Federal Court of Australia

Avant Insurance Limited v Darshn [2021] FCA 1129

ORDERS

THE COURT ORDERS THAT:

1.    The relief claimed in prayer 2 of the interlocutory application dated 3 September 2021 be refused.

2.    The appellant pay the first respondent’s costs of and incidental to the hearing of its application for the relief referred to in Order 1.

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

REASONS FOR JUDGMENT

YATES J:

Introduction

1    In the proceeding below, the following declaration and orders were made on 23 August 2021:

THE COURT DECLARES THAT:

Upon the proper construction of the applicant’s 2018-2019 policy with the first respondent described in paragraph [38] of the reasons for judgment dated 25 June 2021 (Avant Policy), and in the circumstances that have happened, without limiting any right the applicant may have to seek indemnity in relation to the claims of group members in Supreme Court of New South Wales proceedings 279308 of 2017 (the TCI proceeding), the first respondent is obliged to indemnify the applicant in respect of:

(a)    his ‘Legal Defence Costs’ (as defined in the Avant Policy) in relation to his defence of the claims of Ms Sanchez in the TCI proceeding; and

(b)    any civil liability arising in relation to the claims of Ms Sanchez brought in the TCI proceeding.

THE COURT ORDERS THAT:

1.    The first respondent pay the applicant interest on the Legal Defence Costs that he has already paid, from the date of payment by the applicant to his lawyers to the date of payment by the first respondent to the applicant, calculated in accordance with s 57 of the Insurance Contracts Act 1984 (Cth).

2.    The first respondent pay the applicant’s costs of and incidental to the proceeding on a party-party basis.

3.    Within 14 days, the first respondent pay to the applicant:

(a)    $182,000 in partial satisfaction of his entitlement to costs of the proceeding; and

(b)    $189,000 in partial satisfaction of his entitlement to indemnity for Legal Defence Costs.

4.    The costs payable pursuant to paragraph 2 above be the subject of a lump-sum costs assessment in accordance with Part 4 of the Court’s Costs Practice Note (GPN-COSTS) (Practice Note) as follows:

(a)    within 7 days, the applicant file and serve an affidavit in support of the lump-sum claim (Costs Summary) in accordance with paragraphs 4.10-4.12 of the Practice Note;

(b)    within 14 days, the first respondent file and serve any affidavit responding to the matters raised in the Costs Summary in accordance with paragraphs 4.13-4.14 of the Practice Note; and

(c)    in the absence of any agreement having been reached within 21 days of the date of these orders, the matter of an appropriate lump sum figure for the applicant’s costs be referred to a Registrar for determination.

5.    There be liberty to apply in relation to any issue of quantification of the costs already incurred by the applicant in defending the TCI Proceeding.

6.    The first respondent pay the second respondent’s costs of and incidental to the proceeding (including the costs of the second respondent’s interlocutory application dated 23 July 2021) as agreed or assessed.

2    By an interlocutory application dated 3 September 2021, the appellant, Avant Insurance Limited (Avant), seeks a stay of Orders 1 to 6. It also seeks an order that its appeal be expedited. These reasons deal with the application for a stay.

3    The declaration made on 23 August 2021 was based on a finding that the lawyers acting for the first respondent, Dr Darshn—in proceedings called the Scotford proceeding and the Summers-Hall proceeding—had given written notice to Avant of facts that might give rise to a claim against him, for the purposes of s 40(3) of the Insurance Contracts Act 1984 (Cth) (the Insurance Contracts Act). That claim resulted in the TCI proceeding referred to in the declaration.

4    As Avant puts it, the central issue in the appeal is whether the primary judge erred in that finding. Avant accepted Dr Darshn’s claims for indemnity in the Scotford proceeding and in the Summers-Hall proceeding, and had appointed the lawyers to act for Dr Darshn in those proceedings. But Avant contends that the communications between the lawyers and Avant in those proceedings were for the sole purpose of discharging particular retainers, and that communications between the lawyers and Avant relating to the TCI proceeding were not capable of acting as notification by Dr Darshn to Avant for the purposes of s 40(3) of the Insurance Contracts Act.

