FEDERAL COURT OF AUSTRALIA

Tosich v Tasman Investment Management Limited [2008] FCA 377

NEGLIGENCE – duty of care – managed investment scheme – duty of care owed by financial planner to potential investors concerning investment advice – whether breach of duty where lack of proper investigation by financial planner prior to recommending investment

CORPORATIONS LAW – managed investment scheme – statutory duties in relation to registration, operation by responsible entity, provision of information statement – whether breach of statutory duties in instant circumstances

PROPERTY – assignment of cause of action – whether deed purporting to assign interest in cause of action effected valid assignment – whether relevant causes of action capable of assignment – whether “genuine and substantial” interest or “genuine commercial interest” in chose in action immediately prior to assignment – whether chose in action annexed to right of assigned property

PRACTICE AND PROCEDURE – limitation of actions – original plaintiff purports to assign causes of action – assignee joined as plaintiff and assignor removed as party – assignor rejoinded after expiry of limitation period – whether rejoined plaintiff barred from pursuing original causes of action

INSURANCE LAW – professional indemnity insurance – construction of policy – whether policy responds to claims as made

INSURANCE LAW – insurance brokers – failure to procure adequate professional indemnity insurance – whether breach of duty of insurance broker to use due care and skill in procuring cover – defence of non-disclosure – no evidence led by broker or potential insurer as to relevance and significance of matter not disclosed

DAMAGES – quantification of damages – test where breach of duty of due care and skill by insurance broker upon failure to procure adequate cover – whether relevant cover would have been obtained absent breach of duty    

Conveyancing Act 1919 (NSW), s 12

Corporations Law, Ch 5C, s 9, ss 601ED, 601FB, 706, 708, 709(4), 715, 724(1), 728, 728(1), 765(1) 851, Pt 6D.2, Pt 7.11

Corporations Act 2001 (Cth), s 1317K

Federal Court of Australia Act 1976 (Cth), s 59(2B)

Insurance Contracts Act 1984 (Cth), s 40, s 58

Limitation Act 1969 (NSW) 

Federal Court Rules, O 1 r 8, O 6 r 11(3), O 13 r 2  

Australian Securities and Investment Commission v Tasman Investment Management Ltd (2006) 202 FLR 343 related

Australian Securities and Investments Commission v Tasman Investment Management Ltd (2004) 183 FLR 294 related

Alexander Stenhouse Ltd v Austcan Investments Pty Ltd (1993) 112 ALR 353cited

Ayoub v Euphoric Pty Ltd (2004) 12 BPR 22,735;[2004] NSWCA 457 cited

Boston Commercial Services Pty Ltd v GE Capital Finance Australasia Pty Ltd (2006) 236 ALR 720; (2006) 70 IPR 146 cited

Caldwell v JA Neilson Investments Pty Ltd (2007) 14 ANZ Ins Cas 61-724;[2007] NSWCA 3 followed

Campbell’s Cash and Carry Pty Ltd v Fostif Pty Ltd (2006) 229 CLR 386referred to

Cee Bee Marine Ltd v Lombard Insurance Co Ltd [1990] 2 NZLR 1applied

Chapman v Luminis Pty Ltd (No 4) (2001) 123 FCR 62 distinguished

Commercial Union Assurance Co of Australia Ltd v Beard (1999) 47 NSWLR 735; (2000) 11 ANZ Ins Cas 61-458 cited

Crown Insurance Services Pty Ltd v National Mutual Life Association of Australasia Ltd (2005) 13 ANZ Ins Cas 61-659 distinguished

Deloitte Touche Tohmatsu v Cridlands Pty Ltd (2003) 134 FCR 474 distinguished

Fernance v Nominal Defendant (1989) 17 NSWLR 710 cited

Ferrcom Pty Ltd v Inbush (NSW) Pty Ltd (1997) 9 ANZ Ins Cas 61-339 cited

First City Corporation Ltd v Downsview Nominees Ltd [1989] 3 NZLR 710cited

Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 cited

Geoffrey W Hill & Associates (Insurance Brokers) Pty Ltd v Squash Centre (Allawah North) Pty Ltd (1990) 6 ANZ Ins Cas 61-012 applied

Houghton v Arms (2006) 225 CLR 553) followed

Jones v Dunkel (1959) 101 CLR 298 applied

Lefevre v White [1990] 1 Lloyd’s Reps 569 cited

Macquarie Bank Ltd v National Mutual Life Association of Australasia Ltd (1996) 40 NSWLR 543 followed

Malec v JC Hutton Pty Ltd (1990) 169 CLR 638 cited

Manchester Unity Total Care Building Society v MGICA Ltd (1991) 6 ANZ Ins Cas 61-062 cited

Martinus v Kidd (1982) 150 CLR 648 cited

National Mutual Property Services (Aust) Pty Ltd v Citibank Savings Ltd (1995) 132 ALR 514 distinguished

Payne v Parker [1976] 1 NSWLR 191 applied

Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (in liq) (2003) 214 CLR 514 applied

Poseidon Ltd & Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 cited

Post Office v Norwich Fire Insurance Ltd [1967] 2 QB 363 cited

Poulton v Commonwealth (1953) 89 CLR 540 distinguished

Prasad v Minister for Immigration, Local Government and Ethnic Affairs (1991) 101 ALR 109 cited  

Re Daley; Ex parte National Australia Bank Ltd (1992) 37 FCR 390distinguished

Re Harry Simpson & Company Pty Ltd and Companies Act 1936 [1964-5] NSWR 603; (1963) 81 WN (Pt 1) (NSW) 207 cited

Re Mansell; Ex parte Norton (1892) 66 LT 245 cited

Rickard Constructions Pty Ltd v Rickard Hails Moretti Pty Ltd (2004) 220 ALR 267cited

TBI Pty Ltd v Aon Financial Planning Ltd (2004) 13 ANZ Ins Cas 61-601distinguished

“The Jordan Nicolov” [1990] 2 Lloyds Reps 11 cited

Trendtex Trading Corporation v Credit Suisse [1982] AC 679applied

TS & B Retail Systems Pty Ltd v 3Fold Resources Pty Ltd (No 3) (2007) 158 FCR 444followed

Turbo Tek Enterprises Inc v Sperling Enterprises Pty Ltd (1989) 23 FCR 331 cited

Twenty-First Maylux Pty Ltd v Mercantile Mutual Insurance (Aust) Ltd [1990] VR 919; (1989) 92 ALR 661 cited

Weldon v Neal (1887) 19 QBD 394 cited

Zoneff v Elcom Credit Union Ltd[1990] ATPR 41-058 cited

Derrington D, Ashton RS, The Law of Liability Insurance, 2^nd ed, LexisNexis, Australia, 2005

Mann P, Annotated Insurance Contracts Act (4^th ed, Lawbook Co, 2003)    

IN THE MATTER OF TASMAN INVESTMENT MANAGEMENT LIMITED ACN 066 524 365

JOHN TOSICH and ALL SAINTS INVESTMENTS PTY LIMITED v TASMAN INVESTMENT MANAGEMENT LIMITED, COLIN PHILIP WARNE and AON RISK SERVICES AUSTRALIA LIMITED; TASMAN INVESTMENT MANAGEMENT LIMITED and COLIN PHILIP WARNE v AMERICAN HOME ASSURANCE COMPANY and AON RISK SERVICES AUSTRALIA LIMITED; AMERICAN HOME ASSURANCE COMPANY v TASMAN INVESTMENT MANAGEMENT LIMITED and COLIN PHILIP WARNE; AMERICAN HOME ASSURANCE COMPANY v AON RISK SERVICES AUSTRALIA LIMITED 

NSD 3069 of 2003

GYLES J

20 MARCH 2008

SYDNEY

IN THE MATTER OF TASMAN INVESTMENT MANAGEMENT LIMITED ACN 066 524 365

THE COURT ORDERS THAT:

The proceeding stand over to a date to be fixed.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE MATTER OF TASMAN INVESTMENT MANAGEMENT LIMITED ACN 066 524 365

REASONS FOR JUDGMENT

1                     This case concerns the financial consequences of a failed investment in what was known as the Queen Victoria Project.  The first plaintiff, John Tosich, was the investor.  Tosich was a client of the first defendant, Tasman Investment Management Limited, formerly Warne Investment Management Limited, (“Tasman Investment”) that carried on business as a financial planner.  The second defendant, Colin Warne, was managing director of Tasman Investment and was personally involved in its dealings with Tosich.  Warne recommended the investment in the Queen Victoria Project to Tosich.  It was a failure.  Tosich sues Tasman Investment and Warne for his loss.  All Saints Investments Pty Limited (“All Saints”) claims to be an assignee of Tosich’s cause of action against Tasman Investment and Warne.  American Home Assurance Company (“AIG”) is an insurer and issued an Investment Managers Insurance Policy 85550 that Tasman Investment and Warne claim will indemnify them in relation to claims arising out of the failure of the Queen Victoria Project.  Aon Risk Services Australia Limited (“Aon”) was an insurance broker and acted as such for Tasman Investment.  If the AIG policy does not provide cover, then the defendants sue Aon.  These relationships have given rise to a plethora of claims and cross-claims that need to be examined with some care.  The parties have agreed on a chronology of events that fleshes out the issues to be determined.  In order to better match issues with events I have edited and split the chronology under the following headings:  history related to Warne entities; Queen Victoria Project; dealings between Tosich and Warne; dealings between Warne entities and Aon; dealings between Aon and AIG; and dealings between Warne entities and AIG.  The split is somewhat arbitrary and there is some overlap.  The chronology so organised is the first schedule to this judgment.  The second schedule is a dramatis personae.

2                     The fundamental transaction was the purchase of a site of some 404 ha at Tableland Road, Wentworth Falls in the New South Wales Blue Mountains area, the registered proprietor of which was the Wentworth Area Health Service, a branch of the New South Wales Health Department.  It was the site of the former Queen Victoria Hospital.  The site was zoned part Bushland Conservation (No Subdivision) (Hospital), part Bushland Conservation (No Subdivision) and part Environmental Protection under the City of Blue Mountains LEP 1991.  Longevity Management Systems Pty Ltd (LMS) was interested in acquiring the site to develop a retirement village.  The project was introduced to Warne.  

3                     On 10 May 2000 Tasman Investment (by Warne) provided LMS with a written commitment to provide the funds required for acquisition of the property by 28 June 2000 based on a bid price of $1.52 million.  That letter was provided to the Department of Public Works – Services, which was handling the sale on behalf of the vendor, with the bid by LMS.  A further offer of $2,012,000 was made on 25 May 2000 and accepted on 29 May 2000 with settlement on or before 28 June 2000.  Settlement occurred on 27 June 2000.  Tasman Investment provided the funds and LMS took title. 

4                     So, the defendants were committed to the project on 3 June 2000 when Tosich received a letter from Warne on behalf of Tasman Investment as follows:

“It is not everyday I have the opportunity to offer you a Residential Property Development Investment, to build a Retirement Village at Wentworth Falls (Blue Mountains).

We have been researching this type of Property Development for some time and we believe it could generate returns of approximately 20% pa over a 5 year period.

Full details of the project are enclosed.  Please read it and arrange an appointment with Sandra, Laurie or Peter to discuss the suitability of this investment.

A seminar will be held on Wednesday 14^th June 2000, details enclosed.

I will be in Canada from Friday 2^nd June returning Tuesday 27^th June.”

(Original emphasis.)

