William John Jeffries v Indigenous Land Corporation

1. [1]

   The plaintiffs, William Jeffries (“Mr Jeffries”) and David Baffsky (“Mr Baffsky”) are former directors of the defendant, the Indigenous Land Corporation (“ILC”). Mr CRC. Newlinds SC, with Mr RA. Yezerski, appears for the plaintiffs. Ms S. Pritchard SC, with Mr DH. Hughes, appears for ILC.

2. [2]

   On 16 February 2012 Mr Jeffries and Mr Baffsky each executed separate agreements with ILC headed ‘Deed of Access, Indemnity and Insurance’ (“the Deeds”). The substantive terms of the Deeds are identical.

3. [3]

   For the purpose of the proceedings, and pursuant to s 191 of the Evidence Act 1995 (NSW), the plaintiffs and the defendant agreed on the following facts:

4. [4]

   By Summons filed 5 June 2015 the plaintiffs seek the following relief:

5. [5]

   The plaintiffs contend that, in circumstances where the ILC has asserted claims against them in the terms set out in the 27 February Letters and they have incurred legal costs in relation to those asserted claims, they are entitled to be indemnified against any liability for legal costs incurred by them in defending the action under clause 6.2 of the Deeds which is as follows:

6. [6]

   Alternatively the plaintiffs contend that if they are not presently entitled to such indemnity, they would become so entitled upon the ILC commencing the proceedings described by the ILC in the 27 February Letters.

7. [7]

   The plaintiffs accept that to succeed they need to establish:

   1. (1)

      that they have no other indemnity nor insurance (from elsewhere than ILC) to indemnify them against legal costs

   2. (2)

      that the steps which they have undertaken which have led them incurring legal liability for costs are steps taken in:

   3. (3)

      that none of the exceptions or ‘carve outs’ from liability as they have been described set out in cl 6.2(a) to (e) apply

8. [8]

   The plaintiffs claim that they have established (1), that (2)(a) is established notwithstanding the fact that ILC has not to date commenced proceedings, that (2)(b) is established, and that no exceptions of the kind described in 6.2(a) to (e) apply. That they have incurred legal costs in connection with the 27 February Letters including their attempts to obtain indemnity from ILC (see paras 25 and 26 of the affidavit of Brian James Whittaker of 5 June 2015 Tab 3) is not disputed.

9. [9]

   ILC disputes that the plaintiffs have established that they have no other indemnity or insurance. ILC does not dispute that the matters outlined in the 27 February Letters do relate to liability incurred by the plaintiffs’ directors but they do not accept that the letters constitute a demand, and they do not accept that even if the letters constitute a demand that they are sufficient to trigger cl 6.2. ILC contends that for costs incurred to be recoverable ‘action’ requires proceedings to have been commenced in a Court.

10. [10]

    ILC also contends that the plaintiffs’ reliance on cl 6.2 is misconceived. It contends that no indemnity is available under cl 6.2 until a Court has ruled positively in the director’s favour. ILC contends that prior to a determination of the claim against the director, the director has available to him cl 6.3 pursuant to which he can seek a loan from ILC.

11. [11]

    The plaintiffs resist the construction of cl 6.2 advanced by ILC and ILC’s reliance on cl 6.3 to support that construction and submit that once it is established that the director has no other indemnity available to him, and that an action has been foreshadowed and costs incurred, cl 6.2 requires indemnity as soon as it is requested. The plaintiffs accept that if indemnity is granted in accordance with cl 6.2 but a Court later rules against the director making a finding of the type referred to in cl 6.2(a) then the director must repay the money so paid to him pursuant to cl 6.2.

12. [12]

    Although cl 6.2 contains subsections (a) to (e) as ‘carve outs’ only (a), it was agreed, has any relevance here.

13. [13]

    The parties are agreed that the three principal questions which require determination by the Court are:

    1. (1)

       have the plaintiffs established that they are not otherwise entitled to be indemnified by virtue of any other indemnity or policy of insurance? (“the no other indemnity point”)

    2. (2)

       does cl 6.2 of the Deeds require ILC to indemnify each of the plaintiffs for legal costs incurred by them in defending the action described in the 27 February Letters until such time as there is a judicial finding that the plaintiffs have a liability to the ILC as alleged in the 27 February Letters? (“the no indemnity pending finding point”)

    3. (3)

       if the answers to (1) and (2) are yes, are the plaintiffs entitled to indemnity under cl 6.2 of the Deeds in respect of legal costs they have incurred to date in defending the allegations made in the 27 February letters, notwithstanding that no proceedings have yet commenced in respect of those allegations? (“the no action point”)

14. [14]

    I should set out some additional preliminary matters. Although the 27 February Letters were sent in February, ILC has to date not determined whether it will commence proceedings or not. It was unable to indicate by what date it would do so: see T2 of 15 July 2015 before Bergin CJ in Eq and as of the date of the hearing ILC does not expect to make a decision before three months hence and possibly not for six months: T39.8. ILC therefore may never commence proceedings and it contends that the directors would not be entitled to any indemnity for legal costs incurred if it did not do so.

