSWCA 282 at [90]), and by Smith J as “unarguable and should not, on any view, have ever been argued by members of the legal profession” (Young v Hughes Trueman Pty Ltd and Anor [2016] FCCA 989 at [18]).

In my view, the Defendants attempt somehow to draw Lawcover and the independent lawyer (who was never appointed) into its web of widely dismissed conspiracy allegations as an attempt to circumnavigate the Policy speaks to the baseless nature of the Defendants’ case in this respect. On the evidence, there is no suggestion whatsoever of Lawcover somehow being complicit in the alleged conspiracy concocted by the Defendants, let alone any grounds for the Defendants’ apprehensions about the independent lawyer process also being corrupted.

The Defendants also allege Lawcover engaged in bad faith by keeping the Defendants in the dark and not adequately defending them during the Personal Costs Applications (Defendants’ closing submissions [9]-[11], [22]-[23]). The Defendants assert Lawcover “did not lift a finger to defend the Defendants against the personal costs applications” (at [27]) and went as far to suggest the applicants may have had special knowledge Lawcover would not lift a finger to defend the Defendants. In my view, these allegations also have no substance.

The evidence plainly shows the Defendants were consulted with and their positions considered by Lawcover in the lead up to the Personal Costs Application. Mr Yeldham sent Mr Muriniti the draft submissions prepared by Mr Lloyd on 7 July 2016 (CB2/643-660), and a conference took place the following day between Mr Yeldham, Mr Lloyd and both Defendants (CB1/234-236). Mr Newell also confirmed he was provided with these submissions either at the conference or the night before (Affidavit of Mr Newell dated 26 August 2017 at [7]; T90/34-T91/12).

Mr Muriniti sent YPOL his thoughts on “conspicuously unfair” aspects of the findings in Judgment No 6, asking YPOL to ask Mr Lloyd “whether these observations can be incorporated in his submissions in some way as part of his submissions.” YPOL replied on 11 July 2016 explaining after discussing Mr Muriniti’s observations with Mr Lloyd, he thought it was best to not rely on the observations in the costs application. They further asked Mr Muriniti whether he was happy with the proposed final submissions, to which Mr Muriniti replied “I accept David’s advice and otherwise I am happy with David’s submissions” (Exhibit P2).

In my view, these exchanges directly refute the Defendants’ contention they were kept in the dark about the way in which Mr Lloyd would defend the Personal Cost Applications, or that there was “no disclosure” that Mr Lloyd would not be drawing on Mr Muriniti’s observations about the issues with Judgment No 6. The Defendants were sent the draft and finalised submissions, were told Mr Lloyd would not be using Mr Muriniti’s observations in the Personal Cost Applications, and expressly approved of this approach and the finalised submissions.

Similarly, in my view there is no evidence supporting the Defendants’ contention Lawcover did not properly defend the Defendants at the Personal Cost Applications. As is plain from Sheahan J’s judgment and the orders in Judgment No 11, the Personal Cost Applications were properly brought, and Lawcover was right not to advise the Defendants the applications were baseless. Further, as the Plaintiff submits Mr Lloyd’s defence in the Personal Cost Applications must be seen in the context of the evident weakness of the Defendants’ case. Mr Lloyd was constrained by earlier findings of abuse of process, and the strength of the applicants’ cases. The LEC may no adverse comment about the conduct of the Defendants’ defence, and in my view there is no evidence suggesting Mr Lloyd and YPOL were anything other than professional, competent and proper. Further, Mr Newell sat alongside Mr Lloyd at the bar table during the application, and at no point made any objection to the defence by Mr Lloyd.

On these grounds, I do not accept Lawcover engaged in any form of bad faith in the lead up to and during the Personal Costs Applications. They kept the Defendants informed at all times, and were transparent in how they intended to conduct the defence, and conducted it in a professional and competent manner.

The Defendants further contend Lawcover failed to provide sufficient reasons in deciding not to pursue the appeal, meaning Lawcover’s discretion to make such a decision was “miscarried” and contrary to its duty of utmost good faith to provide reasons (Defendants’ closing submissions [19]).

In my view, the reasons provided by the Plaintiff were in no way illusory. The YPOL Advice of 11 April informing the Defendants of Lawcover’s decision not to appeal Judgment No 11 reads as a well-considered and comprehensive review of how Lawcover had reached its decision. It summarises and analyses Judgment No 11 and identifies potential errors before concluding the prospects of the costs orders being overturned on appeal was less than 50%.

I therefore reject the Defendants submissions Lawcover engaged in bad faith by failing to provide sufficient reasons in support of their decision not to appeal Judgment No 11. Not only have the Defendants failed to satisfy me Lawcover was obliged to provide reasons in satisfying clause 21, but even if such an obligation could be implied, I am satisfied Lawcover fulfilled this obligation by the YPOL Advice of 11 April 2017.

As this case is purely concerned with whether the Defendants should be entitled to pursue an appeal, it is not essential, nor necessarily appropriate, for this Court to make any findings on the merits of the Defendants’ case on appeal. However, as many of the Defendants bad faith allegations appear to be premised on the contention their prospects for success on appeal are excellent and Lawcover would be acting in bad faith in preventing them from running the appeal, I am minded to make the following observations.

First, by way of passing comment only, in the normal course of events where a judgment is sought to be set aside on the grounds of it being procured by fraud, generally the fraud is required to be pleaded as a separate and distinct cause of action. In Spies v Commonwealth Bank of Australia (1991) 24 NSWLR 691 (Spies) at 700-701, Handley JA (with whom Mahoney JA and Clarke JA agreed) stated:

At the time of writing this judgment, Spies was last cited by the Court of Appeal in McGinn v Cranbrook School [2016] NSWCA 226 at [32] per Gleeson JA (with whom Beazley P and Simpson JA agreed). This requirement is also reflected in the rules of Court, namely UCPR r 14.14(3).

In this case, the point appears to have been raised by Biscoe J, when Ms Young’s NOM in its original form came before his Honour as the List Judge on 15 August and 19 September 2008. Justice Sheahan made reference to Biscoe J’s position in Judgment No 2 at [65] and Judgment No 4 at [86] and [107]. His Honour went on to note in Judgment No 4 at [396]:

Justice Sheahan did not take the point further in Judgment 4, nor does it appear to have surfaced in subsequent proceedings. In my view it is an important part of the context for any appeal, although unsurprisingly the point has not been made by the Plaintiff in these proceedings.

The requirement to plead precisely is a safeguard against humbug. Indeed, the virtue of such a process is that the pleader has to articulate, in accordance with the rules of the Court and the authorities, the material facts that go to the cause of action. This will almost always expose the humbug. True it is the failure to bring separate substantive proceedings seeking to set aside a judgment allegedly obtained by fraud and instead seek that relief by way of a notice of motion is not necessarily fatal to the application; Spies at 696-697; Re Greenhills Securities Pty Ltd [2015] NSWSC 2021 per Brereton J at [7]. However, it is “generally preferable for the question of fraud to be tried in a new action” (Spies at 699 per Handley JA) and given the extent, seeming complexity and seriousness of the fraud alleged by the Defendants, in my view this is exactly the type of case where the ordinary and preferred procedure should have been followed.

Next, there is no difficulty in principle in bringing an application against a third party to pay the costs of the litigation. However, the authorities make it clear that whilst the Court has jurisdiction to order costs against non-parties to a litigation, and in doing so exercises a discretion, it is also clear this discretion must be exercised judicially and according to principle; Knight v FP Special Assets Ltd (1992) 174 CLR 178 at 185, 192. Further, as noted by the Court of Appeal in Yu v Chao (2016) 91 NSWLR 190 at [137] and following, a costs order against a non-party should be “exceptional” with the Court’s jurisdiction to do so “exercised sparingly.” Although the categories are not closed an important factor is if the third party can be seen as the real party to the litigation. An obvious example would be a liquidator whose funding was necessary to run the litigation.

