Construction, Insurance, Professional Indemnity, property

The Wolf of Newcastle – Fraudulent Investments and s 40(3) of the Insurance Contracts Act

11 July, 2021

The NSW Court of Appeal in P & S Kauter Investments Pty Ltd v Arch Underwriting at Lloyds Ltd considered what information must be contained in a notification to insurers for it to constitute notification of facts giving rise to claim for the purpose of s40(3) of the Insurance Contracts Act 1984 (ICA). The court also considered whether the non-disclosure and misrepresentation made by the insured would be sufficient to allow insurers to deny cover.

Principles

  • Notifications must contain sufficient detail of the factual circumstances for s40(3) of the ICA to apply.
  • Vague and imprecise information regarding a potential claim will be insufficient.
  • In the event an insured fails to disclose material information that would affect its entitlement to coverage, the insurer may be entitled to avoid the policy in full.

Background

The plaintiffs received financial planning advice from Moylan Retirement Solutions Pty Ltd (MRS) (now deregistered) and its principal, Christopher Moylan. Acting on Mr Moylan’s advice, between 2006 and 2009 the plaintiffs made various investments in projects in which Mr Moylan had financial interests. Additionally, moneys of the plaintiffs were misapplied by MRS. No payments of interest, repayments of principal, dividends, or distributions were received in respect of any of these investments.

Pursuant to s601AG of the Corporations Act 2001, the plaintiffs sued MRS’ professional indemnity insurers directly to recover their losses. They claimed that MRS was entitled to indemnity through one of two insurance policies, being for the 2012‚Äë2013 year (2012/2013 policy) or the 2013‚Äë2014 year (2013/2014 policy). MRS’ insurers denied that MRS was entitled to indemnity.

In a proposal filled out in January 2013, at the time of renewal and prior to the expiry of the 2012/2013 policy, Mr Moylan answered “yes” to the question of whether any circumstances or incidents may give rise to a claim. He also indicated:

“A small number of clients have invested/lent funds to property investments and/or companies that have to date been unable to repay those funds in total. At the time of the investment all appropriate disclosures were made and clients invested/lent funds with full knowledge of circumstances at the time. At this stage no loss has been crystallised and no claims or complaints have been formally lodged.”

Mr Moylan had provided no such disclosure at the time of renewal in 2012.

The plaintiffs relied on s40(3) of the ICA. This section provides that where an insured gave notice in writing to the insurer of facts that might give rise to a claim as soon as it was reasonably practical after the insured became aware of those facts, but before the insurance cover expired, the insurer is not relieved of liability by reason only that the claim was made after the expiration of the policy.

Had s40(3) been found to apply, the claims would have been treated as being made during the 2012/2013 policy period.

Supreme Court Decision

The primary judge held that the 2012/2013 policy did not respond because no “claim” had been made against MRS before the 2012/2013 policy expired. His Honour held that the notification in January 2013 of facts that “might give rise to a claim” did not engage s40(3) of the ICA because the notification was not of “facts” but of “bare possibilities”.

In addition, his Honour held that MRS had made fraudulent misrepresentations and non‚Äëdisclosures when seeking to renew the policies, entitling the insurers to avoid both the policies.

Court of Appeal Decision

The court unanimously dismissed the plaintiffs’ appeal.

Meagher JA, with whom Bathurst CJ and Bell P agreed, held that the question of whether a fact “might give rise to a claim” requires an objective assessment of the likelihood or possibility of a claim. It would be sufficient to engage s40(3) of the ICA if the notified facts would reasonably be regarded as giving rise to a realistic possibility of a claim.

It was held that the facts notified by MRS in January 2013 did not give rise to a realistic possibility of a claim. The notification was simply that should any investors suffer loss, there was a chance that they may make a claim against MRS. The notification did not include any facts which made loss more than a possibility.

The court noted the disclosure did not identify any defect in the advice given or disclosures made by MRS, and in fact positively asserted that there was none. As such, there was no notification of facts which “might give rise to a claim”.

The court also found that had MRS disclosed that it misapplied its clients’ money, then underwriters would have declined to issue the policy. Accordingly, the failure to disclose this entitled the insurers to reduce their liability to nil.

Why this case is important

The case illustrates that to attract the protection of s40(3) of the ICA, an insured must give detailed and precise particulars of the factual circumstances of a potential claim, not simply provide vague and inaccurate information. Any notification must be of the facts surrounding the claim, not just a belief or opinion as to the possibility of a claim. Although an insured does not necessarily need to identify the potential claimant(s) or the quantum of the claim.