15. [15]

    The 27 February Letters contained the following two sentences:

16. [16]

    The following are the provisions of s 27M(4) and (5) of the Commonwealth Authorities and Companies Act 1997 (Cth):

17. [17]

    The clauses in the Deeds (additional to cl 6.2 set out above) to which the parties have referred in their submissions are:

18. [18]

    For present purposes cl 6.2 can be restated relevantly as

The no other indemnity point

1. [19]

   The plaintiffs accept that they have the onus of establishing that they are “not otherwise entitled to be indemnified” and are not “actually indemnified” by some other indemnity. They contend that they have discharged that onus. Mr Baffsky deposed in his affidavit that

2. [20]

   Mr Baffsky was cross examined. His evidence that he has not actually been indemnified by anyone to date was not challenged. The cross examination established that Mr Baffsky has deeds of indemnity from some other companies of which he is a director. He said on his oath that he has no directors and officers insurance, he never having taken out one: T34- 35. He accepted that the companies which have granted him an indemnity (other than ILC) might have obtained protection in respect of those indemnities from an insurer and that, to that extent, he might benefit from such a policy (ie because the company has insurance). He was not aware that any such policies contained clauses “in relation to outside directorship”: see T34.24 and he was not himself aware of the availability of such extensions. No evidence was led concerning the existence of such extensions, how they operate or as to their ubiquity in the market. There was a faint suggestion in the submissions on behalf of ILC that I could take judicial notice of the existence of such clauses. I am unaware of the supposed content of such clauses and quite unable to take judicial notice of their existence, content or ubiquity, since their content is not ‘notorious’ or so generally known that every person may be presumed to be aware of it: see Holland v Jones (1917) 23 CLR 149 at 153 per Isaacs J with whom Barton ACJ concurred.

3. [21]

   Mr Baffsky agreed that he did not know whether or not he was the beneficiary of a policy taken out by another company of which he was a director providing an indemnity in respect of his activities as a director of ILC: T34 - 33.50 and that an investigation could have been carried out to see whether that was the case, but his evidence is that he is not aware of any such policy.

4. [22]

   It was open to ILC to subpoena copies of insurance policies effected by companies of which Mr Baffsky was a director to seek to establish that policies effected by those companies granted cover to Mr Baffsky in respect of his role in ILC but they have not done so. I agree with Mr Newlinds’ submission that Mr Baffsky’s evidence discharged the onus placed upon him so that without more the conclusion on the balance of probabilities is that he has no other indemnity.

5. [23]

   In my view the prospect that a corporation in effecting insurance to protect itself in respect of an indemnity granted to a director would arrange and pay for insurance that granted indemnity for activities of that director not as a director of that company but as a director of other companies is remote. That other company would have no reason to seek or pay for insurance of anything beyond the obligations incurred by them under the indemnity given by them nor any interest in incurring and paying for liability to a director for activities unconnected with that company. I am persuaded on the balance of probabilities that there is no other indemnity available to Mr Baffsky.

Mr Jeffries

1. [24]

   Mr Jeffries deposed in identical terms to Mr Baffsky that he has no other indemnity and no insurance policy. Again, his evidence that he has actually been indemnified by anyone other than ILC was not challenged. He was cross examined at T20- T25. Mr Jeffries said he presumed that he had directors liability in respect of his work as director of the National Centre of Indigenous Excellence: T21.18. He could not recall if there was a policy in relation to directors of Indigenous Environmental Service Pty Ltd but he did not think it did: T22.4- 8. He could not recall whether Reconciliation Australia of which he is or was a director had a directors insurance policy.

2. [25]

   Mr Jeffries agreed that he had not examined any directors and officers policies effected by companies of which he was a director at the relevant time which leaves open the possibility that a policy taken out by a company of which he was a director other than ILC might have taken out cover for him in his role as a director of ILC. His evidence is that he is not aware of any policy covering him.

