FEDERAL COURT OF AUSTRALIA

Amlin Corporate Member Ltd v Austcorp Project No 20 Pty Ltd [2014] FCAFC 78

THE COURT ORDERS THAT:

1.    Leave to appeal be granted.

2.    The appeal be dismissed with costs.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

ALLSOP CJ:

1        I agree with the reasons of Gleeson J and with the orders that her Honour proposes.

Associate:

Dated:    30 June 2014

REASONS FOR JUDGMENT

MIDDLETON J:

2        I agree with the orders proposed by Gleeson J for the reasons given by her Honour.

Associate:

Dated:    30 June 2014

REASONS FOR JUDGMENT

GLEESON J:

Introduction

3        This is an application for leave to appeal and an appeal from orders of the Court constituted by a single Judge heard concurrently, on the determination of a separate question concerning the interpretation of two contracts of insurance.

4        The applicants and appellants (“Insurers”) are the professional indemnity insurers of the third respondent (“LM Investment Management” or “LM”), a company which is now in liquidation. The first applicant is the primary insurer, and the second applicants are the second excess layer insurers. The first excess layer insurer is the sixth defendant in the proceeding below: it has not appeared in the proceeding. It is common ground that there are no material differences for present purposes in the relevant terms of the Insurers’ policies.

5        The issue before the Court is whether the Insurers’ policies respond to the claim made by the plaintiffs in the proceeding below against LM Investment Management. The Insurers contend that the policies do not respond because the liability of LM (if any) is one arising from a claim made before the policies incepted.

6        The separate question addressed by the primary judge was:

Whether the agreed fact has the consequence that the [Insurers] are not obliged to indemnify [LM] in relation to any claim that it might make for indemnity under the insurance contracts (being the contracts of insurance referred to in paragraphs 97A-97F of the Amended Statement of claim filed 20 November 2013) in respect of the allegations made in this proceeding by the plaintiffs.

7        The agreed fact was:

The Commercial List Response filed on 13 December 2011 in matter 299479 of 2010 in the Commercial List of the Supreme Court of New South Wales... was served on [LM Investment Management] before 31 July 2012.

8        The Insurers have foreshadowed that they will raise other defences to the claims for indemnity under the policies which are not the subject of this appeal, including the failure of LM to disclose the Commercial List Response prior to the Insurers going on risk.

Factual context

9        As the Insurers have not yet filed a defence, the extent of any dispute between the parties concerning the underlying facts is not known. Based on the Amended Statement of Claim, the proceedings arise out of the acquisition in 2003 by Bellpac Pty Ltd (“Bellpac”) of the assets of a coal mine located near Wollongong, New South Wales, and then known as Bellambi Colliery. The assets included land (“Bellambi Land”). The Bellambi Land was subject to a first mortgage in favour of a company called The Trust Co (PTAL) Limited (“PTAL”). The first respondent (“Austcorp”) and the second respondent (“Compromise”), the plaintiffs in the proceeding below, held securities over the Bellambi Land ranking behind the mortgage held by PTAL.

10        The Insurers do not dispute that LM Investment Management was a lender to Bellpac, nor that Mr Alfred Chi Wai Wong had guaranteed a loan from LM to Bellpac (“the Guarantee”).

11        The Amended Statement of Claim alleges that Bellpac had dealings involving a company called Gujarat NRE Coking Coal Limited (“Gujarat”) and others in connection with the Bellambi Colliery. Disputes arose between parties including Bellpac and Gujarat which resulted in litigation in the Supreme Court of New South Wales (“Supreme Court”).

12        It is alleged that, in May 2009, LM Investment Management appointed receivers and managers to Bellpac (“Receivers”). Subsequently, Bellpac went into liquidation, and has since remained in liquidation.

13        In 2010, LM brought proceedings in the Supreme Court Commercial List seeking to recover from Mr Wong pursuant to the Guarantee.

14        In June 2011, LM, PTAL, the Receivers and other creditors of Bellpac (but not Austcorp and Compromise) participated in the settlement of litigation involving Bellpac and Gujarat. Among other things, the settlement provided for the sale of the Bellambi Land to Gujarat for $10 million. The effect of the sale was to reduce but not extinguish Bellpac’s liability to PTAL.

15        In December 2011, Mr Wong filed and served the Commercial List Response. The Commercial List Response made allegations to the effect that the sale of the Bellambi Land was at a “gross undervalue” and that LM had breached certain duties that it owed to Bellpac in connection with the sale of the property. Relevant parts of the Commercial List Response are set out in detail below.

16        In summary, Mr Wong contended that the Guarantee was discharged by reason of the matters alleged in the Commercial List Response, or alternatively that his obligations under the Guarantee were discharged or alternatively, that any liability under the Guarantee should be reduced by reason that LM Investment Management was knowingly concerned or involved in breaches of duty committed by PTAL and the Receivers in connection with the sale of the Bellambi Land.

17        The Insurers’ policies incepted on 31 July 2012, that is, after the Commercial List Response was filed and served.

18        The proceeding below commenced in February 2013. As the primary judge noted, the allegations made by the plaintiffs, and by Mr Wong in the Commercial List Response, arise from the same substratum of facts, namely the alleged sale of the Bellambi Land at a gross undervalue and the alleged knowing involvement by LM Investment Management in breaches of duty committed by PTAL and the Receivers in connection with the sale.

19        The plaintiffs claim equitable compensation or damages as against LM.

20        The only relief sought by the plaintiffs against the Insurers is a declaration that the Insurers “are liable to indemnify LM for the breaches alleged against LM in the amended statement of claim”.

Leave to appeal 

21        The Insurers submissions in support of a grant of leave were set out in an affidavit filed in support of the application for leave to appeal. No oral submissions were directed to the question of whether the Court should grant leave to appeal.

22        The Court has a wide discretion to grant leave to appeal from an interlocutory judgment. The exercise of the discretion is not constrained by rigid rules but is ordinarily guided by well-recognised principles (see DÉcor Corporation Pty Ltd v Dart Industries Inc (1991) 33 FCR 397; [1991] FCA 655 (“DÉcor”).

23        Leave is more readily granted where the judgment, if allowed to stand, will have the practical effect of determining the claim of a party to relief (Johnston v Cameron (2002) 124 FCR 160; [2002] FCAFC 251). Further, if “while interlocutory in character a decision has the practical operation of finally determining rights, then “... a prima facie case exists for granting leave to appeal”: Ex parte Bucknell (1936) 56 CLR 221, [1936] HCA 67 at 225; DÉcor at 400; Minogue v Williams [2000] FCA 125 at par 18; Mayne Nickless Limited v Multigroup Distribution Services Pty Limited (2001) 114 FCR 108, [2001] FCA 1620 at 118 (“Mayne Nickless”).

24        The decision appealed from involves the resolution of an important legal issue in the case: cf Mayne Nickless at 119. Its resolution has a significant impact on the future conduct of the case, in that, if the Insurers succeed, the proceedings against them must be dismissed. Accordingly, it is appropriate to grant leave to appeal.

Insuring clause

25        The relevant insuring clause is in the following terms:

In return for Your payment of the premium and subject to the Combined Aggregate Limit We shall indemnify You as follows:

1.    Fund and Investment Manager Professional Civil Liability

for any amount up to the Limit of Liability stated in Item 3 of the Schedule in respect of Loss and Defence Costs and Expenses arising from any Claim for any civil liability first made against You during the Period of Insurance and arising out of or in connection with a Wrongful Act.