The decision provides useful guidance to insurers and underwriters. If insurers are provided with vague and unspecific information about a potential claim, they should press the insured for further information. An insured will be unable to rely on s40(3) of the ICA in circumstances where the information provided is insufficient.

It is also a reminder that insurers can deny indemnity in circumstances where had material facts been disclosed, the insurer would not have offered coverage.

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Canadian Court elevates thumbs-up emoji to signature status

In June 2023, a Canadian Court in South-West Terminal Ltd v Achter Land and Cattle Ltd, 2023 SKKB 116, held that the "thumbs-up" emoji carried enough weight to constitute acceptance of contractual terms, analogous to that of a "signature", to establish a legally binding contract.   Facts This case involved a contractual dispute between two parties namely South-West Terminal ("SWT"), a grain and crop inputs company; and Achter Land & Cattle Ltd ("ALC"), a farming corporation. SWT sought to purchase several tonnes of flax at a price of $17 per bushel, and in March 2021, Mr Mickleborough, SWT's Farm Marketing Representative, sent a "blast" text message to several sellers indicating this intention. Following this text message, Mr Mickleborough spoke with Mr Achter, owner of ALC, whereby both parties verbally agreed by phone that ALC would supply 86 metric tonnes of flax to SWT at a price of $17 per bushel, in November 2021. After the phone call, Mr Mickleborough applied his ink signature to the contract, took a photo of it on his mobile phone and texted it to Mr Archter with the text message, "please confirm flax contract". Mr Archter responded by texting back a "thumbs-up" emoji, but ultimately did not deliver the 87 metric tonnes of flax as agreed.   Issues The parties did not dispute the facts, but rather, "disagreed as to whether there was a formal meeting of the minds" and intention to enter into a legally binding agreement. The primary issue that the Court was tasked with deciding was whether Mr Achter's use of the thumbs-up emoji carried the same weight as a signature to signify acceptance of the terms of the alleged contract. Mr Mickleborough put forward the argument that the emoji sent by Mr Achter conveyed acceptance of the terms of the agreement, however Mr Achter disagreed arguing that his use of the emoji was his way of confirming receipt of the text message. By way of affidavit, Mr Achter stated "I deny that he accepted the thumbs-up emoji as a digital signature of the incomplete contract"; and "I did not have time to review the Flax agreement and merely wanted to indicate that I did receive his text message." Consensus Ad Idem In deciding this issue, the Court needed to determine whether there had been a "formal meeting of the minds". At paragraph [18], Justice Keene considered the reasonable bystander test: " The court is to look at “how each party’s conduct would appear to a reasonable person in the position of the other party” (Aga at para 35). The test for agreement to a contract for legal purposes is whether the parties have indicated to the outside world, in the form of the objective reasonable bystander, their intention to contract and the terms of such contract (Aga at para 36). The question is not what the parties subjectively had in mind, but rather whether their conduct was such that a reasonable person would conclude that they had intended to be bound (Aga at para 37)."   Justice Keene considered several factors including: The nature of the business relationship, notably that Mr Achter had a long-standing business relationship with SWT going back to at least 2015 when Mr Mickleborough started with SWT; and   The consistency in the manner by which the parties conducted their business by way of verbal conversation either in person or over the phone to come to an agreement on price and volume of grain, which would be followed by Mr Mickleborough drafting a contract and sending it to Mr Achter. Mr Mickleborough stated, "I have done approximately fifteen to twenty contracts with Achter"; and   The fact that the parties had both clearly understood responses by Mr Achter such as "looks good", "ok" or "yup" to mean confirmation of the contract and "not a mere acknowledgment of the receipt of the contract" by Mr Achter.   Judgment At paragraph [36], Keene J said: "I am satisfied on the balance of probabilities that Chris okayed or approved the contract just like he had done before except this time he used a thumbs-up emoji. In my opinion, when considering all of the circumstances that meant approval of the flax contract and not simply that he had received the contract and was going to think about it. In my view a reasonable bystander knowing all of the background would come to the objective understanding that the parties had reached consensus ad item – a meeting of the minds – just like they had done on numerous other occasions." The court satisfied that the use of the thumbs-up emoji paralleled the prior abbreviated texts that the parties had used to confirm agreement ("looks good", "yup" and "ok"). This approach had become the established way the parties conducted their business relationship.   Significance of the Thumbs-Up Emoji Justice Keene acknowledged the significance of a thumbs-up emoji as something analogous to a signature at paragraph [63]: "This court readily acknowledges that a thumbs-up emoji is a non-traditional means to "sign" a document but nevertheless under these circumstances this was a valid way to convey the two purposes of a "signature" – to identify the signator… and… to convey Achter's acceptance of the flax contract." In support of this, Justice Keene cited the dictionary.com definition of the thumbs-up emoji: "used to express assent, approval or encouragement in digital communications, especially in western cultures", confirming that the thumbs-up emoji is an "action in an electronic form" that can be used to allow express acceptance as contemplated under the Canadian Electronic Information and Documents Act 2000. Justice Keene dismissed the concerns raised by the defence that accepting the thumbs up emoji as a sign of agreement would "open the flood gates" to new interpretations of other emojis, such as the 'fist bump' and 'handshake'. Significantly, the Court held, "I agree this case is novel (at least in Skatchewan), but nevertheless this Court cannot (nor should it) attempt to stem the tide of technology and common usage." Ultimately the Court found in favour of SWT, holding that there was a valid contract between the parties and that the defendant breached by failing to deliver the flax. Keene J made a judgment against ALC for damages in the amount of $82,200.21 payable to SWT plus interest.   What does this mean for Australia? This is a Canadian decision meaning that it is not precedent in Australia. However, an Australian court is well within its rights to consider this judgment when dealing with matters that come before it with similar circumstances. This judgment is a reminder that the common law of contract has and will continue to evolve to meet the everchanging realities and challenges of our day-to-day lives. As time has progressed, we have seen the courts transition from sole acceptance of the traditional "wet ink" signature, to electronic signatures. Electronic signatures are legally recognised in Australia and are provided for by the Electronic Transactions Act 1999 and the Electronic Transactions Regulations 2020. Companies are also now able to execute certain documents via electronic means under s 127 of the Corporations Act. We have also seen the rise of electronic platforms such as "DocuSign" used in commercial relationships to facilitate the efficient signing of contracts. Furthermore, this case highlights how courts will interpret the element of "intention" when determining whether a valid contract has been formed, confirming the long-standing principle that it is to be assessed objectively from the perspective of a reasonable and objective bystander who is aware of all the relevant facts. Overall, this is an interesting development for parties engaging in commerce via electronic means and an important reminder to all to be conscious of the fact that contracts have the potential to be agreed to by use of an emoji in today's digital age.