The basis for the application in this case was that, notwithstanding the outcome of the principal proceedings, not only that the successful party should pay costs, but certain parties hitherto, most of whom had not previously been specified, should pay the costs on an indemnity basis (see Judgment No 8 at [7]). In broad terms, the reason was participation in a conspiracy, in substance the same one Mr Newell and Mr Muriniti had attempted unsuccessfully to articulate for some time and which had been roundly condemned. Unfazed and undaunted, Mr Newell as principal architect, along with Mr Muriniti, sought yet again to deploy the same strategy against the Kings and others. To describe the strategy as bold is far too generous. It was, in my view, positively reckless.

On the basis of the materials before me, the Young Costs Application was an ambitious application which would have had the effect, if it succeeded, of turning the merits of Judgment No 6 on its head. In my view, only in the face of cogent evidence clearly contradicting the findings of the primary judgment would such a result be likely. Prima facie, on the material I have before me, the Defendants do not appear to be able to point to any such evidence supporting the advancement of their non-sequitur application.

On these grounds, the Defendants’ decision to nonetheless attempt to pursue an appeal is, in my view, an example of a strategy that the best defence is a good offence. Adding parties to, in substance, the same rejected conspiracy could hardly, to any rational thinking person, enhance the prospects of Sheahan J warming to the idea. Indeed on one view enlarging the conspiracy to additional persons only detracts from the theory’s plausibility.

The Defendants’ client had over the years paid dearly for their irrational and reckless strategy. Pushing on with the application in the way they did raises, in my mind, real questions as to their judgment and more to the point their competence. To have imagined such a novel application could ever be made let alone have any remote chance of succeeding was not something together or alone they appeared to consider. The vigorous zeal they displayed has led to financial disaster for their client, now a bankrupt.

On its face, Mr Yeldham’s opinion that prospects of success on appeal were less than 50% was objectively viewed, that of an experienced litigator, and both considered and reasonable. He identified error but rightly pointed out that would not alone suffice. He was indeed, to say the least, very kind to Mr Newell and Mr Muriniti. To say, as they both have, that it was not an advice, is disingenuous. It is painfully clear that any advice which was contrary to theirs would never be acceptable to them or regarded as reasonable. They did not want to hear anything at all which conflicted ever so slightly with their point of view of the world. Their stance was as unreasonable as it was absurd. They were never going to invoke operation of clause 33 because Mr Newell and to a lesser extent Mr Muriniti believed the independent lawyer would be corrupted in some way by Lawcover - a view plainly unsustainable in the mind of any rational person, let alone a legal practitioner.

The Defendants, in arguing the merits or “viability” of an appeal (and thus the alleged unreasonable nature of Mr Yeldham’s advice) also seek to countenance the argument that an appeal may be an abuse of process by relying on Michael Wilson & Partners. In my view, the Defendants misunderstand the effect and limited application of Michael Wilson & Partners.

The case involved proceedings instituted against a party in a second forum when there were already proceedings against that party in another, where the High Court determined there was a flawed premise in the abuse of process argument (see [109]). The Defendants’ claim, in my view, does not fall within similar reasoning. Unlike in Michael Wilson & Partners, the Defendants’ claim they are seeking to rely on in appeal is essentially a re-agitation of the conspiracy allegations. The allegations may change in colour, but not in quality, and stem from allegations that have been widely dismissed on multiple occasions. The Defendants’ argument on this point also fails to appreciate other classes of abuse of process the appeal may very well fall within, such as those already found against the Defendants in Judgment 9 at [93]-[96].

In my view therefore, rather than the Defendants’ arguments on abuse of process supporting a finding a “rehearing is the obviously mandated outcome” (Defendants’ closing submissions [57]), the issue of abuse of process is in fact a reason, among many others, why the appeal would likely fail and why Lawcover was not acting in bad faith in asserting the Defendants do not have the right under the Policy to pursue the appeal.

For these reasons, I am not satisfied Lawcover has engaged in bad faith on any level. The Defendants’ allegations on this front are baseless, and provide no grounds for determining the Defendants are not deemed to have consented to Lawcover’s decision not to appeal Judgment No 11.

As stated (see [152] above) the Defendants also seek to claim they are not bound by the operation of clauses 21-23 and 33 of the Policy as those clauses are unenforceable pursuant to the Insurance Contracts Act. In my view, this argument reflects a misunderstanding of both the Policy and the Insurance Contracts Act.

As the Plaintiff submitted in closing, correctly in my view, the dispute resolution mechanism established under clauses 21-23 and 33 stands side by side the obligation to act in utmost good faith. The purpose and origin of many independent lawyer or “QC” clauses in professional indemnity policies is to protect the insured from having to face proceedings which, whether successful or not, might be damaging to his or her reputation; see Jonathan Mance, Iain Goldrein and Robert Merkin (eds) Insurance Disputes (2nd edn LLP, London 2003) at 18.208-18.213. For example, in West Wake Price & Co v Ching [1957] 1 WLR 45 (West Wake Price), Devlin J (as his Honour then was) observed at 49:

While the QC clause in West Wake Price applied in circumstances where the liability of the insured had been ascertained by judgment or settlement, it is plain in my view one of the overriding purposes of alternative dispute resolution procedures, such as the independent lawyer procedure in this Policy, is to enable the insured to limit, if he or she so wishes, further adverse findings in a superior Court.

Against this backdrop, in my view the regime under clauses 21-23 and 33 does not purport to exclude, restrict or modify the operation of the Insurance Contracts Act. First, it is important to consider from the outset the Policy makes plain the insurer is perfectly entitled to give consideration to their own commercial interests (see by analogy Groom v Crocker [1939] 1 KB 194 at 202-204 per Sir Wilfrid Greene MR). This is particularly evident from clauses 15 and 16 giving the insurer conduct of the claim and clause 20 enabling the insurer to decide whether to settle a claim. As noted by Leeming JA (with whom Beazley P and Emmett AJA agreed) in TAL v Shuetrim at [187]:

Indeed, the insurer is perfectly entitled to act in its own pecuniary interests in seeking to invoke the regime under clauses 21-23 and 33 of the Policy, and a decision to do so cannot, in and of itself, be considered as inconsistent with or contrary to its implied statutory and common law obligation to act in utmost good faith towards the insured. As noted, the assumption in clauses 21-23 of the Policy is that there has been an adverse decision against the insured. The insurer is entitled to seek to avoid the risk of costs from an unsuccessful appeal, and greater damages on appeal. In this case, such costs, on top of the estimated $1 million already estimated to have been spent on the costs application (T264/12-23), would likely be significant and the insured has every right to proceed with caution in agreeing to bear that financial risk. That entitlement however may be eclipsed by an expert opinion pursuant to clause 33, which only the insured can invoke pursuant to clause 22.

Further, clause 21 does not "compel the insured to invoke the Clause 22 and resort to an independent lawyer" as the Defendants argue it does (Defendants' closing submissions [66]). As explained, when faced with the insurer's decision of whether or not to pursue an appeal, the insured has three options. It may expressly consent to the insurer taking the steps to implement that decision, it may stay silent on the issue for 14 days and be deemed to have consented, or it may expressly not consent within 14 days. Only if the insured seeks to take the latter route will clause 33 be enlivened. The insured is in no way forced or compelled to take this course.