26        “Claim” is defined relevantly to mean:

(a)    any written demand or civil, regulatory or arbitration proceedings (including proceedings before the Financial Ombudsman Service Limited) or Investigation made against You for compensation or damages alleging a Wrongful Act and/or;

(b)    any suit, civil or third party proceedings, counter-claim or arbitration proceeding brought against You alleging a Wrongful Act …

27         Wrongful Act” is defined as follows:

(a)    In respect of insuring Clause 1.1 any wrongful actual or alleged act, error, omission, misstatement, misleading statement, breach of duty or trust by You or anyone for whom the Company or a Fund has a civil liability whilst performing or failure to perform [in] connection with Advisory Services and arising from the ordinary conduct of Your Professional Business.

Wrongful Act shall not include any actual or alleged act, error, omission, misstatement, misleading statement, breach of duty or trust:

(a)    that occurred, or which is alleged to have occurred, before the Retroactive Date stated in the Schedule;

(b)    committed deliberately or recklessly by You or, in the event that it was so committed by anyone else, it was condoned by You.

28         Loss” is defined relevantly to mean:

… Investigation costs and Defence Costs and Expenses, awards of damages (including but not limited to Compensation Orders and punitive and exemplary damages), costs or settlements agreed with the Insurer for which You are legally liable resulting from a Claim…

Commercial List Response

29        The Commercial List Response alleges that PTAL owed an equitable duty to Bellpac and Mr Wong to exercise its powers of enforcement under its first mortgage in good faith, to deal fairly with Bellpac’s interests in the Bellambi Land and to refrain from acting in wilful or reckless disregard of, or recklessly sacrificing Bellpac’s interests in the land. It further alleges that PTAL owed a duty to Bellpac to take all reasonable care to sell the Bellambi Land at market value or the best price reasonably obtainable.

30        It is alleged that by reason of its breaches of those duties, PTAL sold the Bellambi Land for $10 million when PTAL should have obtained not less than $82 million.

31        Further or in the alternative, the Commercial List Response alleges that PTAL was knowingly involved in breaches by the Receivers of their duties to Bellpac in connection with the sale of the Bellambi Land

32        Paragraphs 100 to 107 of the Commercial List Response are in the following terms:

LM’s involvement in the Receivers’ breaches of duty to Bellpac    

100    At all material times, LM had the conduct and settlement of the LM/PTAL/Bellpac Proceedings and, by its representatives, instructed the legal representatives on its own behalf, on behalf of PTAL and the Receivers on behalf of Bellpac.

101    Alternatively, at all material times LM was instructing the Receivers in relation to the terms of the LM/PTAL/Bellpac Settlement.

102    By reason of the matters contended in paragraphs 86, 87, 88, 100 and 101, LM:

a.    was knowingly in concerned or involved in the Receivers’ breach of their duty to exercise their powers in good faith, to deal fairly with Bellpac’s interests, and to refrain from acting in wilful or reckless disregard of, or recklessly sacrificing, Bellpac’s interests; and

b.    within the meaning of s. 79 of the [Corporations Act 2001 (Cth)], was knowingly involved in the Receivers’ contraventions of ss 180(1), 181(1) and 182(1) of the Act,

and thereby breached its duty to Bellpac.

103    The Defendant repeats and relies upon the contentions pleaded in paragraphs 64 and 65.

104    In the premises, LM is not entitled to claim any amount from the Defendant pursuant to [the Guarantee], and the Defendant is discharged from all liability under [the Guarantee].

105    Alternatively, the Defendant is entitled to a reduction of LM’s claim under [the Guarantee], by an amount equal to the Equitable Compensation.

106    Further or alternatively, by reason of the matters pleaded in paragraphs 102, the Defendant’s position in respect of [the Guarantee] has been prejudiced.

107    As a result, the Defendant is discharged from his obligations and all liability under [the Guarantee].

33        Paragraphs 86 to 88 of the Commercial List Response, mentioned in paragraph 102 of that document, allege that the Receivers owed certain duties to Bellpac, and certain conduct by the Receivers amounted to breaches of the Receivers’ duties to Bellpac.

34        The nature of the duty alleged in paragraph 102 to be owed by LM to Bellpac is not articulated in the Commercial List Response.

35        Paragraphs 64 and 65 of the Commercial List Response, referred to in paragraph 103 set out above, provide:

64    On 30 July 2009, LM appointed Anthony John Warner and Steven Kugel as joint administrators of Bellpac who, on 3 September 2009, were appointed liquidators of Bellpac. As at the date of this Response, Bellpac remains in liquidation.

65     As mortgagor, if Bellpac made a claim against PTAL in respect of the breach of its duty to exercise its enforcement powers under the PTAL Mortgage in good faith and/or its duty under s. 420A(1) of the Act, Bellpac would be entitled to relief, including the taking of accounts in respect of Bellpac’s liability under the Bellpac Loan Agreement, in order to determine the market value or, alternatively, the best price that would reasonably have been obtainable, having regard to the circumstances that then existed for the sale of the Bellpac Land, and reduce Bellpac’s liability by the amount which would be the difference between the market value or price so determined and the Bellpac Land Sale Price (Equitable Compensation).

36        There is no allegation along the lines of paragraph 65 of the Commercial List Response that Bellpac would be entitled to relief against LM if Bellpac made a claim against it.

The Insurers’ case

37        The Insurers contend that:

a)    The Commercial List Response is a “Claim” first made against LM prior to the period of the policies;

b)    Any liability LM may have to the plaintiffs for the conduct alleged in the Amended Statement of Claim is liability “arising from” that “Claim”;

c)    Therefore, the policies do not respond to that liability.

38        This syllogism set out above does not refer to the requirement in the insuring clause that the relevant “Claim” be a “Claim for any civil liability”.

39        The Insurers complain that the primary judge failed to consider the issues raised by their contentions, but wrongly considered:

a)    Whether the Commercial List Response was a “Claim for Loss”; and

b)    If it was such a claim, whether it was the same claim as that made by the plaintiffs in the proceeding below.

40        As to the second matter, the Insurers accept that the claims made in the Commercial List Response and in the proceedings below are different claims. They say that they did not argue to the contrary before the primary judge.

41        The Insurers’ primary case is that the Commercial List Response falls within paragraph (b) of the definition of “Claim”, in that it is a suit, a civil proceeding or a counter-claim brought against LM Investment Management. Thus, the Commercial List Response satisfies the following three criteria to meet the definition of “Claim”, namely:

a)    It is a suit, a civil proceeding or a counter-claim;

b)    It is “brought against” LM Investment Management; and

c)    It alleges a “Wrongful Act”.

42        As appears from the paragraphs of the Commercial List Response extracted below, there is no doubt that the third of these criteria is satisfied.

Primary judge’s reasons

43        The primary judge held that the Commercial List Response was not “a particular defined species of Claim that falls within the insuring clause” for three reasons:

a)    It does not sound in “Loss” within the meaning of the policies;

b)    It is not “brought against” LM;

c)    It does not give rise to “Defence Costs and Expenses”.

44        The primary judge correctly identified the relevant question as whether the Commercial List Response was a “Claim” that fell within the insuring clause and not simply whether the Commercial List Response was a “Claim”.

45        I agree with the primary judge’s conclusion that the Commercial List Response is not a claim that falls within the insuring clause although I would express my reasons slightly differently.

The Insurers’ contentions on appeal

46        Senior Counsel for the Insurers acknowledged that the Commercial List Response did not contain any relevant allegation that LM had breached a duty owed to Mr Wong (although the existence of such a duty was pleaded at paragraph 60 of the Commercial List Response). It was not suggested that the Commercial List Response fell within the insuring clause because it contained a “Claim” made against LM by Mr Wong. Rather, the Insurers’ primary contention was that paragraph 65 of the Commercial List Response involves an allegation that Bellpac would be entitled to the taking of an account. As Senior Counsel for the Insurers put it, by the Commercial List Response, Mr Wong “counterclaimed Bellpac’s claim against LM”.

Consideration

Is the Commercial List Response a “Claim”?

47        The Insurers maintained that the Commercial List Response fell within both sub-clauses (a) and (b) of the definition of “Claim” although, as to sub-clause (a), they acknowledged that the Commercial List Response did not claim “compensation or damages”. On that basis, the Commercial List Response does not fall within sub-clause (a).

48        As to sub-clause (b), the issue is whether the Commercial List Response is “a suit, civil … proceedings [or a] counter-claim…brought against [LM]”.

49        The Insurers did not suggest that the Commercial List Response was a suit or civil proceeding per se. Rather, the Insurers argued that the Commercial List Response is a “counter-claim” because it was “designed to counter the demands of LM” against Mr Wong. It was not suggested that the Commercial List Response was a “suit” or “civil proceedings” on any separate basis.

50        The applicants relied on the decision of Myers v Simcoe & Erie General Insurance Co (1994) 18 OR (3d) 475 (“Myers”), affirmed on appeal: Myers v Simcoe & Erie General Insurance Co (1994) 115 DLR (4th) 607.    

51        In Myers, it was held that a claim for set off was a “civil suit” within the relevant insurance policy. That case involved a claim by architects for professional fees. The clients claimed, by way of set off, damages resulting from the architects’ negligence. In its reasons for dismissing an application for leave to appeal, the Ontario Court of Appeal noted that the damages claimed by way of set off, when assessed, would represent damages which the architects “would be required to pay or assume in the form of diminution of their claim for fees and disbursements”.

52        Myers does not support a conclusion that the Commercial List Response is a suit, civil proceedings or a counter-claim within the meaning of the definition of “Claim” in the policy. In Myers, the issue was the insured’s entitlement to coverage under a provision by which the insurer agreed to defend the insured “in any civil suit…arising out of a claim for which coverage” was provided by the policy. Thus, the issue concerned the construction of a different form of insuring clause.

53        Further, in Myers the matters pleaded by way of set off could have been (and had been) pleaded by way of a separate counter-claim for damages. In contrast, in the Commercial List Response, Mr Wong asserted a right to raise certain defences to an action on a guarantee. He did not claim any relief against LM Investment Management in the Commercial List Response.

54        In argument, Senior Counsel for the Insurers put that, in order to obtain the relief sought in paragraph 105 of the Commercial List Response, Mr Wong had to assert a civil liability on behalf of LM to account to Bellpac. No authority was cited in support of that proposition. To the contrary, in GE Capital Australia v Davis (2002) 180 FLR 250 at 275 to 279 (“GE Capital”), Bryson J identified the following entitlements of a guarantor in a claim brought by a creditor, where the primary debtor is not a party to proceedings:

a)    An equitable set-off relying on an entitlement of the principal debtor to set-off a credit on the taking of accounts between the creditor and debtor (at [83]);

b)    An equitable defence related to the guarantor’s right to be subrogated to the rights of the principal creditor against the security if the guarantor pays out all of the secured debt (at [85]);

c)    An entitlement to a pro tanto reduction in liability for the conduct of a secured creditor which sacrifices the security or diminishes the value which the security would have yielded (at [87]). In support of this right, Bryson J cited, among other authorities Williams v Frayne (1937) 58 CLR 710 at 738 per Dixon J and Buckeridge v Mercantile Creditors Ltd (1981) 147 CLR 654 at 675 per Brennan J.

55        In Ultimate Property Group Pty Ltd v Lord (2004) 60 NSWLR 646 at 658 (“Ultimate Property Group”), Young CJ in Equity noted that under the general law the mortgagee owes “a fiduciary duty of some kind at least to the guarantor, of the mortgage debt: see Fisher & Lightwood [20.18] at 459.”

56        In any event, the Commercial List Response does not allege “a civil liability on behalf of LM to account to Bellpac”. More importantly, Bellpac did not assert any liability or claim any relief by way of the Commercial List Response. Thus, the Commercial List Response does not satisfy the criterion identified by the Insurers for its classification as a “Claim”.

57        By alleging in paragraph 102 of the Commercial List Response that LM breached its duty to Bellpac, Mr Wong identified equitable grounds for the relief claimed by him. It is not entirely clear how paragraph 65 of the Commercial List Response operates in that context, since it asserts an entitlement of Bellpac to the taking of accounts if Bellpac made a claim against PTAL, not a claim against LM. Nevertheless, what is important is that the Commercial List Response seeks to establish a basis for the reduction or discharge of Mr Wong’s liability to LM, namely that it would be “unjust to allow the creditor to claim more against the guarantor than it could have claimed when accounts were taken between mortgagor and mortgagee”: Ultimate Property Group at [77].

58        To the extent that the Commercial List Response pleads an equitable set-off, it is relevant to consider the true nature of that claim. In AWA v Exicom (1990) 19 NSWLR 705 at 710-711, Giles J noted that the so-called equitable set-off could be better described as an equitable defence. In Lord v Direct Acceptance Corporation Ltd (1993) 32 NSWLR 362 at 367, Sheller JA (Kirby P and Meagher JA agreeing) noted the requirement that the debtor establish an equity which “impeached” the creditor’s title to demand payment.

59        This interpretation is congruent with the nature of the policy, which is to indemnify the insured against liability to third parties and not for losses sustained by the insured. The inclusion of “counter-claim” in the definition of “Claim” is directed to the possibility that the insured may suffer a liability to a third party by reason of a counter-claim. The language of the definition of “Claim” does not require the artificial construction suggested by the Insurers.

60        Even if the Commercial List Response could properly be described as a “counter-claim” to the extent that it asserts a liability on behalf of LM to account to Bellpac, it is also necessary to consider the requirement that a relevant suit, civil proceedings or counter-claim be “brought against” the insured to fall within the meaning of “Claim” in the policy.

61        The primary judge concluded that the Commercial List Response was not “brought against” LM Investment Management within the definition of “Claim” in the policy because “a defence, such as the Commercial List Response which asserts a set-off, does not seem to me to be one which is brought against the insured in the ordinary sense in which those words are used to qualify the nature of the proceeding that constitutes a Claim”.

62        I agree with the primary judge that, used in their ordinary sense, the words “brought against” refer to an action that is positive rather than defensive in nature. The words entail proceedings involving a claim for relief or for the enforcement of a right: cf Deutsche National Bank v Paul [1898] 1 Ch 283 at 289.

63        Accordingly, I agree with the primary judge that the Commercial List Response is not “brought against” LM. On that basis, the Commercial List Response is not a “Claim” within the meaning of the policy.

Are any losses LM may incur in these proceedings losses “arising from” the Commercial List Response?

64        The Insurers complain that the primary judge erred in not considering whether, and in not finding that, the loss that LM would suffer from success by the plaintiffs in the proceeding below would arise from the Commercial List Response. If no such finding is made, then the Commercial List Response does not defeat the operation of the insuring clause in relation to the claims in these proceedings.

65        The primary judge reasoned from the language of the insuring clause to conclude that a “Claim” must sound in “Loss”. He observed that the Commercial List Response did not claim damages or any order for compensation by LM. He also correctly observed that any loss asserted by Mr Wong in the Commercial List Response was not the same loss as is now asserted by the plaintiffs. However, the primary judge did not explicitly address the question of whether any losses incurred in these proceedings could be said to be losses “arising from” the Commercial List Response.

66        The expression “arising from” provides a causal linkage between the “Loss” and the “Claim”. In Walton v National Employers’ Insurance Association [1973] 2 NSWLR 73 at 83, Bowen JA said in respect of an entitlement to indemnity “arising out of negligence in the conduct of the insured business as stockbrokers”:

Negligence in this context I take to mean a want of care or skill. I do not read it as referring in a technical sense to the tort of negligence. The policy is designed to protect the insured against the consequences of negligence in the conduct of the business of stockbrokers. The condition is met if the claim arises from a want of care or skill in the conduct of that business, whether the cause of action happens to be based on contract or tort. The words “arising out of” I take to mean originating in or springing from.

67        Bowen JA went on to point out that “arising” was a wider connector than “for” or “based upon”.

68        There is no causal linkage between the Commercial List Response and the losses claimed in these proceedings because LM could not be found liable for those losses in the proceeding in which the Commercial List Response was filed. At most, Mr Wong’s guarantee could be discharged. That would involve a loss to LM but (as the Insurers acknowledged), that was not the loss claimed in these proceedings. Accordingly, the claims in these proceedings are not claims “arising from” the Commercial List Response.

Was the Commercial List Response a claim “for any civil liability”?

69        To fall within the insuring clause, it is necessary for the Insurers to establish that the Commercial List Response was a “Claim for any civil liability”.

70        In Littlewood v George Wimpey & Co Ltd and BOAC [1953] 1 QB 501 at 515, Denning LJ referred to two competing meanings of “liable” being liable by reason of the entry of judgment, and responsible in law. A person who is “liable” is one “who can be compelled to pay by using the due process of law” and liability is established and quantified by judgment: Hall v Bonnett [1956] SASR 10 at 15-16. For the purposes of this case, the significance of the requirement that a “Claim” be “for any civil liability” is that it must seek the establishment by judgment of responsibility in law.

71        In Chittick v Maxwell (1993) 118 ALR 728 at 745, Young J construed an insurance policy which covered “all loss…in respect of any description of civil liability” to include amongst relevant losses a liability to pay equitable compensation. There is no doubt that, in its ordinary usage the expression “civil liability” is not confined to liability for civil compensation or damages: Kyriackou v ACE Insurance Ltd [2013] VSCA 150 at [57].

72        The Insurers did not seek to argue that Mr Wong’s claim for a discharge of his liability under the guarantee was a claim “for civil liability”. The case made by the Insurers was that the Commercial List Response included a claim for civil liability because it asserted a liability against LM which was a civil liability. The civil liability asserted was said to be the liability to account to Bellpac.

73        Senior counsel for the Insurers contended that it was necessary to determine what the claim was that Bellpac would have had in order to determine the alternative claim made in paragraph 105 of the Commercial List Response, that Mr Wong was entitled to a pro tanto discharge of the guarantee.

74        There are several difficulties with this argument:

a)    There is no express claim in the Commercial List Response of any liability of LM to account to Bellpac;

b)    There is no claim for relief made by Bellpac in the Commercial List Response;

c)    There is no express claim by Mr Wong for any relief based upon LM’s alleged liability to account to Bellpac;

d)    When used in paragraph 105 of the Commercial List Response, the expression “Equitable Compensation” appears to refer to an amount by which Mr Wong claims to be entitled to a reduction of LM’s claim under the relevant guarantee. Contrary to the submission of Senior Counsel for the Insurers, it does not contain an allegation that LM has to pay an amount by way of equitable compensation to Bellpac (or Mr Wong);

e)    The entitlement of a surety to a pro tanto discharge of liability under a guarantee does not arise solely from an equitable set off but also from the same principle by which a surety may be entitled to a complete discharge. The general proposition is that equity intervenes to protect a surety: China & South Seas Bank v Tan [1990] 1 AC 536 at 544. See also Watts v Shuttleworth (1861) 158 ER 510 at 510-511, Capel v Butler (1825) 57 ER 421, Strange v Fooks (1863) 66 ER 765, Wulff v Jay (1872) LR 7 QB 756, Pearl v Deacon (1857) 53 ER 328, and Taylor v Bank of New South Wales (1886) 11 App Cas 596.

f)    As explained above, to the extent that the Commercial List Response did assert a liability on the part of LM to account to Bellpac, that assertion was made in support of the existence of an equitable defence and did not involve or require the establishment by judgment of LM’s responsibility in law to Bellpac.

Conclusion

75        The primary judge answered the separate question correctly.

76        The appeal must be dismissed with costs.

Associate:

Dated:    30 June 2014