3. [26]

   It is true that Mr Jeffries’ evidence does not exclude the possibility that another corporation of which he was a director did effect insurance covering not only his role as a director of that corporation but of other corporations as well, but what I have said in [22] and [23] in relation to Mr Baffsky above applies equally to Mr Jeffries’ position.

4. [27]

   I conclude on the balance of probabilities that neither Mr Baffsky nor Mr Jeffries held indemnity or policies entitling them to indemnity in respect of their role as directors of ILC, from anyone other than ILC.

The “no indemnity pending finding” point

1. [28]

   I turn now to the “no indemnity pending finding” point.

2. [29]

   The plaintiffs point to a number of matters favouring the construction for which they contend:

   1. (1)

      in all subclauses of cl 6 “the criterion of operation for the exception in question is some judicial determination on the merits, and not merely the existence of an accusation of liability”

   2. (2)

      the construction contended for accords with the analysis in authorities construing s 199A of the Corporations Act 2001 (Cth) (which is in very similar terms to s 27(4) of the Cth Act): Rickus v Motor Trades Association of Australia Superannuation Fund Pty Limited [2010] FCAFC 16 and Note Printing Australia Ltd v Leckenby [2015] VSCA 105

   3. (3)

      cl 6.6(c) of the Deeds supports this construction

   4. (4)

      the construction advanced by the defendant, it is contended, gives the clause a commercial and businesslike construction. In Leckenby, Tate JA observed (at 66):

3. [30]

   ILC:

   1. (1)

      contends that any liability to indemnify the plaintiffs does not arise until such time as a Court adjudicates the claim against the plaintiffs (ie in this case by ILC) in favour of the plaintiffs. ILC claims that cl 6.3 and not cl 6.2 provides the mechanism for an advance of funds to allow a former director to defend proceedings of the kind identified in cl 6.2(a) to (e) which funds will not be repayable if the director is successful in his defence of the proceedings

   2. (2)

      calls in aid the following principles of construction:

   3. (3)

      submits that the interpretation advanced by the plaintiffs is uncommercial

4. [31]

   It might be thought surprising that a corporation would agree to indemnify a director in respect of costs he incurs in defending a claim by the corporation itself but it is not asserted by ILC that the Deed is not intended to provide protection to directors who are sued by the corporation itself. An argument of that kind was run by the trustee in Rickus and accepted at first instance but rejected on appeal: see Rickus [47] to [56].

5. [32]

   ILC’s argument placed considerable weight upon the existence of cl 6.3. I enquired of Ms Pritchard as to whether, in absence of cl 6.3, there would be any basis for resisting the plaintiffs’ claim to indemnity (leaving entirely to one side the “no action” point). Ms Pritchard was not able to provide me with any reasons that would support the defendant’s position if cl 6.3 was absent (see T48.20- T49.1).

6. [33]

   Cl 6.3 does provide a mechanism for assistance to directors who are sued whether by third parties or ILC. The clause requires provision of a QC/SC opinion and the payment of interest on the advance and the provision of such security as ILC shall determine. There is something incongruous in the director having to provide a QC/SC’s opinion to the very party who brings the suit against them but that anomaly exists both on the plaintiffs’ construction and ILC’s construction. Importantly, however, cl 6.3 commences with the words:

7. [34]

   Given the absence in cl 6.2 of any qualifying words about indemnity given by cl 6.2, in my view it follows that ILC has agreed to indemnify the director in relation to any liability incurred by the director “in defending an action” provided the liability in question is one alleged to have been incurred as a director of ILC.

8. [35]

   I am unable to accept ILC’s contention that the question of whether indemnity should be provided is dependent on a ‘positive’ finding in favour of the director. The reverse is true- the director is entitled to an indemnity until such time as the director is found to have a liability for which he could not be indemnified under cl 6.1. If such a ‘finding’ were made, any money received by the director by reason of the indemnity under cl 6.2 would lead to the director being required by virtue of cl 6.6(c) to repay the amounts so received within 30 days of receipt of the details of payment.

9. [36]

   I do not regard cl 6.2 as ambiguous and accordingly there is no scope for the principle found in Andar Transport Pty Ltd.