Further, adverting to an independent expert does not, in my view, do violence to the Insurance Contracts Act, in particular the duty to act in utmost good faith. Indeed, it enhances it. The independent expert merely provides a mechanism by which the impasse between the parties can be resolved in a cost effective way. Both parties agree on the choice of a lawyer (cl 33(a)), are entitled to make written submissions concerning their own interests (cl 33(b)), and agree to simply be bound by the expert opinion of the independent lawyer regardless of which party the opinion favours (cl 34).

Further, contrary to the Defendants’ submissions, clause 33(e) does not preclude the independent lawyer from having regard to vital interests of the insured, but simply mandates that at the very least regard should be had to the legal issues in the claim and the costs of the appeal. There is nothing to suggest an independent lawyer, being bound by professional and ethical obligations that such a position holds, would not have regard to any submissions the insured may make under clause 33(b) regarding their vital interests.

On these grounds, I am not satisfied the regime established under clauses 21-23 and 33 is any way unenforceable as some sort of impermissible attempt under section 52 to contract out of the Insurance Contracts Act.

Finally, the Defendants appear to argue it would contrary to public policy to prevent the insured from conducting an appeal “which Lawcover is no longer obliged to pursue” (Defendants’ closing submissions [73]). I do not accept this submission.

The plain reason why the Defendants cannot run an appeal at its own costs is because they must be held by their contractual obligation not to pursue such a course. In my view, this argument goes no further as a matter of proper construction. The Defendants are obliged by operation of their deemed consent under clause 23 to comply with the insurer’s decision not to appeal Judgment No 11.

However, even if through some construction of the Policy the Defendants are entitled to run the appeal at their own costs, in my view Lawcover has grounds to shut the appeal down given it will inevitably be Lawcover who would bear the financial consequences of an appeal. The Defendants’ primary position is that while they are entitled to run the appeal themselves, Lawcover is obliged to foot the bill. They openly concede (T24/4-6 of Transcript dated 1 November 2017) they would rely on clause 35 of the Policy if they were to run the appeal, preventing either party from cancelling or avoiding the Policy.

Further, as submitted by the Plaintiff, correctly in my view, Lawcover would remain exposed to direct claims by the successful costs claimants pursuant to section 4 of the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW), as section 10 precludes Lawcover from relying on some arrangement outside the terms of the Policy to avoid that consequence.

On these grounds, I do not accept the Defendants are entitled to run the appeal so long as they bear the costs. They are contractually prevented from doing so, and Lawcover would nevertheless still be bound to provide indemnity and would risk being subject to direct claims from successful costs claimants.

In my view, the Policy, properly construed, means the Defendants have been deemed to have consented to Lawcover’s decision not to appeal. Lawcover was entitled to reach this decision, and the Defendants were entitled to challenge this decision pursuant to clause 22 of the Policy. The Defendants chose not to exercise this contractual right, and were therefore deemed to have consented to Lawcover’s decision and are thus prevented from pursuing an appeal.

The Defendants’ attempt to continue a dispute with Lawcover so as to provide some legitimacy for not provoking clause 33 is the product of their irrational thinking rather than any honestly held view. They deliberately chose not to avail themselves of the clause 33 mechanism and in doing so, on the express construction of clause 23, should be seen as having consented to the appeal not being pursued.

Further, in my view for the reasons I have set out, the Defendants’ allegations of bad faith, argument concerning the “contracting out” of the Insurance Contracts Act, and claim they could nonetheless run the appeal on its own costs carry no substance.

On these grounds, the Plaintiff is entitled to relief claimed under paragraph 3 of the summons. Further, the Plaintiff is entitled to a permanent injunction restraining the Defendants from taking any steps to prosecute their appeals from Judgment No 11, and an order requiring the Defendants take all steps reasonably required to ensure a solicitor appointed by Lawcover be recorded as the solicitor on the record for the Defendants in the appeals.

I invite the parties to prepare short minutes reflecting these findings, and, should the need arise, address me on the question of costs.