Published by Foez Dewan
29 August, 2023
Government

Venues NSW ats Kerri Kane: Venues NSW successful in overturning a District Court decision

The McCabes Government team are pleased to have assisted Venues NSW in successfully overturning a District Court decision holding it liable in negligence for injuries sustained by a patron who slipped and fell down a set of steps at a sports stadium; Venues NSW v Kane [2023] NSWCA 192 Principles The NSW Court of Appeal has reaffirmed the principles regarding the interpretation of the matters to be considered under sections5B of the Civil Liability Act 2002 (NSW). There is no obligation in negligence for an occupier to ensure that handrails are applied to all sets of steps in its premises. An occupier will not automatically be liable in negligence if its premises are not compliant with the Building Code of Australia (BCA). Background The plaintiff commenced proceedings in the District Court of NSW against Venues NSW (VNSW) alleging she suffered injuries when she fell down a set of steps at McDonald Jones Stadium in Newcastle on 6 July 2019. The plaintiff attended the Stadium with her husband and friend to watch an NRL rugby league match. It was raining heavily on the day. The plaintiff alleged she slipped and fell while descending a stepped aisle which comprised of concrete steps between rows of seating. The plaintiff sued VNSW in negligence alleging the stepped aisle constituted a "stairwell" under the BCA and therefore ought to have had a handrail. The plaintiff also alleged that the chamfered edge of the steps exceeded the allowed tolerance of 5mm. The Decision at Trial In finding in favour of the plaintiff, Norton DCJ found that: the steps constituted a "stairwell" and therefore were in breach of the BCA due to the absence of a handrail and the presence of a chamfered edge exceeding 5mm in length. even if handrails were not required, the use of them would have been good and reasonable practice given the stadium was open during periods of darkness, inclement weather, and used by a persons of varying levels of physical agility. VNSW ought to have arranged a risk assessment of the entire stadium, particularly the areas which provided access along stepped surfaces. installation of a handrail (or building stairs with the required chamfered edge) would not impose a serious burden on VNSW, even if required on other similar steps. Issues on Appeal VNSW appealed the decision of Norton DCJ. The primary challenge was to the trial judge's finding that VNSW was in breach of its duty of care in failing to install a handrail. 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Published by Leighton Hawkes
18 August, 2023
Litigation and Dispute Resolution

Expert evidence – The letter of instruction and involvement of lawyers

The recent decision in New Aim Pty Ltd v Leung [2023] FCAFC 67 (New Aim) has provided some useful guidance in relation to briefing experts in litigation.