(the “Initial Offer Letter”)

5                     It is unnecessary to set out the full terms of the proposal (the “Initial Offer Proposal”), although some parts of it bear particular relevance:

“Retirement Village Development Overview

Ø      Research Phase – 2.5 years to complete

Ø      Development Potential – 150 to 200 units

Ø      Timing of development approval – 1 year

Ø      5 stages over 48 months

Ø      Marketing *Bucklands waiting list and people living in Sydney

Ø      Pre-sales expected to be significant

Ø      Strong Management at each phase

Ø      Construction costs – average – $100,000 per unit

Ø      Retail pricing   –   $255,000 (3 bedroom)

                              –   $230,000 (2 bedroom)

* have 60 years experience in Aged care and administration

Investment

Ø      Ownership – Longevity Management Systems P/L

Ø      Investor’s Vehicle – Direct

Ø      Investment Breakdown:

Percentage of Development Profit

70% investors

30% LMS (Longevity Management Systems Pty Ltd)

…

Design and Development Approvals

DESIGN & ZONING

Ø      Tom Simmat & Assoc – experienced Age care Architects

Ø      No rezoning required

Ø      Development approval by Alderman is necessary – Mayor is supportive

…

Financing

ACTIVITY                                            SOURCE

Ø      Research                                         LMs

Ø      Land Acquisition                            Investors

Ø      Construction                                  Bank/Pre sales

Ø      Operations                                     Bucklands

INVESTORS ASSUMPTIONS

Ø      Investors entry                               June 2000

Ø      Entry amount                                 $10,000 units

Ø      Investment Period                          60 months

Ø      Capital Returned                            within 2.5 years

Ø      Exit timing                                     up to June 2005

Ø      Expected Annual Return                21% pa

Ø      Investors position underpinned by anticipation of increasing land values

Project Risks

…

DEVELOPMENT APPROVALS

Ø      No zoning required

Ø      SEPP 5 applies – enables retirement villages to be built

Ø      Able to go to Land & Environment Court

Ø      Financial Contingency for extra cost factored into financial plan

…

Investment Risks

…

Ø      This investment should be proportioned at a rate of no more than 10% of Total assets for retirees.

…

SUMMARY

In summary, risk can be defined as the possibility that the actual return of an investment will be different from the expected returns. 

Any investment in Property Development carries with it a higher than average level of risk especially where construction costs may expose the investor.  As a consequence, investment in Property Development should only play a role in a portfolio where risk exposure is consciously accepted. (Refer risk analysis) Property Development, while carrying risk, can still be a fundamentally sound investment, provided costs are adequately controlled and confidence exists in the particular investment.  This project provides a unique opportunity to participate in the strongly growing aged accommodation industry.

I have participated in this investment for our clients because of the significant profit potential and the very low cost of the land. (approximately $10,000 per unit with a construction cost of approximately $100,000 per unit).  If for unforeseen reasons we decided to terminate the investment and sell all units at cost I believe we should recover our capital.  I believe the site is quite exceptional as the mountains provide limited opportunities for this type of investment. 

The land will settle on 28^th June 2000, consequently funds need to be in by that date.  Cheques should be made payable to Longevity Management Systems Pty Ltd.  I will be in Canada from Friday 2^nd June returning to work Tuesday 27^th June.  Please contact Laurie, Sandra or Peter in my absence to discuss this project.

We will be conducting a seminar at the Fairways Resort, Primbee on Wednesday 14^th June at 5.30pm, please call Vanessa or Genny by Tuesday 13^th June to confirm your booking.  The seminar will be led by Executive Directors of Longevity Management Systems Pty Ltd Mr Peter Barnes and Mr Tim Brennan.

I am very enthusiastic about the prospects of this new project and I look forward to participating in it with you.”

(Original emphasis.)

6                     No significant difference in the proposal was indicated at a September meeting between Tosich and Warne where Warne continued to commend the project.  As a result, Tosich invested $125,000 on or about 6 November 2000. 

7                     Leaving aside matters of detail (important as they may have been) and the commercial merits of the proposal, there were two fundamental problems with the proposal that were never solved – zoning of the land and the legal structure of the investment.

8                     The proposal was presented as a retirement village, with individual units available for sale.  There is no doubt that the zoning of the land did not permit that use.  It is clear that there was never any chance of obtaining approval of the scheme as proposed to investors.  Considerable later modification of the proposal to seek to qualify as a “hospital” did not overcome the difficulties that were spelt out by the Blue Mountains City Council in its letter of 17 April 2002.  Even when radical amendments, including the removal of all independent living/low care cottages, were proposed, Council officers maintained objections.  The directors of Tasman Investment accepted by 13 August 2002 that the project as had been proposed to investors was not a permissible use. 

9                     By 22 August 2000 LMS had received advice from Chris Lonergan & Associates of significant concerns as to permissibility of the development.  The only valuation of the site in the possession of LMS in evidence was $500,000–$1,000,000 on an “as is” basis.  At no time before the end of 2000 the defendants neither obtained an independent valuation of the property nor sighted any valuation that LMS had obtained.  Before the end of 2000 the defendants did not obtain any independent town planning advice as to the permissibility of a retirement village on the property and did not ascertain the attitude of Blue Mountains City Council to such a development.  The defendants also did not prepare any cash flow statements to ascertain whether the capital invested into the project could be returned if development approval was not granted.  The defendants simply accepted and passed on to Tosich what had been put by LMS without any independent verification. 

10                  The other problem was the inchoate basis of the investment of the funds as put forward in the Initial Offer Proposal, with no material change before the funds were paid and received in November.  It is simply not possible to ascertain what rights were to be acquired and from whom.  That situation was never satisfactorily resolved.  It is not necessary to trace the tortuous path of the negotiations between the defendants and LMS as to that.

Plaintiffs’ claim against Tasman Investment and Warne (Third Amended Statement of Claim)

11                  The parties are identified and the relationship between Tasman Investment and Warne pleaded leading to a duty of care pleaded as follows:

“In the premises, Warne Investments and Warne jointly and severally owed to Mr Tosich a duty of care in relation to the provision of advice as to Mr Tosich’s financial affairs including, without limitation, investments suitable for him.

In the premises, at all material times, Mr Tosich was a person who might reasonably have been expected to rely on any recommendation in relation to securities made by Warne Investment or Warne.”

12                  The Initial Offer Letter and the Initial Offer Proposal are pleaded.  It is then alleged that the project described was a managed investment scheme within the meaning of s 9 of the Corporations Law (as it then applied) and the project had to be registered on or before 1 July 2000 in the manner prescribed in Ch 5C of the Corporations Law as required by s 601ED of the Corporations Law and had to be operated by a responsible entity by the same time (s 601FB), but that it was neither registered nor operated by a responsible entity as required.  It is alleged that Tasman Investment was required to provide Tosich with an offer information statement within the meaning of s 715 of the Corporations Law and lodge a copy with the Australian Securities and Investments Commission (ASIC), but did not do so as the Initial Offer Letter did not comply as it omitted material information.  The non-compliance was materially adverse from the point of view of Tosich such that s 724(1) applied.

13                  It is alleged that representations were made by Tasman Investment in the Initial Offer Letter, the Initial Offer Proposal and at a meeting between Tosich and Warne in September 2000.  It is alleged that each of the representations was made in, or in connection with, a dealing in securities and/or the making of a securities recommendation within the meaning of s 851 of the Corporations Law and that certain of them were with respect to future matters within the meaning of s 765(1) of the Corporations Law.  Reliance, by investing $125,000, is pleaded, together with related allegations.  The misleading and deceptive nature of the various representations is pleaded and causation related to that is pleaded.

14                  Negligence consisting of breach of the duty set out in para 11 above causing loss or damage is alleged.  Various contraventions of the Corporations Law are alleged – breach of Ch 5C, contravention of Pt 7.11, contravention of s 728(1) and s 851.  Damage, being the investment of $125,000 less a first and final dividend of $25,608.38, is claimed. 

15                  To summarise, Tosich relies upon a claim in negligence and upon various breaches of the Corporations Law.

16                  All Saints pleads the acquisition of all the rights of Tosich as against the defendants by virtue of a deed of assignment dated 16 June 2005 and pleads all facts and matters pleaded by Tosich.

17                  Tasman Investment and Warne make a number of admissions in their defence to the claim but deny any liability. They also ultimately relied upon certain grounds of defence that are pleaded by Aon, it having been joined in order that those grounds be taken.  The first of those grounds puts in issue the enforceability of the assignment of the causes of action whilst purporting to admit the assignment.  Three points are taken:

(1)               All Saints did not have a “genuine and substantial” or “genuine commercial interest” in the chose in action immediately prior to the time of the assignment.

(2)               The chose in action was not annexed to a right of property assigned at the same time as the assignment.

(3)               Neither the statutory causes of action nor the cause of action in tort was capable of being assigned.

The second ground is that, for present purposes, Tosich only became a plaintiff on 18 May 2007 by which time all causes of action were statute barred.

Primary liability

18                  Each of Tasman Investment and Warne admits owing the pleaded duty of care to Tosich.  That was inevitable in view of the history of the relationship between Warne and Tasman Investment and Tosich.  They do not admit breach of that duty of care.

19                  The defendants admit that had they been aware in June 2000 that a retirement village was not going to be possible for the property, they would not have advised Tosich to make the investment.  They also admit that had they been made aware of the concerns expressed by Lonergan in August 2000, they would not have encouraged Tosich to make the investment.  The advice given was misleading.  The lack of proper investigation of the project prior to recommending investment to clients was a serious breach of the duty of care and skill owed by a financial planner.  The commitment by Warne to LMS to provide substantial funds was undoubtedly a major factor in the imprudent advice to clients.  However, I am satisfied that Warne was convinced of the merits of the proposal, and invested some of his own money.  He did not consciously mislead Tosich.  Recommending and receiving an investment with no fixed and appropriate structure was also a serious breach of duty.  To recommend such an investment was negligent.

20                  The next problem was the failure to comply with the requirements of the Corporations Law applicable at the time.  The proposal was undoubtedly a “managed investment scheme” as defined in s 9 of the Corporations Law.  Whilst this case has concentrated upon three investors, more than 20 investors contributed approximately $4 million in total.  Prima facie, registration was required (s 601ED(1)).  It could not be established that all of the issues of interests did not need disclosure to investors under Pt 6D.2 when made (see s 706 and s 708).  Registration would have required the production to ASIC of documents that did not exist and a responsible entity to operate the scheme being a public company that held a dealer’s licence to operate a managed investment scheme.  The responsible entity would be subject to a number of statutory obligations.  There was no responsible entity.  These breaches were admitted in collateral proceedings in the Supreme Court of New South Wales and formed the basis of orders made in those proceedings (Australian Securities and Investments Commission v Tasman Investment Management Ltd (2004) 183 FLR 294; Australian Securities and Investment Commission v Tasman Investment Management Ltd (2006) 202 FLR 343).  It follows that Tosich had none of the protections provided for by the Corporations Law flowing from registration and the existence of a responsible entity.  The proposal should not have been made to Tosich (or others) at all by a responsible financial planner. 

21                  In addition, the provisions relating to disclosure to investors about securities (Pt 6D.2) were ignored by the defendants.  They required provision of an offer information statement in the circumstances of this case (s 709(4)).  The contents of such a statement were governed by s 715 as follows:

“(1)     An offer information statement for the issue of a body’s securities must:

(a)        identify the body and the nature of the securities; and

(b)        describe the body’s business; and

(c)        describe what the funds raised by the offers are to be used for; and

(d)        state the nature of the risks involved in investing in the securities; and

(e)        give details of all amounts payable in respect of the securities (including any amounts by way of fee, commission or charge); and

(f)        state that:

(i)         a copy of the statement has been lodged with ASIC; and

(ii)        ASIC takes no responsibility for the content of the statement; and

(g)        state that the statement is not a prospectus and that it has a lower level of disclosure requirements than a prospectus; and

(h)        state that investors should obtain professional investment advice before accepting the offer; and

(i)         include a copy of a financial report for the body; and

(j)        include any other information that the regulations require to be included in the statement.”