5    In the proceeding below, the primary judge also found that Avant had breached its duty of utmost good faith in rejecting Dr Darshn’s claim for indemnity. Avant appeals from that finding. It also appeals from the primary judge’s findings that costs should be awarded to Dr Darshn on a lump sum basis and that Dr Darshn is entitled to payment of the two sums referred to in Order 3.

The parties’ submissions

6    In support of its application, Avant submits:

(a)    it has an arguable case on appeal, which raises bona fide issues for determination;

(b)    as revealed in an affidavit made by Dr Darshn’s solicitor, Mr Ishak, on 18 August 2021, Dr Darshn’s financial position is “parlous”;

(c)    therefore, if a stay is not granted, its appeal could be rendered nugatory;

(d)    should it succeed in its appeal, there will be no liability on its part to pay any of the costs which were ordered to be paid on 23 August 2021; and

(e)    if a stay is not granted, and it is forced to make payment of those costs, there can be little doubt that Avant is likely to have negligible prospects of recovering those costs.

7    Avant also relies on the fact that the payments required by Order 3 concern costs to be paid to Dr Darshn’s lawyers. Avant contends that those lawyers have acted for Dr Darshn since December 2020 on the basis of limited costs contributions by him. The sums referred to in Order 3 have been paid to those lawyers and deposited in a trust account with an undertaking that Dr Darshn will not authorise disbursement of those funds until 4.00 pm on 15 September 2021. By agreement signified at the hearing of the present application, the undertaking not to disburse will remain in place until judgment is given on the present application. Avant’s point is that there can be no prejudice to Dr Darshn personally if the payments to his lawyers in relation to their costs are stayed until after the determination of the appeal.

8    There is a further matter of significance. In the course of oral argument on the stay application, leading counsel for Avant, Mr McCulloch SC, stressed that Avant is not seeking a stay of the operation of the declaration. In other words, it is prepared to continue to fund Dr Darshn’s Legal Defence Costs (as defined in the Avant Policy) in the TCI proceeding on and from 23 August 2021 but not, it seems, in relation to the preceding period (because of the stay it seeks), even though its payment of Legal Defence Costs on and from 23 August 2021 is exposed to the same risk which, Avant contends, is the reason why a stay should be granted in relation to the orders made on 23 August 2021. This was explained as a commercial decision taken by Avant. It was also advanced as a reason why Dr Darshn would not be prejudiced by the stay being granted. His future legal representation in the TCI proceeding would be secured (although not, it would seem, his future legal representation in this appeal).

9    In opposing the stay application, Dr Darshn submits:

(a)    his financial difficulties are primarily the consequence of Avant’s refusal of indemnity, which has resulted in him incurring liability for legal costs in this proceeding and in the TCI proceeding in the order of $1.183 million, of which he has paid $494,000;

(b)    if the stay is granted, his mounting legal costs may prevent him from defending this appeal;

(c)    he is not otherwise impecunious: he is a registered cosmetic surgeon who owns property and his own cosmetic surgery practice, which he continues to operate;

(d)    the evidence does not warrant a finding that there would be negligible prospects of Avant recovering any monies paid in the event that it is ultimately successful in its appeal;

(e)    there are no immediate demands for payment by any of his creditors;

(f)    the debts he has accrued in funding his claim against Avant will be entirely (or substantially) discharged by the costs order made below in his favour and his entitlement under the Avant policy.

10    Dr Darshn submits that the fact that his current financial circumstances are a consequence of Avant’s conduct is significant, especially where its conduct has involved a breach of its duty of utmost good faith. He submits that if a stay is granted, it would likely stifle his ability to defend the appeal. In this connection, he points to the inequality of his and Avant’s respective resources as parties to the litigation. He submits that he would be severely prejudiced in his capacity to defend Avant’s appeal were a stay to be granted. This prejudice, he argues, would not be cured by an order for expedition because he is exposed to the risk of losing his legal representation in the appeal or, indeed, facing an event of bankruptcy in the meantime.