10. [37]

    I accept that this approach leaves cl 6.3 limited scope since it would operate only when the director has in fact been found liable and hence where the director wishes to launch an appeal. Cl 6.3 would apply because there having been a finding that the director is not entitled to indemnity the director could not obtain indemnity by virtue of cl 6.2 and could apply through cl 6.3 for a loan (subject to complying with the terms of cl 6.3). I do not accept that the approach contended for by the plaintiffs renders 6.3 nugatory.

11. [38]

    In Rickus the plaintiff was the chairman of the board of directors of an industry superannuation fund trustee. Claims were brought against Mr Rickus including claims relating to documents which he had provided to APRA. Mr Rickus sought, by way of cross claim, declarations as to his entitlement to indemnity in respect of his costs of defending the proceedings (including costs incurred before the proceedings were commenced). The trustee abandoned its claims against Mr Rickus before the hearing.

12. [39]

    Flick J ordered the trustee to pay Mr Rickus’ costs of defending the proceedings on an indemnity basis, but that order did not extend to costs incurred before the commencement of proceedings. The deed used the phrase “any liability incurred”. The Full Court, Jacobsen, Siopis and Foster JJ held that the Deed of Indemnity (and Article 88 of the Corporate Constitution) provided the right of indemnity to the director. The Full Court held, contrary to the trial Judge, that the indemnity did apply to claims brought by the trustee itself against the director not just the claims by third parties: see [49]- [53] and [58].

13. [40]

    As the trustee had abandoned its claims against Mr Rickus there was a question as to what was to be determined on the cross claim (ie the claim for indemnity). The Court did not accept that any finding concerning a breach by Mr Rickus was relevant to whether or not he was entitled to indemnity in accordance with his cross claim. This was because it was only in the trustee’s proceedings in which that would be determined and those proceedings had been abandoned.

14. [41]

    In the course of considering whether the trial Judge’s conclusion that the deed only applied to claims by third parties and not claims by the trustee, the Full Court said of s 199A(3) of the Corporations Law on which cl 2.2 of the deed was based (similar to cl 6.2):

15. [42]

    In Leckenby the Chief Executive Officer of NPAL was charged with conspiring to bribe foreign officials to secure bank note printing contracts for the benefit of NPAL. Mr Leckenby sought to recover under a Deed of Indemnity granted to him by NPAL. NPAL refused to indemnify Mr Leckenby on the basis that NPAL was not permitted at law to indemnify Mr Leckenby until it was known whether or not he is found guilty in criminal proceedings. NPAL offered to lend Mr Leckenby money subject to his providing NPAL with sufficient security.

16. [43]

    Cl 2.2 of the deed had a clause which was similar to cl 6.2 because it provided that NPAL:

17. [44]

    Tate JA stated:

18. [45]

    I accept, with respect, the conclusion of Rickus and Leckenby that payment of funds prior to any finding of the type described as a carve out does not involve any breach of relevant legislation, in this case s 27M, and indeed ILC did not contend that cl 6.2 read as the plaintiffs contend would infringe s 27M. The plaintiffs accept that construction by a Court of the words in one contract is not a precedent for construction of similar words in another contract: see Commonwealth of Australia v Chubb Security Australia Pty Ltd [2004] NSWCA 77 at [11] per Palmer J with whom Handley JA and Beazley JA as her Honour then was concurred: see Sir Kim Lewison and David Hughes ‘The Interpretation of Contracts in Australia’ (2012, Thomson Reuters) at 4.09 for a detailed discussion of this area. Whilst the interpretation of words used in one contract does not provide authority for what similar words in another contract between different parties mean, the close interplay between legislative provisions and indemnities and the similarity of context do provide some guidance, and I find the reasoning in Rickus and Leckenby persuasive.

19. [46]

    Further, although involving a different wording in a different document between different parties, the approach taken in Rickus and Leckenby is, in my view, precisely the same as that taken in Wilkie v Gordian Runoff Ltd [2005] HCA 17; (2005) 221 CLR 522. I have set out the passage in Leckenby in which Tate JA made reference to what was raised by Callinan J in Wilkie at [52]. That case concerned an exclusion clause in a directors and officer insurance policy by which the insurer would not be liable for defence costs arising out of dishonest, fraudulent or malicious acts or any breach of legislation or contract where such conduct had been admitted to have occurred or subsequently established to have occurred “following the adjudication of any court, tribunal or arbitrator” with the plurality commenting in the course of discussing the exclusion:

20. [47]

    In my view cl 6.2 does not operate only after there has been a hearing in which the director obtains a positive finding in his favour. Rather the director is entitled to indemnity until there has been a finding that he is not entitled to be indemnified.

21. [48]

    ILC made submissions relying on the explanatory memorandum to the Corporate Law Economic Reform Program Bill 1998 para 6.16 which is in the following terms:

22. [49]

    So far as the ‘term of art’ point is concerned, it seemed to be suggested by the defendant that cl 6.2 by using the phrase ‘indemnified’ in contrast to the use of the word ‘advance’ of amounts in cl 6.3 the parties must have intended what is normally understood by indemnity, that is a payment which cannot be recovered from the recipient. This is a theme that was discussed in Leckenby because the Full Court drew attention to the fact that Sifris J the trial Judge (at [59] of [2014] VSC 538) had regarded the indemnity, which was repayable, as not a traditional indemnity. Tate JA held that the trial Judge was correct to find that the payment was otherwise than a strict indemnity loan or advance: see [64] but that did not mean that the deed infringed the prohibition found in s 199A(3)(b) (and replicated in s 27M(4)(b)). Her Honour said

23. [50]

    Given the terms of cl 6.6 which expressly recognises that the director might have been paid an amount under cl 6.2 (or cl 6.1) but is “not subsequently entitled to an indemnity in relation to the liability” he must repay it, I do not think it is open to construe cl 6.2 (or cl 6.1) as not providing for an indemnity in different terms to that which might normally prevail. A promise to indemnify subject to a condition subsequent is still, in my view, a promise to indemnify and I do not think that cl 6.2 can be treated as using ‘indemnified’ without regard to another clause of the Deed. I regard the word ‘irrevocable’ in cl 8 as meaning that the indemnity (with its attendant qualifications) could not be revoked and I do not think that repayment in accordance with the terms of the indemnity amounts to revocation of the indemnity.

24. [51]

    As for commercial interpretation, I see no lack of commerciality if the Deed works as providing an indemnity for costs to a director unless and until he is found not to be entitled (ie because he has been found to have a liability for which he cannot be indemnified under cl 6.1) and that thereafter he is entitled to a loan on which he must pay interest and for which he must provide security which he will have to repay if he loses his appeal.

25. [52]

    I do not think it is incongruous that the director should not have to pay interest or provide security at any time before a finding is made and it makes sense that after a finding has been made against him that he has to pay interest and provide security in respect of the loan to fund his appeal. It does not strike me as absurd, as Ms Pritchard contended (see T54.10), that a director should, as it were, pay a higher price for assistance, once a finding against him has been made.

26. [53]

    It follows in my view that the plaintiffs are entitled to indemnity as soon as they have incurred a liability of the type described in cl 6.2. I therefore need to deal with the third question.

Action

1. [54]

   Ms Pritchard has referred the Court to definitions of the word ‘action’ in various legal dictionaries and made reference to Nilant v Macchia (2000) 178 ALR 371 at [49] in which a passage in Black’s Law Dictionary to the effect that the term ‘proceeding’ is more comprehensive than the term ‘action’. I accept that ‘action’ in cl 6.2 is referring to a proceeding in a court of law or tribunal commenced against a director and that this is so notwithstanding that the phrase ‘legal proceedings’ and ‘proceedings’ are also used in the clause. It is clear that no proceeding in a court or tribunal has been commenced against either of the plaintiffs.

2. [55]

   However, the question for determination is not whether a proceeding has been commenced but rather whether the plaintiffs have taken steps which have led them to incur liability for legal costs in defending an action. In my view steps can be taken to defend a proposed action before it is commenced. A publisher who arranges for an author to be interviewed by media outlets prior to publication is taking steps to sell the book even though the book has not yet been published. A student who purchases texts for next years course is expending money for the purpose of the course even though the course has not commenced. The question which needs to be addressed is whether the words ‘defending an action’ requires the action to have been commenced rather than only threatened. It is not necessary to determine whether the 27 February Letters constitute a ‘demand’, rather the question is whether by their very nature the letters are likely to prompt incurral of legal fees in determining the appropriate response and preparation for a foreshadowed action. The words “in full and final settlement” are important since they point to a full and final settlement of the action threatened.

3. [56]

   In my view it must have been envisaged that a director who receives a letter from a company of which he was a director and which:

Conclusion

1. [57]

   It follows in my view that the plaintiffs are entitled to the relief sought in their Summons and set out at para 4(1)-(5).

Costs

1. [58]

   The plaintiffs have been successful and the defendant should pay the plaintiffs’ costs on a full indemnity basis because that is what they are entitled to under the Deed.