22                  Section 728 relevantly provides:

“(1)     Misleading or deceptive statements, omissions and new matters A person must not offer securities under a disclosure document if there is:

(a)        a misleading or deceptive statement in:

(i)         the disclosure document; or

(ii)        any application form that accompanies the disclosure document; or

(iii)       any document that contains the offer if the offer is not in the disclosure document or the application form; or

(b)               an omission from the disclosure document of material required by section 710, 711, 712, 713, 714 or 715; or

(c)        a new circumstance that:

(i)         has arisen since the disclosure document was lodged; and

(ii)        would have been required by section 710, 711, 712, 713, 714 or 715 to be included in the disclosure document if it had arisen before the disclosure document was lodged.

(2)        Forecasts and other forward-looking statements A person is taken to make a misleading statement about a future matter (including the doing of, or refusing to do, an act) if they do not have reasonable grounds for making the statement.  This subsection does not limit the meaning of a reference to a misleading statement or a statement that is misleading in a material particular.”

(Original emphasis.)

23                  It is clear enough that the proposal circulated by the defendants was seriously deficient compared with a proper offer information statement and was misleading or deceptive in a number of respects, although, as I have said, that was not deliberate.

24                  I am satisfied that all of the pleaded statutory contraventions are established.  I am satisfied that there is a remedy sounding in damages for the contraventions save for the failure to register the scheme pursuant to Ch 5C and the failure to have the scheme operated by a responsible entity.  Those contraventions are relevant to the claim in negligence, but I cannot find a basis for a direct claim for damages.

25                  There can be no doubt that there was a causal connection between the negligence and each of the identified statutory breaches, and the loss making investment by Tosich.  Each cause of action is established against Tasman Investments.  There is no doubt about Warne’s personal liability for all causes of action so established.  He was the moving force for Tasman Investments in all respects relevant to the investment in the Queen Victoria Project and is responsible for all acts and omissions giving rise to the liability of the company (Houghton v Arms (2006) 225 CLR 553).

Assignment

26                  The deed of assignment was executed on 16 June 2005 between Tosich as assignor and All Saints as assignee.  At that time this proceeding was on foot, and a receiver had been appointed to the Queen Victoria Project by the Supreme Court of New South Wales in proceedings brought by ASIC.  The substantive operative provisions of the deed were as follows:

“1.       The assignee will pay to the assignors by bank or trust account cheque the sum of One-Hundred and Fifty Thousand Dollars ($150,000) on the exchange of this Deed.

2.         The assignors hereby transfer set-over and assign to the assignee absolutely all of their right, title and interest both at law and in equity in:-

(a)       the investment in their names in the Queen Victoria Project referred to in recital A;

(b)       all rights to receive any dividend or other monies from or by virtue of the receivership of the Queen Victoria Project referred to in recital C;

(c)        all claims demands causes of action and rights of action maintainable by the assignors or either of them arising out of or connected with the facts matters and circumstances referred to in the statement of claim filed in the Tosich proceedings;”

27                  There are other features of the deed to note.  The first is that the defendants Tasman Investment and Warne were each party to the deed and gave joint and several warranties as to the financial position of the assignee and Warne.  They also (together with the assignee) indemnified the assignors against future legal costs and expenses in the proceeding, and covenant that they will not seek costs or expenses from the assignors in relation to this proceeding.  Then there are clauses dealing with later recovery as follows:

“11.    If the receiver declares and pays a dividend in respect of the Queen Victoria Project prior to the conclusion of the Tosich proceedings and the connected proceedings, that dividend will be paid to the assignors once the Tosich proceedings and the connected proceedings have been finally concluded.  If the receiver declares and pays a dividend in respect of the Queen Victoria Project once the Tosich proceedings and the connected proceedings have been finally concluded, that dividend will be paid to the assignors forthwith.

12.       In circumstances where the assignors become entitled to any further payments consequent upon any award or judgment obtained by it, Tasman and/or Warne, the assignors shall be entitled to a further payment equivalent to:

(a)       $125,000;

(b)       plus interest which is hereby agreed in the amount of $54,225; plus

(c)       costs and disbursements which are hereby agreed in the amount of $55,000 inclusive of GST;

less any amount paid pursuant to this Deed.”

28                  Aon directly challenges the effectiveness of the assignment and AIG takes the point indirectly.  It is submitted that each of the causes of actions is personal to Tosich (and any other like investor) and is not capable of assignment.  The plaintiffs submit that each cause of action is incidental to a property right viz the interest in the project and also that there was a genuine commercial interest in the enforcement of the claim by All Saints.

29                  This area of the law is controversial.  Choses in action in general are assignable (eg s 12 Conveyancing Act 1919 (NSW)).  However, a bare right to litigate requires special consideration.  Although maintenance was referred to in this context, no submissions were directed to the effect of the Maintenance, Champerty and Barratry Abolition Act 1993 (NSW) (cf Campbell J in Mid-City Skin Cancer and Laser Centre Pty Ltd v Zahedi-Anarak (2006) 67 NSWLR 569 at [194]).  It is convenient to discuss the cause of action in negligence first.  In 1953 the High Court, in Poulton v Commonwealth (1953) 89 CLR 540 at 602, in relation to a claim in conversion, baldly said:

“… according to well-established principle, the right was incapable of assignment either at law or in equity”.

Lord Roskill said in Trendtex Trading Corporation v Credit Suisse [1982] AC 679 at 702C:

“Though in general choses in action were assignable, yet causes of action which were essentially personal in their character, such as claims for defamation or personal injury, were incapable of assignment…”

30                  One well established category where an assignment is valid (recognised by the authorities cited in Poulton 89 CLR 540 at 602) is an assignment of property, even though the property may be incapable of being recovered without litigation – or, as it was put by Lord Roskill in Trendtex [1982] AC 679 at 703, where the cause of action is incidental to a right of property that has been acquired.  There is no reason why such a cause of action could not include tort in an appropriate case eg detinue or conversion.  However, based upon the submissions in this case, examples of the practical application of the principle are sparse.  Re Daley; Ex parte National Australia Bank Ltd (1992) 37 FCR 390 was cited but the decision turned on what was held to be the assignment of a debt (37 FCR at 394–395).  In Monk v Australian and New Zealand Banking Group Ltd (1994) 34 NSWLR 148 there had been no assignment of the cheques that would have constituted the necessary property.  In that case, Cohen J referred to the decision of Gault J in First City Corporation Ltd v Downsview Nominees Ltd [1989] 3 NZLR 710 where it was held (at 757) that the assignment of a debenture by a parent company to a subsidiary included an assignment of causes of action in tort against a receiver of the company that issued the debenture and that the causes of action in tort were ancillary to the assignment of the debenture and so valid.  The effect of that decision is somewhat clouded by the subsequent appellate history of the case (First City Corporation Ltd v Downsview Nominees Ltd [1990] 3 NZLR 265; Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295) although the appeals did not turn upon the point in issue here.

31                  The decision of Finkelstein J in TS & B Retail Systems Pty Ltd v 3Fold Resources Pty Ltd (No 3) (2007) 158 FCR 444 may be seen as an example of the category of connection with property.  There, the assignment of a cause of action for breach of confidential information, connected with or relating to rights of property that were assigned, was upheld (see particularly 158 FCR 444 at [79]–[81]).  However, that decision, and others since 1982, have been influenced by dicta of Lord Wilberforce and Lord Roskill in Trendtex [1982] AC 679 indicating another basis for exception from the general rule – whether the assignee has a “genuine and substantial interest in the success of the … litigation” (per Lord Wilberforce at 694D) or has a “genuine commercial interest in the enforcement of the claim of another” (per Lord Roskill at 703D).

32                  There have been varied opinions as to whether that basis can be applied by Australian courts without the High Court qualifying Poulton 89 CLR 540.  As it happens, most negative opinions have been expressed by judges of this Court, eg Allstate Life Insurance Company v Australia and New Zealand Banking Group Ltd [1994] FCA 814; National Mutual Property Services (Aust) Pty Ltd v Citibank Savings Ltd (1995) 132 ALR 514; Chapman v Luminis Pty Ltd (No 4) (2001) 123 FCR 62; Deloitte Touche Tohmatsu v Cridlands Pty Ltd (2003) 134 FCR 474; and Boston Commercial Services Pty Ltd v GE Capital Finance Australasia Pty Ltd (2006) 236 ALR 720; (2006) 70 IPR 146.  A number of those and other authorities are analysed by McDougall J, who took the wider view, in Rickard Constructions Pty Ltd v Rickard Hails Moretti Pty Ltd (2004) 220 ALR 267.

33                  Finkelstein J took the wider view in TS & B Retail Systems Pty Ltd 158 FCR 444 and suggested that the High Court in Campbell’s Cash and Carry Pty Ltd v Fostif Pty Ltd (2006) 229 CLR 386 had approved the effect of the statements by Lords Wilberforce and Roskill in Trendtex [1982] AC 679.  The precise point that arises here did not arise in Campbell’s Cash and Carry Pty Ltd 229 CLR 386.  However, the reasoning of Gummow, Hayne and Crennan JJ at [68]–[82] and Callinan and Heydon JJ at [258]–[261] supports the opinion of Finkelstein J.  In my opinion, the principle enunciated in Trendtex [1982] AC 679 can be taken to be established for Australia.  It needs to be borne in mind that the statement in Poulton 89 CLR 540 was not the centre of controversy in that case.

34                  Did All Saints have a genuine commercial interest in the enforcement of Tosich’s claim?  There is no direct evidence concerning the position of All Saints prior to the transaction.  The inescapable inference from all the circumstances, including the structure of the transaction, is that All Saints was under the control of the Warne interests and that the transaction was to ensure that this proceeding continued notwithstanding a reluctance to pursue it on the part of Tosich.  In particular, it seems to be aimed at removing or minimising Tosich’s risk as to costs.  It may be inferred that the purpose was to provide a vehicle for the defendants to pursue their cross-claims with the benefit of a claim proved by a plaintiff.  That would remove the kind of problem exemplified by CGU Insurance Ltd v AMP Financial Planning Pty Ltd (2007) 237 ALR 420; (2007) 81 ALJR 1551; (2007) 62 ACSR 609.  Indeed, as much was made clear by counsel for the plaintiffs and for the defendants on various occasions.  I do not see anything objectionable about that purpose or about the structure of the transaction.  All Saints could not profit from the arrangement.  It is not “trafficking” in causes of actions in any real sense.  Facilitation of cross-claims to be determined on their merits is not objectionable as such.  However, it seems to me that the dicta in Trendtex [1982] AC 679 would have to be extended to include these circumstances within the permissible categories of assignment.  The assignee is not shown to have had any interest in the claim prior to, or regardless of, the assignment.  In view of the controversy surrounding the topic, an extension of the categories is not the province of a single judge. 

35                  What, then, of the connection with property?  Austin J found that there were property interests created by the scheme.  The deed purports to assign those interests and causes of action, including the present.  In one sense, there is a clear connection.  The intention is to recover the loss of property invested.  However, the claim in negligence is not to recover the property that existed at the time of the transaction – it is to recover the loss by way of damages.  In my opinion, that is not the kind of claim connected with property that is covered by the traditional exception to the rule against assignment of causes of action, assuming, as I do, that the exception can include claims in tort where appropriate.  The assignment of the cause of action in tort is not effective.

36                  In the course of argument, counsel for the plaintiffs referred to a claim for money had and received.  The Third Amended Originating Process claims, inter alia:

“Orders in the nature of restitutionary orders for the refund to the Plaintiffs of the moneys originally invested in the Queen Victoria Project by the First Plaintiff and interest.”

The Third Amended Statement of Claim does not include pleading to support that claim and no amendment has been sought. Such a claim can be ignored for present purposes.

37                  The statutory claims remain to be considered.  Counsel for the plaintiffs ultimately conceded that he could find no support for assignability of these causes of action.  That is correct.  That relieves me from deciding the point.  I should say that the concession would follow, directly or indirectly, from a long line of authority in this Court that is against assignment of a claim for damages pursuant to s 82 of the Trade Practices Act 1974 (Cth) commencing with Park v Allied Mortgages Corp Ltd (1993) ATPR (Digest) 46-105.  Those cases were recently reviewed and followed by Rares J in Boston Commercial Services Pty Ltd v GE Capital Finance Australasia Pty Ltd (2006) 236 ALR 720; (2006) 70 IPR 146 at [50]–[58] in relation to claims made pursuant to s 82 for breaches of s 52 and s 51AC of the Trade Practices Act. 

38                  It follows that the purported assignment of each cause of action is ineffective.  I should add that if the assignment is ineffective, it is so for all purposes.  It follows that Tosich retains the causes of action regardless of the deed.  That transaction has no relevant impact upon his claims.  There is no evidence as to the arrangements between Tosich and All Saints in the eventuality of the assignment being ineffective.  Such evidence would be as irrelevant to this case as would any other side arrangements between parties such as insurance.

Limitation

39                  Aon directly pleads limitation defences.  The defendants adopt a “coat-tails” approach.  Aon has taken the running on the issue.  The starting point is that Tosich was reintroduced to the proceeding as a plaintiff by amendment on 18 May 2007.  The next step is that 18 May 2007 is taken to be the date of the commencement of the proceeding by Tosich by virtue of O 6 r 11(3) of the Federal Court Rules.  It is then contended that all relevant causes of action accrued on or about 6 November 2000 when the money was paid by Tosich.  The last step is that each cause of action is barred, either by particular limitations in the Corporations Law or by the Limitation Act 1969 (NSW), applicable by virtue of s 79 of the Judiciary Act 1903 (Cth).  There is little to recommend such a result.  It would be a triumph of form over substance.  Tosich commenced the proceeding on 27 November 2003, well within all potential limitation periods.  All Saints was substituted for Tosich as plaintiff by order of the Court on 19 April 2006 claiming to be an assignee of the Tosich causes of action.  The substantive causes of action remained the same at all times.  Thus, the defendants faced the same causes of action at all times.  The cross-defendants faced the same cross-claims at all times.  However, lack of merit alone is not an answer to the point.

40                  The first two steps are common to all causes of action.  There has been much debate about amendment and limitation since Weldon v Neal (1887) 19 QBD 394.  Many of the authorities were considered by the New South Wales Court of Appeal, presided over by Gleeson CJ, in relation to a rule similar to O 6 r 11(3) in Fernance v Nominal Defendant (1989) 17 NSWLR 710, particularly concerning the relationship between that rule and the New South Wales equivalent of the present O 13 r 2 of the Federal Court Rules.  In this Court, see eg Zoneff v Elcom Credit Union Ltd [1990] ATPR 41-058 at 51,746–51,747.  The introduction of s 59(2B) to the Federal Court of Australia Act 1976 (Cth) in 1994 and the consequent amendments to O 13 r 2 changed the landscape.  Here, no argument was directed to those changes and their significance and, in particular, as to the interplay between O 6 r 11 and O 13 r 2.  There was no discussion of the power to dispense with the Rules (O 1 r 8) (cf Karam v Australia and New Zealand Banking Group Ltd (2000) 34 ACSR 545). 

41                  However, even if O 6 r 11(3) alone is considered and operates according to its terms, there is a real issue in this case as to the last step – the effect of the limitation provisions.  In Martinus v Kidd (1982) 150 CLR 648 it was pointed out that no new cause of action comes into being against the personal representative of a deceased tortfeasor – the existing cause of action survives.  In that case, time runs for limitation purposes from accrual of the cause of action against the deceased (see per Gibbs CJ, Murphy and Wilson JJ at 652; Mason J at 659).  The same principle must be applicable in relation to a cause of action that survives for the benefit of the personal representation of the deceased estate, absent any special provisions.  That principle applies to an action by a trustee in bankruptcy to enforce a liability of the bankrupt (Re Mansell; Ex parte Norton (1892) 66 LT 245).  The same principle should apply in the case of the assignment of a cause of action.  The original cause of action remains the foundation of the action (although not directly applicable, see “The Jordan Nicolov” [1990] 2 Lloyds Reps 11 per Hobhouse J at 19; Lefevre v White [1990] 1 Lloyd’s Reps 569 per Popplewell J at 577 citing Post Office v Norwich Fire Insurance Ltd [1967] 2 QB 363 per Lord Denning at 373; cf per Jacobs J in Re Harry Simpson & Company Pty Ltd and Companies Act 1936 [1964-5] NSWR 603 at 605; (1963) 81 WN (Pt 1) (NSW) 207 at 209.  In the present case, the same causes of action have been pursued at all times. 

42                  All of the limitation provisions relied upon by way of defence, with one exception, speak in terms of causes of action.  The exception is s 1317K of the Corporations Act 2001 (Cth), which provides for a limit of six years “after the contravention”.  The institution of a proceeding for a compensation order (as in this case) satisfies the section.  As I have said, commencement of this proceeding was well within all time limits.  It is thus unnecessary to consider the vexed question as to when the various causes of action accrued for limitation purposes.

The cross-claim against AIG

43                  This claim is made pursuant to policy number 85550 being styled an Investment Managers Insurance Policy in respect of the period 31 October 2001 to 31 October 2002 issued by AIG to Tasman Capital Group Ltd (Tasman Capital).  Tasman Investment was deemed an “insured entity” under the Policy pursuant to an endorsement.  Warne claims to be an insured by reason of being an “Individual Insured”.  The cross-claim is for indemnity in relation to the claims by Tosich and All Saints and two other investors whose claims had been paid out – Kotwal and Roach.

44                  AIG denies that the policy responds to the claims; denies that there was a valid notification of any circumstance or of the claim as required; raises estoppels leading to rectification; relies upon certain exclusions and non-disclosure; and says that the cross-claimants settled certain claims other than that by Tosich contrary to the terms of the policy.  AIG now accepts that the Tosich claim was made and notified during the period of insurance as required.

Policy coverage

45                  The principal insuring clause was as follows:

“Insuring Clause A – Professional Indemnity

This policy shall pay on behalf of each Insured all Loss resulting from any Claim first made against the Insured during the Period of Insurance for any Wrongful Act of the Insured or of any other person for whose Wrongful Act the Insured is legally responsible, by reason of rendering or failing to render Investment Advisory Services.”

(Original emphasis.)

46                  The highlighted terms that are relevant are defined as follows:

“‘Claim’ means any suit or proceeding, including an civil or arbitration proceedings, brought by any person or entity against an Insured for monetary damages or other relief, including non-pecuniary relief, or any written demand from any person or organisation that it is the intention of the person or entity to hold an Insured responsible for the results of any specified Wrongful Act.

Moreover, with respect to Insuring Clause B only, Claim shall also mean any criminal prosecution brought against an Individual Insured, or any administrative or regulatory proceeding or official investigation regarding any specified Wrongful Act of an Individual Insured.

All Claims arising out of, based upon or attributable to a Single Wrongful Act shall be considered to be a single Claim for the purposes of this policy.

…

‘Insured’ means the Insured Entity and the Individual Insured.

…

‘Investment Advisory Services’ means those financial, economic or investment advisory services regarding investments in Securities and/or rendering investment management services including in connection with interests in the Fund of the Insured Entity furnished pursuant to a written contract and permitted by law or regulation and which services the Insured is duly authorised and/or licensed and/or approved to carry out where required by law or regulation to be so authorised and/or licensed and/or approved, rendered by an Insured at any time whether before, on or after the inception date of this policy, pursuant to an agreement as long as such service is rendered to a customer or client of the Insured Entity:

(a)       in return for a fee, commission or other compensation, or

(b)       without compensation as long as such non-compensated services are rendered in conjunction with services rendered for compensation.

…

‘Wrongful Act’, for purposes of Insuring Clause A, shall mean any:

(a)       any actual or alleged breach of duty, breach of trust, neglect, act, error, omission, misstatement, misleading or deceptive conduct (including any breach of the Trade Practices Act 1974 (Cth) or of the Fair Trading Acts); or

(b)               the publication or utterance of a libel or slander or of other defamatory or actionable material, or publication or utterance in violation of an individual’s right of privacy; or

(c)               the fraudulent or dishonest conduct of any Employee of the Insured, for which the Insured is legally liable, provided that conduct or conduct of a similar type, has not been condoned by the Insured.  Cover is not provided to the person committing the fraudulent or dishonest conduct;

or other act by the Insured in the rendering of or failure to render Investment Advisory Services.

‘Wrongful Act’, for purposes of Insuring Clause B, shall mean any breach of duty, breach of trust, neglect, error, misstatement, misleading statement, omission, breach of warranty of authority or other act by the Individual Insured in their respective capacities as Directors or Officers, partners, or trustees of the Insured Entity or any matter claimed against them solely by reason of their status as Directors or Officers, partners or trustees  of the Insured Entity.

Related, continuous or repeated Wrongful Acts shall constitute a Single Wrongful Act for the purpose of the of the cover provided by this policy.”

(Original emphasis.)

47                  The policy recites that the written proposal and documentation supplementing and supporting it are the basis of the contract and are incorporated in, and form part of, the contract.  The pro forma proposal indicates that the insured is a fund manager.  The Wollongong Prime Property Fund was the only Fund identified as such in the proposal.  A statement was provided with the proposal, relevant portions being as follows:

“Tasman Capital Ltd and Subsidiaries

Tasman Capital Ltd was established in February 2001 with the aim of purchasing 100% of the share capital In Warne Investment Management Ltd and its subsidiary Tasman Financial Planning Pty. Ltd.

Warne Investment Management Ltd was established by Mr Colin Warne in September of 1994. Mr Warne was the sole shareholder until April 2000 when Mr Warne sold 33.3% of the company to Mrs J McCoughy a nominee of Mr Stephen Harrison.

At this time both Mr Warne and Mr Harrison injected funds into the business and Warne Investment Management Ltd purchased Court & Co Financial Services Pty Ltd. from the Chartered Accounting firm Court & Co in Sydney. Court & Co Financial Services Pty Ltd. has since changed its name to Tasman Financial Planning Pty. Ltd.

In March Tasman Capital Ltd purchased the shareholding in Warne Investment Management Ltd from Mr Warne and Mrs McCoughy. Also at this time Mason Investments NV purchased 25% of the share capital of Tasman Capital Ltd. Mason Investments NV is the nominee company of the Cullen Group of New Zealand. Mr Cullen is better known to Australians as the owner of the New Zealand Warriors rugby league team.

Warne Investment Management Ltd. has now changed its name to Tasman Investment Management Ltd.

Both Tasman Investment Management Ltd and Tasman Financial Planning Pty. Ltd act as financial planners. Tasman Investment Management Ltd. is also the responsible entity for the Wollongong Prime Property Trust the owners of buildings in Wollongong and Parramatta with a current value of $26.0 million. From1 July 2001 the group has been restructured. All financial planning will now be done by Tasman Financial Planning Pty. Ltd. Tasman Investment Management Ltd. will become the property arm of the group and will concentrate on the Wollongong Prime Property Trust as well as other property investment schemes. All staff will be employed by Tasman Capital Ltd.

The company structure is therefore as follows :

It is planned that eventually Tasman Financial Planning Pty. Ltd. will become a direct subsidiary of Tasman Capital Ltd.

The shareholders of Tasman Capital Ltd are ...

The Directors of Tasman Capital Ltd are …

The Directors of Warne Investment Management Ltd are …

The Directors of Tasman Financial Planning Pty. Ltd. are …

During the 2000/2001 year the group has concentrated its efforts on consolidating the Court and Co acquisition. On establishing a presence in Sydney and in acquiring the services of suitable financial planners to support the future aims of the group. These aims being to supply an above average level of financial planning services to high net worth clients. The profit for 2000/2001 has been affected by these extra costs without commensurate revenue increases.

Substantial increases in revenues and profits are now forecast as a result of the efforts during 2000/2001.

The Tasman Capital group currently has $350 million of funds under management. It aims to increase this to $1 billion within three years. This increase will be obtained by natural increase, from referrals and by further acquisitions. The funds injected into the group by Cullen have been earmarked for these acquisitions.”

(Original emphasis.)

48                  Accounts for the Wollongong Prime Property Fund to June 2001 were provided with the proposal.

49                  One of the questions and answers in the proposal is:

“Has the Fund Manager any of the following types of insurance currently in force:

—     Directors and Officers Liability?                   q    Yes              þ    No

—     Professional Indemnity?                                þ    Yes              q    No

—     Crime/Fidelity Guarantee?                           q    Yes              þ    No

If the answer to any of the forgoing is “Yes”, please give details.

P.I. – Macquarie Underwriting – Expires 31.3.02.”

50                  AIG contends that the policy does not cover advice regarding investments other than Securities as defined, those being limited to securities of the “Insured Entity” being Tasman Capital Limited (and subsidiaries) and the Wollongong Prime Property Trust.  The defendants contend that this construction is too restrictive and would deny commercial efficacy.  It is submitted that construing the clause “contra proferentem” the words “of the Insured Entity” in the definition of “Securities” governs either “debt security” only or, at most, “share or other equity or debt security”.  It is submitted that if “Securities” had to be of the Insured Entity, that would be inconsistent with Investment Advisory Services “including” (but not being limited to) “in connection with interests in the Fund of the Insured Entity”.

51                  In my opinion, AIG’s construction of “Securities” is clearly correct. It reflects the ordinary meaning of the language.  Furthermore, it is consistent with the policy being an Investment Manager Policy and with the emphasis in the Proposal upon the insured as a fund manager.

52                  However, some issues of construction of the phrase “Investment Advisory Services” remain.  That definition is not easy to construe.  For example, it is not at all clear whether rendering investment management services is deemed to be an advisory service.  The two concepts would not normally be regarded in that way.  It is not clear to what the phrase “including in connection with interests in the Fund of the Insured Entity” relates.  In my opinion, the better view is they are limited to “Securities” as defined but that rendering investment management services is a distinct activity, not limited to (but including) in connection with interests in the Fund of the Insured Entity.  This is consistent with the core activity being the rendering of such services.  However, the cover does not relate to those services as such, but to financial, economic or investment advisory services regarding those services.  “Investment management services” are not defined.  Can the services provided by Tasman Investment to Tosich be described as the management of investments and, if so, was the advice given regarding that management included in “Investment Advisory Services” within the meaning of the policy?  In my opinion, this is stretching the clause too far. 

53                  However, in any event, the services in question were not provided pursuant to a written contract.  There is no evidence of any document in the nature of a retainer, formal or informal.  Written advice was tendered from time to time, but that is not what was required.

Exclusion

54                  Endorsement No 4 to the policy is another problem for the defendants.  It provides that the insurer is not liable for payment of loss in connection with a claim “arising out of, based on or attributable to” any Wrongful Act committed or alleged to have been committed prior to 31 October 2000.  It is submitted that the payment of $125,000 by Tosich and the consequent losses arose out of, were based upon and were attributable to the misleading representations contained in the Initial Offer Letter and Initial Offer Proposal made on or about 3 June 2000 and made at the meeting in September 2000.  Those representations constituted Wrongful Acts.  On the other hand, counsel for the defendants submits that the receipt of the money on or about 6 November and the payment over to LMS was the ultimate, and relevant, Wrongful Act, and so not excluded from cover.

55                  In my opinion, the loss and the claim did arise out of the June and September misleading representations and so fall within (a) of the definition of Wrongful Act.  The connection is not broken by the receipt and payment of the money, whether or not that constituted a separate Wrongful Act.  No claim can be made pursuant to Insuring Clause A by either defendant.

Insuring Clause B

56                  Insuring Clause B is as follows:

“Insuring Clause B – Directors and Officers Liability

The Insurer shall pay on behalf of each Individual Insured, or the Insured Entity when it is legally required or permitted to indemnify the Individual Insured, all Loss of the Individual Insured resulting from any Claim first made against the Individual Insured during the Period of Insurance for any Wrongful Act in the Insured’s capacity as an Individual Insured.”

(Original emphasis.)

57                  The definition of “Individual Insured” will be recalled:

‘Individual Insured’ means a natural person who is a past, present or future Director, Officer, partner or trustee of the Insured Entity and any member of a Compliance Committee established for the purposes of Chapter 5C of the Australian Corporations Law.

‘Individual Insured’ shall also mean any Employee of the Insured Entity with respect to Insuring Clause A, and any Employee in a managerial or supervisory capacity with respect to Insuring Clause B.  Furthermore, Individual Insured with respect to Insuring Clause B does not include any externally appointed officers, such as receivers, managers, liquidators, administrators, mortgagees, in possession and the like.”

(Original emphasis.)

58                  “Director or Officer” means:

“any natural person duly appointed or elected as a director, secretary or executive officer of the Insured Entity.

(Original emphasis.)

59                  “Employee” relevantly means:

“any natural person employed by the Insured Entity in the ordinary course of the business of the Insured Entity and whom the Insured Entity compensates by way of salary or wages and has the right to govern and direct the performance of that person’s duties.  Employee shall also include an Individual Insured while performing acts coming within the scope of the regular duties of an Employee.”

(Original emphasis.)

60                  AIG raises a threshold issue.  It contends that Insuring Clause B only covers a claim against the director or officer personally for default in that capacity, rather than a claim based upon conduct for which the corporate insured is liable vicariously or as principal.  It contends that the latter is covered by Insuring Clause A rather than B.  No doubt the former is covered by Insuring Clause B, but it is not so clear that it is all that is covered.

61                  Some assistance might be obtained from considering those provisions that distinguish between the two.  One is the definition of “Individual Insured”.  Any employee is covered with respect to Insuring Clause A and any employee in a managerial or supervisory capacity with respect to Insuring Clause B.  That gives some support to AIG’s argument.  Another, the clause concerning Retention, is of no particular significance.  Endorsement 3 applies only in respect of Insuring Clause B.  It excludes liability for claims by past or present shareholders controlling 15% or more of the voting rights of the insured corporation.  This supports the view that Insuring Clause B relates to those duties or liabilities imposed upon a director or senior officer as such, rather than all conduct in the course of employment.  Endorsement 5 is significant, but the rationale for distinguishing between Insuring Clause A and Insuring Clause B in relation to this exclusion is not immediately obvious.  The effect of the clause is that individual duties and responsibilities as a director or senior officer in relation to fundraising are not covered, but that actions carried out on behalf of the insured are covered.  This gives some support to the contention of AIG as to scope of Insuring Clause B.  All in all, the contentions of AIG as to the scope of Insuring Clause B should be accepted. 

62                  Thus, it becomes necessary to examine whether any of the causes of action against Warne would fall into that category.  All of the causes of action that flow from the direct dealings between Warne and Tosich – whether in person or by correspondence – fall within Insuring Clause A.  They do not depend upon his position as a director or senior manager as such.  A claim concerning the failure to register the scheme and all that flowed from that failure would fall within Insuring Clause B.  If there is such a duty it would be on the basis of Warne’s personal liability because of his office.  That would involve some but not all of the statutory breaches.  However, Endorsement 5 would exclude cover.  In my opinion, Warne was engaged in the raising of capital by equity, debt or other means, and the liability would arise out of, or be in connection with, that endeavour.  Warne cannot rely upon Insuring Clause B.

63                  It is now accepted by the defendants that the claim for cover in respect of Kotwal and Roach cannot succeed.

64                  As all claims for cover fail, it is not necessary to consider the estoppel and rectification claims by AIG or the issue of non-disclosure. 

Cross claim against Aon

65                  The gist of the cross-claim is that Aon breached its retainer as broker in not taking all reasonable steps to procure cover for Tasman Investment against liabilities incurred as a financial planner and investment adviser.  The claim covers the liability to Tosich and to other investors, namely John and Denise Roach and Archana Kotwal.  The first issue for determination, in view of my previous findings, is whether Aon was in breach of duty to Tasman Investments in connection with the failure to procure Professional Indemnity (PI) insurance for it to take effect after 31 March 2002 when the cover by Macquarie Underwriting expired.

66                  The issue relates to the nature of PI insurance.  That form of insurance is generally (as here) offered on a “claims made” basis, ie for claims made upon the insured in the current period of insurance.  Such insurance is usually offered on an annual basis.  A claims made policy may or may not respond to claims arising out of circumstances occurring before the year of claim.  Furthermore, if circumstances that may give rise to a claim are known to the insured prior to the relevant period, they must be disclosed to the insurer.  This may cause the insurer to decline to review cover, or to exclude the risk that is disclosed.  The Australian Law Reform Commission discussed some of the ramifications of this structure in Report No 20 on Insurance Contracts, eg para 47 and para 265.  Section 40 and s 58 of the Insurance Contracts Act 1984 (Cth) are a partial response.  (See, generally, Derrington D, Ashton RS, The Law of Liability Insurance, 2^nd ed, LexisNexis, Australia, 2005.)

67                  Aon was an insurance broker with a substantial business.  It had dealt with the Warne companies since early 2000.  Mr Schuyler Elia was the employee who usually dealt with the Warne companies.

68                  The claim in this case was made on behalf of Tosich on or about 10 December 2002.  Leaving aside the AIG policy, the only PI policy in force in relation to the Warne companies in December 2002 was the policy with Dexta Corporation entered into in April 2002 through Aon.  That policy did not cover Tasman Investment at all.  By then Tasman Investment was not engaged in financial planning and advisory services.  It had been covered by a PI policy with Macquarie Underwriting, taken out effective from 30 June 2000 to 31 March 2001, and renewed for another year, expiring on 31 March 2002.  As that was a claims made policy, it did not respond to the claims made after the expiry of the policy.  Thus, Tasman Underwriting had no “run off” or retrospective insurance in relation to the financial planning and advisory business it had carried on.  That is the cause of the complaint.  It is contended by the defendants that Aon should not have caused or permitted that to occur.

69                  On 5 March 2002 Tasman Capital Limited sent to Aon (per Mr Schuyler Elia) completed proposal forms for PI insurance for it and its subsidiaries with Macquarie Underwriting.  This amounted in substance to a proposal to renew.  Tasman Investment was named as an insured.  Although financial planning was stated as an activity of the group, the details described Tasman Investment Management Ltd only as the responsible entity of Wollongong Prime Project Trust.  A financial planner’s addendum was forwarded on 13 March 2002 on behalf of Tasman Capital Ltd and its subsidiaries.  Tasman Financial Planning Pty Ltd was identified as the company through which insurance agent agreements are held.

70                  Aon, by Elena Kazakova, described as an account broker and one of a service team consisting of herself, Schuyler Elia and Nerida Wallace, sought clarification of some issues arising out of the proposal for renewal.  One question was:

“Tasman Investment Management Limited (‘Warne’) can still be named as an Insured under any new policy, however, they will not be covered for conducting a managed Property Trust.  Please advise what you require.”

The answer, provided by Mr Brian Johnson, was

“Suggest you talk to Schyuler about whether or not we need this.  If there is no extra cost I suggest we include them.”

There is no evidence as to whether this request was followed up.

71                  In the meantime, Aon, by Elena Kazakova, obtained a quote for PI insurance from AIG.  The “non-binding indication” covered breaches as a licensed security dealer only.  The principal terms of what were described as option one were:

·                    a limit of $2 million on any one claim and in the aggregate;

·                    a retention (excess) of $50,000 inclusive of costs for each and every claim;

·                    a premium of $25,000 plus GST and stamp duty.

The proposed retroactive date was “Policy Inception”.  No option two was included.

72                  On 27 March 2002 Dexta Corporation Ltd responded to Schuyler Elia with a non-binding indication.  The insured were Tasman Capital Ltd and Tasman Financial Planning Pty Ltd and the business was described as “Financial Planner”.  As clarified later, the basis was for a limit of $1 million and $3 million aggregate and an excess of $20,000, a premium of $23,800 plus GST and stamp duty was quoted, alternatively, for a limit of $2 million and $6 million aggregate and an excess of $20,000, a premium of $30,950 plus GST and stamp duty was quoted.  The terms included:

“2)      Financial Relationship Endorsement

There is no indemnity under this Policy for any Claim made against You:

(a)       by any person advised or induced by You or Your employees to invest or lend money to You or any firm or corporation operated or controlled by You or by any of Your employees nominees or trustees and in which You or any member of Your family has a direct or indirect financial interest;

(b)       arising out of the provision by You of any advice, inducement, recommendation, endorsement or opinion regarding the investment of interest, capital or personal endeavour in an investment facility or service in which You or any member of Your family has a direct or indirect control or financial interest.

For the purpose of this exclusion only:

Financial Interest shall not exclude any Nominal Financial Interest in a corporation listed on a stock exchange being a member of the associated Australian stock exchanges.

Nominal Financial Interest shall mean less than 10% of the issued capital in a public company.

3)         Conflict of Interest Endorsement

There is no indemnity for any Claim made against You or any claim by You for indemnity under this Policy directly or indirectly arising from an actual or alleged conflict of interest.

However this exclusion shall not apply where:

(a)       prior to providing professional services, You have obtained from a party relying on Your professional services a signed and dated document wherein the party acknowledges that You are also involved with another party whose interests may differ to those of the party relying on Your professional services, or

(b)       after investigation, Dexta Corporation Ltd is satisfied that a conflict of interest does not exist.

4)         Managed Investment Schemes

There is no indemnity for any Claim made against You or any claim by You for indemnity under this Policy directly or indirectly arising from investments in managed investment schemes other than schemes which invest in equities, property, fixed interest or cash.

…

9)         Amended continuity clause

Clause 1.8 of this policy is deleted in full and replaced by the following:

1.8       Continuous cover

Notwithstanding exclusion 3.7 (prior Claims or circumstances), and in the absence of fraudulent non-disclosure by You, We agree to extend indemnity under insuring clauses 1.1 and 1.2 to any Claim arising from or attributable to or in consequence of any fact or circumstance which could have been, but which was not, notified under a previous professional indemnity insurance policy (‘Previous Policy’) PROVIDED THAT:

(a)       if the fact or circumstance had been notified under the Previous Policy, You would have been entitled to indemnity under the Previous Policy;

(b)       apart from Our right to refuse indemnity due to:

(i)        Your failure to disclose the fact or circumstance to Us before this Policy was entered into; or

(ii)       the application of exclusion 3.7 (prior Claims or circumstances);

You are entitled to indemnity under this Policy; and

(c)        You have continued without interruption to be insured under a professional indemnity insurance policy with Us from the time when the fact or circumstance could have been notified under the Previous Policy until the time when the Claim, fact or circumstance is notified to Us.

Our liability for the Claim shall not exceed the amount of indemnity which would have been available under the Previous Policy if the fact or circumstance had been notified under the Previous Policy or the available Limit of Liability under this Policy, whichever is the lesser.”

(Original emphasis.)

73                  On 3 April 2002 Schuyler Elia of Aon reported to Johnson advising that Macquarie had requested further information and that he had asked for an indicative quotation based on the information on file.  The report included:

“I must apologise for the inconvenience this has caused with Elena not aware of your other insurance in place with AIG …”

The report summarised the key elements of the AIG and Dexta quotes.  AIG was recommended.  Neither the analysis nor the recommendation discusses the question of “run off” cover for the financial planning activities of Tasman Investment, although reference was made to “additional reinstatement of the sum insured”.

74                  Johnson favoured the second Dexta alternative, but elected to wait for a response from Macquarie.  After several prompts from Johnson to Aon with no response, on 17 April 2002 Johnson instructed Elia to proceed with Dexta Option 2, confirmed by email on 18 April 2002 at 9.31 am.  At 12.29 pm on that day, Elia sent an email to Johnson reporting that Macquarie had quoted $2 million on one claim with $6 million aggregate, with a deductible of $20,000 each and every claim with a premium of $65,000 before charges.  He recommended Dexta.  The reasons did not include any reference to the position of Tasman Investment.

75                  Dexta required further information.  Johnson forwarded that information, signed by Warne.  It included the material earlier provided for the Macquarie renewal.  The insured were identified as Tasman Capital Ltd and Tasman Financial Planning Pty Ltd.  The policy issued in due course.

76                  In my opinion, Aon was clearly in breach of its duty to the defendants to exercise due care and skill in arranging insurance cover in not drawing to the attention of Johnson the need for cover for the previous financial planning and advisory activities by Tasman Investment, including the officers of Tasman Investment, having in mind the rearrangement of corporate responsibilities within the group.  Aon, by Elia, had been closely involved in the details of professional indemnity cover for the group since May 2000, and was well aware of the details of the corporate rearrangement of responsibilities.  Aon was involved in effecting PI insurance for all entities in the group, including directors’ and officers’ cover.  It had effected the cover with AIG.  The lack of “run off” cover for the prior financial planning and advisory services of the group was a critical feature of the insurance rearrangements and very material to decision making as to that cover.  However, there is no evidence of the issue having been raised by anybody on behalf of Aon at any time.  Neither Warne nor Johnson was cross-examined to suggest that they had been given any advice by Aon concerning the run off of liabilities of Tasman Investment or, indeed, that there was any discussion by anyone on behalf of Aon about that factor to be taken into account when making a decision about PI insurance.  There was no cross-examination of Johnson to suggest that the query concerning Tasman Investment being a party, the subject of the correspondence, was discussed by any officer of Aon with him.  What is more, no explanation for the omission has been given by those involved.  Indeed, those involved for Aon, particularly Elia and Kazakova, were not called to give evidence.

77                  Counsel for AON cross-examined Warne and Johnson to suggest that a conscious choice was made to exclude Tasman Investments from PI insurance.  He submitted that Aon’s role was limited to executing specific instructions.  He also pointed to the absence of evidence from Blackett, who had a role in relation to effecting insurance.  There were unsatisfactory features of the evidence of Warne and Johnson, principally because of their attempts to bolster the case against AIG on the Investment Managers Policy.  However, the decision making by Warne and Johnson took place without any attention paid to the “run off” of the group’s financial planning and advisory services preceding the change of role of Tasman Investment within the group.  Blackett’s absence is of no significance.  Aon has not led any evidence of any relevant communication with Blackett.  There is no suggestion that Blackett was aware of the “run off” problem.  He was not a decision maker.  Johnson gave evidence that, had he been aware at the time of renewing PI insurance after 31 March 2002 that Tasman Investment would be exposed for its past financial planning activities and investment advice, he would have addressed with Aon what needed to be done to protect Tasman Investment against that risk.  I accept that evidence.  Commercial reality compels the conclusion that, if Warne and Johnson had been made aware of the problem, they would have paid attention to the solution of it.  Warne, in particular, had potential personal liability and a considerable stake in the fortunes of the companies.  I do not accept that a conscious choice was made to exclude cover for the run off of financial planning liability or that Aon’s role, as broker, was restricted to merely executing instructions.

78                  The unexplained omission by Aon to draw the attention of the client to such an important consequence of the overall insurance arrangements that were in contemplation was a breach of the duty of Aon to exercise care and skill in carrying out its role as broker (Caldwell v JA Neilson Investments Pty Ltd (2007) 14 ANZ Ins Cas 61-724;[2007] NSWCA 3; per Ipp JA at [103]–[104]).  No expert evidence is necessary to come to that conclusion (cf Geoffrey W Hill & Associates (Insurance Brokers) Pty Ltd v Squash Centre (Allawah North) Pty Ltd (1990) 6 ANZ Ins Cas 61-012 per Kirby P at 76768).

79                  The next question is what loss flowed from the breach.  The role of damages in a case such as the present is to place the wronged party in the position it would have been in if there had been no breach of duty, ie if correct and timely advice had been given.  The defendants lost the benefit of that advice.  They were never in the position of having the advantage of it.  That much is clear.  That amounts to a loss caused by the breach sufficient to complete the cause of action (if it is viewed as tort) (Poseidon Ltd & Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 per Mason CJ, Dawson, Toohey and Gaudron JJ at 355 and Brennan J at 362 and 368). 

80                  Quantification of damages is a different matter.  It has been said that the defendants have to establish that, absent the breach of duty, relevant cover would have been obtained, eg Ferrcom Pty Ltd v Inbush (NSW) Pty Ltd (1997) 9 ANZ Ins Cas 61-339 per Cole JA at 76732.  That is so if full indemnity is to be awarded, cf Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 per Mason, Wilson and Dawson JJ at 13.  The position is different if less than full indemnity is considered.  Reconstruction of what would have occurred if the correct advice had been given involves a hypothetical set of past circumstances.  As explained in Malec v JC Hutton Pty Ltd (1990) 169 CLR 638, particularly per Brennan and Dawson JJ at 639–640 and Deane, Gaudron, McHugh JJ at 642–643, this is not decided as if it were an assessment on the balance of probabilities as to whether an event did or did not happen.  Furthermore, in considering this case, it is to be borne in mind that Aon prevented the posited situation occurring and that it, not the defendants, was the expert in the field.  See, generally, Cee Bee Marine Ltd v Lombard Insurance Co Ltd [1990] 2 NZLR 1 at 5–6.  The reconstruction of events in this case does not depend upon what the defendants would have done in a particular situation in the sense discussed by Buchanan JA in Crown Insurance Services Pty Ltd v National Mutual Life Association of Australasia Ltd (2005) 13 ANZ Ins Cas 61-659 at [9]–[14].  It principally (but not entirely) depends upon the assessment as to what others would have done.  It is to be noted that the discussion of this question by Ashley J in TBI Pty Ltd v Aon Financial Planning Ltd (2004) 13 ANZ Ins Cas 61-601 at [213]–[218] was tentative obiter dicta. 

81                  The defendants relied upon the evidence concerning Macquarie Underwriting to support the availability of appropriate insurance.  That company had been the underwriter for the financial planning and investment advice activities of the group for 2000–2001 and 2001–2002 years.  The renewal for 2001–2002 on 3 August 2001 was on the basis that the policy was unlimited as to retroactive date of the circumstances giving rise to the claim without any express exclusion of known claims and/or circumstances.  The policy when first issued had an unlimited retroactive date.  The communication from Stuart Coleman of Macquarie Underwriting to Elena Kazakova of Aon on 15 March 2002 indicated that Tasman Investment could be named as an insured, however, it would not be covered for conducting a managed property trust.  It will be recalled that Johnson’s response was to suggest Elena Kazakova talk to Schuyler Elia about whether it was necessary.  There is no indication that the policy would not be framed as to the retroactive date in accordance with the then current policy.  The only material given by Aon to Johnson at that time made no reference to retroactive cover. 

82                  An unidentified handwritten note on a Macquarie Underwriting communication with the initials SE (no doubt Schuyler Elia) and dated 18 April 2002 says:

“MACQ – S.C. → $62,000 – (new bus premium) – retro inception”

That note requires explanation.  The absence of evidence from either Elia or Kazakova from Aon is significant on this aspect, particularly as there is no evidence from Macquarie that proves or explains a change in its attitude to retroactive cover.

83                  It was submitted for Aon that Johnson had rejected Macquarie’s quote out of hand because of cost and it might therefore be put to one side.  I do not agree.  There was no explanation of the Macquarie quote by Aon in the context of the “run off” problem and it was never considered by Johnson or Warne in that context.  I am satisfied that disclosure of that factor would have compelled close consideration of the Macquarie quote.

84                  Aon called evidence from two underwriters as to PI insurance, principally in relation to non-disclosure, but some of that evidence was relevant to the instant issue.  One common factor was the impact of the collapse of HIH and its withdrawal from the PI insurance market for financial planners by March 2001.  Up until then, it had been the dominant local underwriter in the field.  It had a large market share and offered low premium rates.  It is interesting in this connection to note that Macquarie Underwriting’s original quote in 2000 for the Warne companies was less in premium and deductible than HIH.  The principal competition was from two agents for Lloyd’s syndicates, one of which was Markel Australia and the other Resource Underwriting.  By March 2001 Resource Underwriting was reducing its exposure to the Australian market.  As a result, it was said that a sellers market developed in PI insurance, including that for financial planners.  Markel Australia declined many financial planning PI proposals in 2001 and 2002.  Markel Australia was not approached by Aon in respect of Tasman Investment or the Warne group in March/April 2002. 

85                  Ian Williams, an underwriter from QBE, was called by Aon to give evidence of guidelines prepared by QBE in 2001–2002 concerning PI cover for financial planners.  It is not clear when they actually came into force.  Those guidelines are silent as to both renewals and run off cover.  QBE had formerly provided professional indemnity cover to the Warne group that was cancelled in July 2000 after the Macquarie Underwriting quote had been accepted.  The nature of that cover was not explored. There is no evidence that Aon approached QBE for PI cover in 2002.  It can be deduced from the cross-examination of the witness upon particular files that QBE provided cover retroactive to the inception of business to a former client of HIH that had made known claims upon HIH.  In another case, Aon had submitted a proposal for renewal to QBE on the basis that it was to be a run off policy.  Williams confirmed that QBE would normally afford run off or retroactive cover provided it was already the insurer. 

86                  That is consistent with the experience with Macquarie Underwriting to which reference has been made.  It is also consistent with the experience upon renewal of the Investment Managers Policy with AIG in October 2001.  Although it did not cover Tasman Investment for its financial planning activities, it was a PI policy.  General Condition 5 was as follows:

“Continuity

Cover is provided under Insuring Clauses A and B of this policy for any Claim, fact, matter or circumstance which could or should have been notified  under any earlier policy.  Provided always that:

(a)       the Claim, fact, matter or circumstance could and should have been notified after the Continuity Date; and

(b)       the cover provided by this Condition shall be on the same terms, exceptions and conditions as the policy under which the Claim, fact, matter or circumstance could and should have been notified.”

(Original emphasis.)

The continuity date was 31 October 2000.

87                  Based upon the evidence, it can be inferred that if Aon had approached Macquarie Underwriting on the basis that the financial planning business was in truth a continuing business, although carried on by another entity, that PI insurance would have been issued as if it were a renewal on terms no less favourable than the quote given as to premium and with retroactive cover to Tasman Investment and Warne to at least the inception of business and on the basis that prior known circumstances would be covered.  At the very least, the evidence required an explanation from Aon as to precisely what occurred between it and Macquarie Underwriting.  That explanation may, in turn, have required an explanation from Macquarie Underwriting.  Counsel for the defendants is on strong ground in relying upon the unexplained failure of Aon to call any witness of its own, particularly either or both of Elia and Kazakova.  A clear Jones v Dunkel inference is to be drawn (Jones v Dunkel (1959) 101 CLR 298).  The consequence is that the inference available from the evidence that a renewal on suitable terms to cover the Tasman Investment run off would have been available from Macquarie Underwriting can be more readily, and is, drawn.

88                  In my opinion, counsel for the defendants is correct in submitting that a Jones v Dunkel inference is also available because of the failure by Aon to call evidence from those involved in the negotiations for Macquarie Underwriting, particularly Stuart Coleman.  The availability of a Jones v Dunkel inference in the case of a witness who is a third party can be a difficult issue.  Macquarie and Aon are not in the “same camp” and Coleman is not under the control of Aon.  In a sense, he was available to both parties.  However, only the broker, Aon, had dealings with the potential insurer.  The client was not, and would never be, directly in that loop.  Between the parties here, it was natural for Aon rather than the defendants to call the evidence from those at Macquarie Underwriting who were involved in the dealings between Aon and Macquarie from the inception of business and in the subsequent management of the business including the proposed renewal.  The failure to lead this evidence further buttresses the inference in favour of the defendants (Payne v Parker [1976] 1 NSWLR 191 per Glass JA at 201–202; Prasad v Minister for Immigration, Local Government and Ethnic Affairs (1991) 101 ALR 109 at 123; Turbo Tek Enterprises Inc v Sperling Enterprises Pty Ltd (1989) 23 FCR 331 at 343–344; Ayoub v Euphoric Pty Ltd (2004) 12 BPR 22,735;[2004] NSWCA 457 per McClellan AJA at [62]–[64]). 

89                  I am also satisfied that Johnson and Warne, if properly advised by Aon, would have accepted Macquarie’s terms if Tasman Investment was a party and satisfactory run off cover was included, unless Aon was able to arrange more favourable insurance.  Aon simply did not analyse the offers with the run off as a factor.  If that issue had been pointed out, the commercial reality was that the risk had to be covered. 

Non-disclosure

90                  Aon pleaded the following defence to the second amended cross-claim:

“In further answer to the whole of the Second Amended Cross-Claim, Aon:

(a)       says that it was a duty imposed upon TIML and Warne prior to the entry of any contract of insurance, including:

(i)        any investment management insurance contract entered into on or about 31 October 2001; or

(ii)       any professional indemnity insurance contract entered into on or about 30 March 2002,

(31 October 2001 and 30 March 2002 being respectively ‘relevant dates’) to disclose to any prospective insurer every matter that:

(i)        TIML and/or Warne knew to be a matter relevant to the decision of the prospective insurer whether to accept the risk the subject of the proposed contract of insurance and, if so, on what terms; or

(ii)       a reasonable person in the circumstances TIML and/or Warne could be expected to know to be a matter so relevant.

Particulars

The duty was imposed by virtue of the operation of s 21 of the Insurance Contracts Act. To the extent that the Cross-Claimants were named parties under any contract of insurance pursuant to s 48 of the Insurance Contracts Act, the obligation arises under s 48(2)(a), s 48(3) or on the basis that the rights under s 48 carry with them a relevant duty of disclosure.

(b)       says that in the periods preceding the relevant dates, TIML and Warne knew:

(i)        that TIML (then known as Warne Investment Management Limited) had raised money from clients of TIML (‘clients’) for use by Longevity Management Systems Pty Limited (‘LMS’) in the purchase and development of the Queen Victoria Nursing Home and hospital site at Wentworth Falls, Blue Mountains (‘QV project’) in circumstances where the form of the interest to be purchased by the clients had not been settled upon;

(ii)       that the fundraising was based upon an information memorandum prepared by TIML (‘information memorandum’) being sent by TIML to a large number of its clients;

(iii)      that any fundraising had to comply with the provisions of Part 6D.2 of the Corporations Act unless exempted;

(iv)      that it was intended by TIML and Warne that the fundraising fall within the ‘sophisticated investors’ exemption to the fundraising provisions of the Corporations Act (s 708(8)-(10));

(v)       that unless the fundraising fell within the ‘sophisticated investors’ exemption to the fundraising provisions of the Corporations Act, the fundraising would be in breach of the Corporations Act;

(vi)      that a draft agreement had been prepared for use by TIML, LMS and the clients (‘draft agreement’);

(vii)     that it was a term of the draft agreement that initially the client monies that were the subject of the fundraising would be deposited by the clients into a trust account in the name of Warne Investment Management Limited;

(viii)    that it was a term of the draft agreement that the release of client monies by TIML to LMS from the TIML trust account was subject to each of TIML and LMS being satisfied that the advance by the client to LMS was an excluded issue under s 708 of the Corporations Act;

(ix)      either or both:

(A)       the conditions that needed to be satisfied to meet the ‘sophisticated investors’ provisions; and/or

(B)       that they had not satisfied themselves at the time of the fundraising as to the conditions that needed to be satisfied to meet those provisions;

(x)       either or both that:

(A)       at least Mr Tosich, and perhaps other clients of TIML who had been sent the information memorandum, did not satisfy the criteria to qualify as a ‘sophisticated investor’; and/or

(B)       the information memorandum had been sent out to clients without the Cross-Claimants then being satisfied that each of those clients met the criteria to qualify as a ‘sophisticated investor’, or, alternatively without then knowing what that criteria was;

(xi)      either or both that:

(A)       a written statement required by s 708(10)(c) of the Corporations Act had not been provided to each of the clients and none of the clients had signed an acknowledgement required by s 708(10)(d) of the Corporations Act before or at the time when the offer to invest (by way of the information memorandum) had been made to each of the clients; or

(B)       the information memorandum had been sent out to clients without the Cross-Claimants then being satisfied if there were any information disclosure requirements under the ‘sophisticated investors’ provisions of the Corporations Act,

(xii)     all client monies that had been agreed by the clients to be invested had been paid over to LMS;

(xiii)    that the said monies had been raised and invested:

(A)       in breach of the Corporations Actand the draft loan agreement;

(B)       alternatively, without TIML taking steps to satisfy itself as to whether the Corporations Act and the terms of the draft loan agreement had been breached;

(xiv)    that the information memorandum had calculated both the costs and timing of the investment by the clients on the basis that development approval would be received by June 2001, allowing construction to commence in July 2001;

(xv)     that at each relevant date:

(A)       development approval had not yet been obtained;

(B)       construction had not yet commenced;

(xvi)    that, as a consequence of (xiv) and (xv) above, even if construction did ultimately progress, it was unlikely that the clients would receive the anticipated returns at the anticipated times identified in the information memorandum.

(c)        says that each of the above matters individually were matters that:

(i)        TIML and Warne knew to be matters relevant to the decision of the prospective insurer whether to accept the risk the subject of the proposed contract of insurance and, if so, on what terms; or

(ii)       a reasonable person in the circumstances could be expected to know to be a matter so relevant;

(d)       says that if TIML and Warne had complied with their statutory duties and disclosed the above matters to any potential insurer from the relevant dates, then TIML and Warne would not have been protected by insurance that would have been indemnified them in respect of claims arising out of:

(i)        the said fundraising;

(ii)       the QV project;

(e)        further, and in the alternative to (d), says that in the circumstances described in (a)-(c) above, an insurer that had provided investment management insurance or professional indemnity insurance for TIML and Warne for the period from the relevant dates would have been entitled pursuant to s 28(3) of the Insurance Contracts Act to reduce to nil its exposure to any claim for indemnity from TIML and/or Warne in respect of the said fundraising and/or the QV project;

(f)        says that if, which is denied, Aon breached its retainer as alleged by TIML and Warne, Aon says that any such breach is not causative of loss to TIML and/or Warne.”

(Original emphasis.)

91                  This defence is principally based upon s 21 of the Insurance Contracts Act 1984 (Cth) that provides, so far as presently relevant, as follows:

“(1)     Subject to this Act, an insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that:

(a)       the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or

(b)       a reasonable person in the circumstances could be expected to know to be a matter so relevant.”

92                  The topic is contended to be relevant in two ways:  in the first place, if proper disclosure had been made, the risk would not have been accepted; and, in the second place, if the risk had been accepted and the policy issued, it would have been liable to cancellation once the true circumstances emerged. 

93                  Some basic propositions about s 21 should be borne in mind before approaching the detail of the issue.

(1)               “Knows” and “known” are strong words.  They mean considerably more than “believes” or “suspects” or even “strongly suspects” (per McHugh, Kirby and Callinan JJ in Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (in liq) (2003) 214 CLR 514 at 531; see also Commercial Union Assurance Co of Australia Ltd v Beard (1999) 47 NSWLR 735; (2000) 11 ANZ Ins Cas 61-458 per Davies A-JA at 75259).

