Stealth Enterprises Pty Ltd t/as The Gentlemen’s Club v Calliden Insurance Ltd

HIS HONOUR: This is an application for a stay of enforcement of orders made by this Court on 5 April 2017 (and varied on 28 April 2017) pending determination of Calliden Insurance Ltd’s application for special leave to appeal to the High Court. The application for special leave relates to the judgment of this Court in Stealth Enterprises Pty Ltd t/as The Gentlemen’s Club v Calliden Insurance Limited [2017] NSWCA 71. By that judgment, this Court set aside a judgment in favour of Calliden directed by Schmidt J on 3 September 2015 (Stealth Enterprises Pty Limited trading as The Gentleman’s Club v Calliden Insurance Limited [2015] NSWSC 1270). This Court subsequently directed the entry of judgment for Stealth in the sum of $648,604.93.

At the material time, Stealth owned and operated a brothel from premises in the Australian Capital Territory. Calliden issued an Adult Industry Insurance Policy to Stealth covering, inter alia, damage caused by fire. Following a fire at the premises on 1 January 2012, Stealth submitted a claim under the policy.

Calliden denied liability on the basis that Stealth had failed to comply in two respects with its duty of disclosure under s 21 of the Insurance Contracts Act 1984 (Cth). The first matter not disclosed was that Stealth’s sole director and its manager were members of the Comancheros bikie gang. The second was that the brothel’s registration under the Prostitution Act 1992 (ACT) had lapsed or expired prior to the date of the last renewal of the policy.

The Court held that Stealth had not breached its duty of non-disclosure in the first respect alleged. This is because Calliden had not established that a reasonable person in the position of Stealth could be expected to have known that the subject information was relevant to Calliden’s decision whether to accept the risk (s 21(1)(b) of the Insurance Contracts Act). The Court held that Calliden had not in any event established that if the information had been disclosed that it would not have renewed the policy.

Similarly, the Court held that Calliden had not established that if Stealth had disclosed the lapse or expiration of the brothel’s registration, Calliden would not have renewed the policy.

The Court’s view on the first issue was summarised as follows:

Ward JA agreed with this conclusion but stated that she did so with “some hesitation” (at [77]). Sackville AJA also agreed but observed that “[a]t first blush this may seem a surprising conclusion” (at [81]).

The Court’s reasons for concluding that Calliden had not established that disclosure in the first respect (see [3]-[4] above) would have caused it to refuse to renew the policy were summarised as follows:

Calliden’s Special Leave Application records at [7] the following contentions put to the Court of Appeal, and intended to be pursued before the High Court:

In the Application, Calliden submits that the Court of Appeal’s judgment was erroneous as a matter of principle “because it depended upon the failure to recognise and accept that a matter which increased the possibility that an otherwise known risk might eventuate was a matter relevant to the decision to increase the risk” (at [19]).

In relation to the Court’s findings that disclosure would not have made any difference to Calliden’s attitude, Calliden contends that the Court did not properly apply the principles stated in Fox v Percy (2003) 214 CLR 118; [2003] HCA 22. Calliden contends that the Court should have asked itself whether Ms Shepherd’s evidence that she would not have written the policy if disclosure had occurred was glaringly improbable (compare Judgment at [97] quoted in [8] above).

For the purpose of its stay application, Calliden attempted to obtain evidence of Stealth’s financial position. The evidence it tendered indicated that Stealth has a paid up share capital of $2, has not filed annual returns with the Australian Securities and Investment Commission, and does not own any real property, at least in New South Wales. Stealth did not tender any evidence suggesting that it has any significant assets.

In these circumstances, I conclude that there is a substantial risk that if Calliden now satisfies the judgment against it, Stealth will be unable to repay the amount of the judgment, together with interest accrued on it, in the event that the judgment is set aside by the High Court.

I will not repeat the references I gave in Wu v Ling (No 3) [2016] NSWCA 381 at [2]-[3] to the principal authorities relevant to the grant by this Court of a stay pending an application for special leave to appeal to the High Court. Suffice it to say that a finding that there are substantial prospects of success on the special leave application should be made before a stay is granted.

In my view, such prospects exist in the present case; not in the sense that it can be concluded that the Special Leave Application is likely to succeed, but in the sense that the Application is strongly arguable and has a significant chance of success. As is evident from Ward JA’s hesitation expressed in this Court’s judgment (see [7] above), different views could reasonably be taken as to the correct outcome of Stealth’s proceedings. Further, the principal issue on the Special Leave Application does not turn upon a question of fact as to what Stealth knew at the relevant time, but rather the objective question of what a reasonable person in Stealth’s position would have known. If the High Court chooses to address this question, its judgment is likely to provide guidance to practitioners in an important area of insurance law and practice.

As there is a real risk that Stealth would not be able to effect restitution if this Court’s judgment is reversed in the High Court, the balance of convenience strongly favours the grant of a stay. In these circumstances, and as the Special Leave Application is strongly arguable, I consider that a stay should be granted.

Calliden’s Notice of Motion only sought a stay pending determination of its Special Leave Application. As a result, I shall so confine my order. It follows from my reasoning however that if Calliden’s Special Leave Application is successful, it will be entitled to a stay pending determination of its appeal to the High Court.

I make the following orders: