This edition of the newsletter includes articles on:
the application of the Insurance Contracts Act 1984 (Cth) in
Maxwell v Highway Hauliers Pty Ltd
a review of the new Vexatious Proceedings Act 2014 (Vic)
an update on the impact of mortgage fraud on lenders in Perpetual
Trustees Victoria Limited v Xiao & Anor
the equitable right of contribution and shared liabilities of
co-guarantors to a loan in Lanvin v Toppi.
Please do not hesitate to contact us if you would like more
information on any topic, whether covered in this newsletter or
not. We hope you find the newsletter informative and
useful.
This edition of the newsletter includes articles on:
- the application of the Insurance Contracts Act 1984
(Cth) in Maxwell v Highway Hauliers Pty Ltd
- a review of the new Vexatious Proceedings Act 2014
(Vic)
- an update on the impact of mortgage fraud on lenders in
Perpetual Trustees Victoria Limited v Xiao & Anor
- the equitable right of contribution and shared liabilities of
co-guarantors to a loan in Lanvin v Toppi.
Please do not hesitate to contact us if you would like more
information on any topic, whether covered in this newsletter or
not. We hope you find the newsletter informative and
useful.
Application of the Insurance Contracts Act in
Maxwell v Highway Hauliers Pty Ltd
The Insurance
Contracts Act 1984 (Cth) (Act) was introduced
to ensure that insurance contracts operate fairly and to strike a
balance between the interests of insurers, insured parties and
other stakeholders.
Section 54(1) of the
Act provides that an insurer cannot refuse to pay a claim by reason
of some act or omission of the insured where:
- the effect of the contract of insurance would, but for
section 54(1), be that the insurer may refuse to pay a claim by
reason of some act or omission;
- the act or omission occurred after the contract of
insurance was entered into;
- the insurer is refusing to pay the claim by reason only
of that act or omission; and
- the act or omission could not reasonably be regarded as
being capable of causing or contributing to a loss in respect of
which insurance cover was provided by the contract of
insurance.
Where section 54(1)
applies, the insurer's liability is reduced by an amount that
fairly represents the extent to which the insurer's interests were
prejudiced as a result of the relevant act or omission.
In the recent
decision of Australia in Maxwell v Highway Hauliers Pty
Ltd [2014] HCA 33, the High Court unanimously found that the
plaintiff insurers could not deny indemnity to the defendant in
respect of damaged vehicles by reason of the drivers' lack of
qualifications.
Facts
Highway Hauliers Pty
Ltd (Insured) owned a fleet of vehicles which
included prime movers and trailers which could be linked together
in combinations known as "B Doubles". The vehicles were insured
under a contract of insurance with Lloyd's Underwriters
(Insurers) for the period 29 April 2004 to 30
April 2005.
The insurance policy
provided that the insurers would indemnify the insured for loss,
damage or liability incurred subject to the conditions of the
policy.
One section of the
policy provided that no indemnity was available for a B Double
unless the driver of the B Double "has a PAQs driver profile score
of at least 36, or an equivalent program approved by [the
Insurers]".
The PAQs driver
profile referred to psychological testing of a driver's attitude
towards safety conducted by People and Quality Solutions Pty
Ltd.
During the period of
insurance, two B Doubles were damaged in separate accidents. The
Insurers refused to indemnify the Insured by reason of the fact
that each of the damaged vehicles had been driven by a driver who
had not undertaken the PAQs test or an equivalent test approved by
the Insurers.
High Court
Decision
The Insurers conceded
that the fact that the vehicles were driven by untested drivers
could not reasonably be regarded as being capable of causing or
contributing to any loss incurred by the Insured as a result of
each accident. The Insurers also conceded that their interests were
not prejudiced.
The sole issue was
whether section 54(1) of the Act applied. The Insurers argued that
a claim for indemnity in respect of a vehicle driven by an untested
driver was entirely outside the scope of cover and did not attract
section 54(1). The Insurers submitted that the fact that the
drivers were untested was a characteristic that removed the
accidents from the scope of cover and therefore the operation of
section 54(1).
The High Court agreed
with the trial judge and the Court of Appeal in finding that no
distinction could be made between provisions which define the scope
of cover (such as the section in question) and other conditions
affecting an entitlement to claim indemnity.
Comment
The High Court
decision in Maxwell v Highway Hauliers Pty Ltd confirms
that section 54(1) of the Act provides a high level of protection
to insured parties and that it is difficult for insurers to deny
indemnity where breach of a policy term occurs after the contract
of insurance is entered into and the breach is not connected to
actual loss. Section 54(1) will also apply regardless of the way in
which a policy term is expressed.
Authored by
Katherine Wangmann
Contact: Joe
Naccarata, Partner and Head of Insurance &
Risk
Review of
the Vexatious Proceedings Act 2014
The new Vexatious Proceedings Act
2014 (Vic) ('the Act') commenced on 31
October 2014 and outlines a new regime for the courts and VCAT to
deal with vexatious litigants.
What is Vexatious Litigation?
Vexatious litigation is legal proceeding is
designed to harass, annoy, delay or cause detriment to another, is
an abuse of process, commenced or pursed without reasonable
grounds, or is brought for another wrongful purpose.
Traditionally, the Courts have focussed on
the nature and substance of the particular proceeding in
determining whether a proceeding is vexatious. The Act broadens the
definition of vexatious litigation to include proceedings to allow
the Court to look at the conduct of the litigant in a particular
proceeding, which may be vexatious regardless of the intentions of
the litigant.
Previous Regime
Previously, only the Supreme Court had the
power to make declarations to prevent a person from commencing or
continuing proceedings without leave of the Court, where a person
had habitually, persistently or without reasonable grounds
commenced vexatious legal proceedings.
The application of this provision was
limited, as only the Attorney General could make application to the
Court for an order under the provision. Further, the threshold for
making such a declaration was high, and consequently could only be
issued after numerous proceedings have been issued by the subject
vexatious litigant.
New Act
The new Act provides all Victorian Courts
and VCAT to intervene in the early stages of a proceeding and
provides suitable barriers to prevent further vexatious
litigation.
The Act provides three tiers or levels of
order that can be made in respect of a vexatious litigant, to
provide flexibility to the Court in dealing with varying degrees of
vexatious behaviour, depending on the litigation history and past
behaviour of the vexatious litigant. These provisions of the Act
expand on the previous regime, allowing the Court to take into
account interlocutory applications and appeals from interlocutory
decisions when determining the person's litigation history, where
previously, this could not be considered.
In contrast to the previous regime, a party
to the proceeding or any person with a sufficient interest in the
proceeding is able to make an application for a litigation
restraint order. To prevent any abuse of this feature, the Court
must grant leave to these parties to make the application, but
leave will be granted by the Court provided there is merit to the
application and it would not be an abuse of process.
Litigation Restraining Orders
Limited Litigation Restraint Order
This order can be made by any
Victorian Court or VCAT pursuant to section 11(1) of the Act where
a person has made two or more vexatious applications in a
proceeding. The effect of this order is to restrict a vexatious
litigant from making or continuing an interlocutory application for
the duration of the proceeding without leave of the Court. However,
the litigant is not precluded from commencing other
proceedings.
Extended Litigation Restraint
Order
Pursuant to section 17(1) of the Act, an Extended Litigation
Restraint Order can be made against an individual who has
persistently brought vexatious litigation against a specific person
or entity. This order restricts the vexatious litigant from
continuing or commencing proceedings against the person or entity
specified in the order without leave of the Court.
General Litigation Restraint
Order
A General Litigation Restraint Order prevents a vexatious litigant
from continuing or commencing a proceeding in a Victorian Court or
tribunal (section 30(1) of the Act) for a period specified by the
Supreme Court. This order can only be made by the Supreme Court
pursuant to section 30(1) of the Act when it is satisfied that a
person persistently and without reasonable grounds commenced or
conducted vexatious proceedings.
Other features of the Act
Leave to Proceed with Litigation
A vexatious litigant that is subject to a Litigation Restraint
Order would need to seek the leave of the Court or tribunal to
commence another proceeding or interlocutory application. The Act
imposes a strict threshold test for granting leave, which will only
be granted where the court is satisfied that the proposed
application or proceeding is not vexatious and that is has
reasonable grounds.
The other parties to the proposed proceeding or application will
not be notified of the application unless the Court is considering
granting leave, at which time they will be given an opportunity to
oppose the application. The applications will, except in
exceptional circumstances, will be done on the papers, which will
result in a significant cost saving to the parties.
Acting in Concert
Orders
The Court will also have the
power to make any orders it sees fit in respect of people acting in
concert with a person who is subject to a Litigation Restraining
Order. This will include making a Limited or Extended Litigation
Restraining Order against those persons. These orders are designed
for example to prevent a vexatious litigant commencing proceedings
in the name of a company they control rather than in their own
name.
Appeal Restriction
Orders
The Supreme Court, and to a lesser extent
the other Courts and VCAT, also has powers to limit the rights of a
vexatious litigant to appeal a decision of the Court to refuse
leave to commence or proceed with a proceeding or interlocutory
application. The Court can only make such orders where it is
satisfied that the person has frequently made vexatious
applications for leave to proceed, and it is in the interest of
justice to make the orders.
First Use
The first decision under the Act was in
respect of an application brought by the notorious Hoddle Street
murderer Julian Knight, who had previously been declared a
vexatious litigant pursuant to the provisions of the Supreme
Court Act 1986 (Vic).
Pursuant to the Act, any person who was
previously declared a vexatious litigant under the old regime is
deemed to be subject to General Litigation Restraint Orders, and
requires leave of the Court to proceed with any interlocutory
application or new proceeding.
Ginnane J denied leave to Knight to commence
proceedings to challenge various powers of the Secretary of the
Department of Justice in relation to prisoner separation and
removal of privileges. In doing so, His Honour confirmed that the
test for leave under the Act required Knight to convince the Court
that the proceeding was not a vexatious one as defined by the Act,
and that there are reasonable grounds for the proceeding. Knight
did not have to demonstrate to the Court that he would succeed in
the proceeding. This threshold for leave is considered
significantly higher than under the previous regime.
His Honour also found that his decision to
refuse leave would not have been different under the old test
applicable under the Supreme Court Act 1986 (Vic).
Potential
developments include whether the Act will be used by civil
litigants seeking the less restrictive restraint orders available,
and the sorts of proceedings for which litigants may be refused
leave under the new test.
Authored by and
Contact: Bianca Quan, Senior Associate, Commercial
Litigation
An update on the impact of mortgage fraud on lenders
Background
In the case of Perpetual
Trustees Victoria Limited v Xiao & Anor [2015] VSC
21, Mr Fitzgerald transferred property to his wife, Ms
Xiao, which was then used to secure a loan procured from Perpetual
in Xiao's name. Fitzgerald was not eligible to obtain the finance
in his own name due to his poor credit history.
Fitzgerald forged his wife's signature on the
mortgage, the loan agreement and all accompanying documents,
including a transfer of the property back to Fitzgerald from Xiao,
and a declaration of trust. The mortgage was an "all monies"
mortgage, with the covenant to pay included in the loan agreement
and determined by reference to all present or future amounts owing
under any agreement between Xiao and Perpetual.
Following default under the loan and
mortgage, Perpetual commenced proceedings against Xiao seeking
possession of the mortgaged property and repayment of the amounts
advanced.
The Position in
Victoria
There is no disputing that on
registration, the mortgage is indefeasible, and the mortgagee is
entitled to rely on the registered mortgage. The indefeasibility of
the mortgage will not be lost in the case of fraud, unless the
mortgagee has knowledge of the fraud or is somehow a party to it.
The question in the case of fraud is what, if anything, is secured
by the mortgage.
In circumstances where the mortgage
document which is registered with the Land Registry specifically
states the amount lent and the obligation to repay (the covenant to
pay), the Courts have found that the mortgage is effective security
for the amount in the document. A difficulty arises however in the
case of an "all monies" mortgage, where the covenant to pay is not
specified on the mortgage document itself, but is contained in and
determined by reference to forged loan documents.
Until Xiao, the decision in
Solak v Bank of Western Australia Limited [2009] VSC 82
served as authority in Victoria that where the loan agreement and
mortgage documents are forged by the same person, the documents
could be construed as being effective security for the
loan.
Decision in
Xiao
In determining whether the mortgage
forged by Mr Fitzgerald was effective security for Perpetual's
loan, Hargrave J departed from the reasoning in
Solak. His Honour held that where a lender relies on
a mortgage containing a covenant to pay by reference to monies
owing under another agreement, and that agreement is forged, there
can be no 'secured agreement' for the purposes of the mortgage and
therefore, no 'secured amount'. In such instances, the amount that
the mortgage secures is nil and the mortgagee is unable to enforce
the mortgage to recover the amount advanced to the
borrower.
Whilst Perpetual was unable to enforce
its mortgage to recover the amount owed, Mr Fitzgerald was ordered
to repay the amount owing to Perpetual, with the Court also finding
that the property was held by Xiao on trust for Fitzgerald, such
that Fitzgerald had a beneficial interest in the
property.
An application by Xiao for leave of the
Court to appeal the decision of Hargrave J has recently been
refused.
Moving Forward
The case of Xiao has changed
the legal landscape when it comes to dealing with mortgage
forgeries, pulling Victorian jurisprudence in line with what has
been settled law in NSW for some time.
Accordingly, lenders will need to
consider their lending practices, balancing the flexibility of all
monies mortgages with the risk of such mortgages being ineffective
security in the case of fraud. Lenders must take particular care to
have robust processes and procedures in place, not only to minimise
any possibility of fraud, but also to ensure compliance with the
verification requirements imposed by recent amendments to the
Transfer of Land Act 1958 (Vic).
Authored by and Contact: Bianca Quan,
Senior Associate, Commercial Litigation
The equitable right of contribution and shared
liabilities of co-guarantors to a loan
In the recent case of Lavin v
Toppi [2015] HCA 4, the High Court considered the equitable
right of contribution and shared liabilities of co-guarantors to a
loan. In unanimously dismissing the appeal, the High Court affirmed
the NSW Supreme Court of Appeal's ruling and held that a creditor's
covenant not to sue a co-guarantor did not extinguish the rights of
a co-guarantor to recover from another co-guarantor.
Background
Ms Lavin and Ms Toppi were directors of, and equal
shareholders in, a photography company named Luxe Studios. In 2005,
Luxe purchased a property in Sydney which was funded by loans from
the National Australia Bank (NAB), secured by a guarantee from Ms
Lavin and Ms Toppi and other associated parties. The loan contained
a clause whereby the co-guarantors agreed to repay the balance of
the loan when due, or on demand in the event of default under the
loan agreement.
Receivers were appointed to Luxe in
November 2009, being an event of default under the loan agreement.
In March 2010, NAB demanded payment from the co-guarantors for
payment of the loan balance outstanding. Luxe sold the Sydney
property but remained indebted to NAB for over $4 million for which
NAB commenced action against Ms Lavin and Ms Toppi. In July 2010,
Ms Lavin filed a cross-claim seeking a declaration that the
guarantee was unenforceable on the basis that it had been procured
in unconscionable and unjust circumstances. Ms Lavin settled the
proceeding with NAB on the basis that she pay NAB $1.35 million. In
return, NAB agreed not to pursue Ms Lavin for the remainder of the
debt owed.
Terms of settlement between NAB and Ms
Lavin, provided that NAB could still recover payment from the
co-guarantor Ms Toppi. In early 2011, Ms Toppi and her husband sold
their family home and used the proceeds of the sale to pay the
balance of the guaranteed debt of approximately $2.9 million. The
net result was that Ms Toppi paid NAB nearly $1.55 million more
than the co-guarantor Ms Lavin.
The Contribution Proceedings
Ms Toppi commenced proceedings in the NSW Supreme
Court claiming contribution from Ms Lavin for nearly $775,000, an
amount equal to half the difference between the respective amounts
paid by the co-guarantors. Both the NSW Supreme Court and the NSW
Supreme Court of Appeal found Ms Toppi was entitled to recover that
amount from her co-guarantor, Ms Lavin.
High Court Decision
The High Court unanimously affirmed the decision
of the NSW Supreme Court of Appeal and held that a creditor's
covenant not to sue a co-guarantor did not extinguish the rights of
a co-guarantor to recover from another co-guarantor. The court held
the equitable doctrine of contribution requires co-guarantors to
share the burden equally. If guarantors share a common obligation
then they should contribute proportionately to satisfy that
obligation. The obligation for the co-guarantors to pay the
guaranteed debt arose at the time Luxe defaulted on the loan or
when NAB demanded payment. The co-guarantors were jointly and
severally liable to NAB, but shared equal liability to each
other.
The High Court held it was a settled
principle that once a creditor calls upon co-guarantors to pay the
guaranteed debt, the right of a co-guarantor to recover
proportional payment from another co-guarantor cannot be defeated
by any acts of creditors. NAB granting Ms Lavin a covenant not to
sue did not extinguish Ms Toppi's right to recover proportional
contribution from her co-guarantor.
Practical Implications
This case serves as a reminder for guarantors of
loans there are important considerations when dealing with
creditors. Any settlement reached between a single co-guarantor and
a creditor does not extinguish the equitable rights of contribution
between co-guarantors. If a co-guarantor is granted a covenant not
to sue, they are only protected on one front and still face
liability to their co-guarantor.
Authored by: Noah Bender
Bennett and Bianca Quan
Contact: Bianca Quan, Senior Associate, Commercial
Litigation
Team Member Profile
Joe Naccarata, Partner and Head of Insurance &
Risk
Joe has 30 years' legal experience. The breadth
and depth of Joe's expertise in the insurance industry means he is
adept at analysing insurance claims and devising strategies to
place his clients in superior bargaining positions. He advises and
assists clients in dealing with claims against them, and is skilled
at delivering the best possible legal and commercial results.
Joe's experience also enables him to provide
clients with monetary projections of potential claims at an early
stage. He is therefore able to give accurate advice before
litigation commences, affording his clients an early opportunity to
make adequate provision for potential losses.
Click here to view Joe's profile.