(2)               The “matter” must be known to the insured.

(3)               On one alternative, the “matter” must also be known to be relevant to the decision of the particular insurer whether to accept risk, and, if so, on what terms – in this case, on the basis put forward, by Macquarie Underwriting.  As Gummow and Hayne JJ said in Permanent Trustee Australia Ltd 214 CLR 514 at [70]:

“Under the Act, attention is shifted from the prudent insurer to the particular insurer.”

Although their Honours were in dissent in the result, this statement is obviously correct.  (See also Twenty-First Maylux Pty Ltd v Mercantile Mutual Insurance (Aust) Ltd [1990] VR 919; (1989) 92 ALR 661.) 

(4)               Relevance to the acceptance of the risk in the sense of the particular insurance hazard is required (McHugh, Kirby and Callinan JJ in Permanent Trustee Australia Ltd 214 CLR 514 at [32]).

(5)               In the other alternative, it must be found that a reasonable person in the circumstances could be expected to know that the matter was relevant to the decision of the particular insurer.  There is some debate about the meaning of the words “the circumstances”.  Although they plainly mean the circumstances of the particular case, the debate is said to be between subjective and extrinsic circumstances (see the discussion in Mann P, Annotated Insurance Contracts Act (4^th ed, Lawbook Co, 2003), para 21.10.8).

(6)               There is a debate as to whether an insured can “know” a matter by its agent cf McHugh, Kirby and Callinan JJ at [30] with Gummow and Hayne JJ in Permanent Trustee Australia Ltd 214 CLR 514 at [82]–[89].  Pending further clarification by the High Court, the wider view should be taken following Macquarie Bank Ltd v National Mutual Life Association of Australasia Ltd (1996) 40 NSWLR 543 per Powell JA at 610–611 (agreed with by Priestley JA and Clarke JA).

(7)               The obligation applies to renewal of a contract (s 11(9)(b)) (Alexander Stenhouse Ltd v Austcan Investments Pty Ltd (1993) 112 ALR 353).

94                  It follows from (3), (4) and (5) above that a claim of non-disclosure by an insurer would rarely succeed without that insurer giving evidence as to the relevance and significance of the matter not disclosed to it.  It would be curious, to say the least, if the particular insurer led evidence as to the practice of other insurers but not from its own camp.  Of course, this is not a claim against an insurer but, rather, a claim against the broker.  However, the broker led evidence from the other insurers but not from Macquarie Underwriting, which was the particular potential insurer, or from any other insurer that had actually been approached for cover in 2002, including Dexta, which granted cover.  No explanation was tendered for that omission.  The difficulty is all the greater because of the absence of any witness from the broker itself.  It is not uncommon for a broker to be qualified to give evidence as to the state of a particular insurance market at a particular time, assuming a satisfactory actual knowledge of the practices of a sufficient cross-section of insurers.

95                  Evidence from the other insurers has little, if any, probative value upon the point at issue.  Each insurer is a commercial entity competing for custom with differing business policies and practices.  For this reason, it is dangerous for the Court to substitute its own opinion for evidence as to the practice of the relevant insurer.  An insurer actively seeking certain types of business will have very different attitudes from an insurer who is not keen to attract that type of business.  It will be recalled that in 2000 Macquarie Underwriting was competing actively with HIH for PI business at levels considered to be uneconomic by the witnesses for the insurers that were called.  Furthermore, it is clear from the cross-examination of the witnesses from the other insurers, based upon particular files, that general guidelines apparently laying down strict prudential standards by no means govern the consideration of every proposal.  There may be all manner of reasons why an insurer may wish to accommodate a particular proposal, notwithstanding the guidelines. 

96                  Warne, who was effectively the decision maker, was of the view that there was no occasion to give notice of circumstances that might give rise to a claim until the second half of 2002 when it became clear that the application for a retirement village would not succeed and that there had to be a radical recasting of the proposed venture.  At that stage, the investors were notified accordingly and the claim from Tosich followed shortly thereafter.  Notification was then given to AIG as the insurer claimed to be responsible.  Warne’s evidence in this respect was somewhat confused, partly because the cross-examination was conducted by counsel for AIG who had objectives relevant to its client in mind.  A particular difficulty arose for Warne because of an answer given in relation to renewal of the AIG policy in October 2002 where an answer “No” was given to the question:

“Does the Fund Manager or any of its Directors, officers or employees have any knowledge of any fact or circumstances which might give rise to a claim.”

Warne conceded that he should have advised the insurer at that time if the insured had been aware of the potential Corporations Law breaches and potential loss of capital in the Queen Victoria Project.  In my opinion, counsel for AIG is correct in putting that the true explanation of that answer is that the AIG policy was, in truth, regarded by Warne as only relevant to the Wollongong Prime Property Trust and not to the Queen Victoria Project.  By the time of the AIG renewal, all of the material matters concerning the Queen Victoria Trust were all too clear to the defendants.

97                  The real question is whether a duty of disclosure arose before or at the time that PI insurance was to be renewed in March/April 2002.  The pleading essentially relies upon breaches of the Corporations Law and the defendants’ knowledge about them, together with delay in relation to the project.  That was also the foundation of the evidence led from the witnesses from the other insurers.

98                  I am satisfied that the defendants knew of the likelihood of breaches of the Corporations Law in relation to the fundraising for the Queen Victoria Project from at least late 2001 after the first Phillips Fox letter.  I am also satisfied that Johnson was also aware of that circumstance.  I am satisfied that Harrison drew Warne’s attention to the potential problem and that knowledge of the first Phillips Fox letter would have come to the attention of both Johnson and Warne.  It was significant enough not to be forgotten.  In particular, I find that Warne knew of the substance of that letter and that it remained present to his mind.  On the other hand, I am not satisfied that it was a matter of particular concern to Johnson and Warne until after March 2002. 

99                  The pleading relies upon the fact that the progress of the Queen Victoria Project was slower than had been represented by the time of renewal of the PI insurance in 2002.  However, there is no evidence of active investor concern at that time.  Warne had circulated a progress report to investors including Tosich in 2001.  That indicated a program that would take some time to complete.  Tosich expressed concern to Warne some weeks thereafter about progress, but did not follow the matter up with Warne until about August 2002.  By then, the withdrawal of the Development Application was public and Tasman Investment had recognised the inevitable.  The first record of a complaint from an investor was in early July 2002.  The critical letter from the Council to Chris Lonergan & Associates was not sent until 17 April 2002.  The pleading does not allege that Warne knew of the impending failure of the project at the time of effecting PI insurance in 2002.  There is no evidence of any real concern on the part of Warne about the project up to the time of the renewal, notwithstanding that he was an investor in his own right as well as being, in effect, responsible for the investments by his clients.  In short, Warne appears to have remained a true believer until after March 2002.  His draft letter to investors was dated 13 May 2002.  That timing explains his lack of concern about potential breaches of the Corporations Law during the relevant period.  It can be concluded that Warne would not have known that the disclosure would be relevant to Macquarie Underwriting in March/April 2002.  Neither Johnson nor Warne was cross-examined on the part of Aon on the topic of non-disclosure.

100               Aon seeks to sidestep this aspect of the matter by aggregating the knowledge of all relevant officers of the Warne group, including Harrison’s knowledge through his LMS connection.  Even if that doubtful proposition be legitimate in this context, it could not rise higher than the pleaded circumstances – likely breach of the Corporations Law and delay in the Queen Victoria Project.  Those circumstances were known to Warne in substance and have been dealt with.

101               Thus, the issue of non-disclosure is to be decided without any evidence from any relevant potential insurer, from the insurance broker actually involved and without any relevant admissions on the part of the potential insured.

102               I have adverted to the problem confronting Aon in the absence of evidence from Macquarie Underwriting or Aon itself on this point.  It cannot be doubted that the existence of the pleaded circumstances might be regarded by an insurer as relevant to the decision as to whether to accept the risk in question.  But that does not establish that this insurer would so regard it, let alone that this insured, or a reasonable person in the circumstances, would know it to be so relevant.

103               There could, no doubt, be a case where the circumstances are such that it can be taken that any reasonable insured would know that any insurer would regard them as relevant to cover of the risk proposed without the benefit of evidence from the insurer or broker.  It may be that the position arrived at by September/October 2002 would fall into that category so far as PI insurance in relation to run off insurance for Tasman Investments was concerned.  A fund raising that was advised to be likely to be in breach of the Corporations Law was clearly failing, with the investors likely to suffer considerable losses.  In my opinion, the same cannot be said of the circumstances in March/early April 2002.  The likelihood of loss on the investment was not known.  The possibility of breaches of the law in relation to the fund raising was known, but that is as high as it reached at that point.  That was likely to be academic if the project succeeded.  The relevance of that circumstance to a particular insurer needs to be established by evidence.  It is conceivable that such evidence could have been led, but it was not.  For the Court to fill that gap and make a finding as to that issue would amount to speculation.  I conclude that it has not been established that a failure to disclose the pleaded circumstances would have given rise to any relief in relation to the hypothetical Macquarie Underwriting policy.  The same reasoning would apply in relation to the application of s 28(3) (Manchester Unity Total Care Building Society v MGICA Ltd (1991) 6 ANZ Ins Cas 61-062). 

104               I am, thus, satisfied that the proper basis for quantification of loss is to assume that a Macquarie Underwriting policy would have issued based upon the proposal it received,  including Tasman Investment as an insured with a retroactive date at least back to the inception of the business in 2000.  The policy would, thus, have responded to claims made in the period from March 2002 to March 2003 arising from circumstances occurring in June–November 2000.  Such claims would have clearly fallen clearly within the insured risk and there has been no suggestion of any relevant exception. Allowance will have to be made for the proposed deductible of $20,000 per claim.  Some allowance should be made for the higher premium proposed by Macquarie Underwriting.  It would not be right in principle to allocate all of that increase to the one claim by Tosich.  The amount recovered of $25,608.38 should be deducted.  There should also be a modest discount to reflect the possibility that a policy on appropriate terms might not have issued.  All in all, the cross-claimants should recover the sum of $70,000 plus interest in relation to Tosich. 

105               Little attention was paid to the claims in relation to Roach and Kotwal and no special defence was raised in relation to them.  The fact that they were paid out is of no consequence as there was no relevant policy in force at the time.  The only distinction is that they were made later than that by Tosich.  If proper insurance had been obtained, that should not have been relevant.  The quantification of these claims needs to be further considered. 

Summary

106               The first plaintiff Tosich succeeds on his claim against the defendants. The cross-claim by the defendants against AIG fails.  The cross-claim by the defendants against Aon succeeds to the extent indicated.

107               The proceeding will stand over to enable draft minutes of order to be brought in to give effect to these reasons, to deal with costs and to enable my attention to be drawn to any failure to deal with a necessary issue.

Associate:

Dated:         20 March 2008

Schedule 1

CHRONOLOGY

History related to Warne entities

Queen Victoria Project

Dealings between Tosich and Warne

Dealings between Warne entities and Aon

Dealings between Aon and AIG

Dealings between Warne entitIes and AIG

SCHEDULE 2

DRAMATIS PERSONAE

This Schedule of dramatis personae is structured as follows:

A.        Parties

B.         Non-party witnesses and deponents

C.        Other persons

D.        Other entities

E.         Structure of Tasman Capital group

A.        PARTIES

B.        NON-PARTY WITNESSES AND DEPONENTS (alphabetical by surname)

C.        OTHER PERSONS (alphabetical by surname)

D.        OTHER ENTITIES (alphabetical)

E.         STRUCTURE OF TASMAN CAPITAL GROUP

·                    Group structure as at 1 July 2001:

·                    Alterations to names of entities in group structure after 1 July 2001:

o          Tasman Capital Limited changed its name to Tasman Capital Pty Ltd.

o          Tasman Financial Planning Pty Ltd changed its name to Warne Financial Services Pty Limited.