11    Dr Darshn relies on a further matter. He contends that the Court should take into account Avant’s conduct in the months following the publication, on 25 June 2021, of the primary judge’s reasons on which the orders of 23 August 2021 are founded. He points to the fact that the proceeding below was conducted on an understanding that expedition was “critical”. However, the present appeal was commenced (as it could only be) after the orders of 23 August 2021 were made. Dr Darshn submits that this delay (which involved a dispute as to the form of orders to be made but not, ultimately, the form of the declaration) could have been avoided had Avant made its intention to appeal clear at a much earlier date. Dr Darshn’s point is that there has been a delay caused by Avant which would make the granting of a stay even more prejudicial to him given the time that will elapse before an appeal will be heard (even if expedited).

12    Dr Darshn does not contend that Avant’s appeal is unarguable. His opposition is directed to the continuing financial prejudice he will suffer, with possible dire consequences, if effect is not given to the judgment he has won after a fully contested hearing before the primary judge.

Principles

13    Rule 36.08 of the Federal Court Rules 2011 (Cth) provides:

(1)     An appeal does not:

 (a)     operate as a stay of execution or a stay of any proceedings under the judgment subject to the appeal; or

(b)     invalidate any proceedings already taken.

(2)     However, an appellant or interested person may apply to the Court for an order to stay the execution of the proceeding until the appeal is heard and determined.

(3)     ...

Note:     Interested person is defined in the Dictionary.

14    Section 29 of the Federal Court of Australia Act 1976 (Cth) provides:

(1)     Where an appeal to the Court from another court has been instituted:

(a)     the Court or a Judge, or a judge of that other court (not being the Federal Circuit Court or a court of summary jurisdiction), may order, on such conditions (if any) as it or he or she thinks fit, a stay of all or any proceedings under the judgment appealed from; and

(b)     the Court or a Judge may, by order, on such conditions (if any) as it or he or she thinks fit, suspend the operation of an injunction or other order to which the appeal, in whole or in part, relates.

(2)     ...

15    Except in one respect, the parties are not at issue as to the principles to be applied. They accept that the discretion conferred by s 29(1) is not fettered by requiring the demonstration of special or exceptional circumstances: Stirling Harbour Services Pty Ltd v Bunbury Port Authority (No 2) [2000] FCA 87 at [13]. They accept that it is only necessary for the applicant for the stay to demonstrate a reason or an appropriate case to warrant a favourable exercise of the discretion: Steggles Limited v Yarrabee Chicken Company Pty Ltd (No 2) [2011] FCA 1097 at [8]. Ultimately, Avant needs to demonstrate a proper basis for a stay that is fair in the circumstances: Alexander v Cambridge Credit Corporation Ltd (1985) 2 NSWLR 685 at 694-695. Avant accepts that a stay is not granted “simply for the asking”: Bryant v Commonwealth Bank of Australia [1996] HCA 3; 134 ALR 460 at 463.

16    The point of difference between the parties is that Dr Darshn relies on Heerey J’s observation in Henderson v Amadio Pty Ltd (No 3) (1996) 65 FCR 66 (Henderson) at 69 that:

… where the judgment sought to be stayed is for payment of a money sum and costs, as is the case here, the appellant will often be concerned with the prospect that without a stay the proceeds of the judgment may be dissipated or seized by other creditors or for some other reason be impossible or very difficult to recover. In such a case the appellant has to show there would be no reasonable probability of getting back moneys paid under the judgment if the appeal succeeds: see Andrews v John Fairfax & Sons Ltd [1979] 2 NSWLR 184 at 189 citing Bridges v Australian Consolidated Press Ltd (unreported, NSW Court of Appeal, 16 June 1970). …

(Emphasis added).

17    On the other hand, Avant relies on McKerracher J’s observation in Nichol v Discovery Africa Limited [2016] FCA 254 (Nichol) at [7] that an exercise of the discretion to grant a stay may be satisfied where there is “a real risk that it will not be possible for a successful appellant to be restored substantially to its former position if the judgment is executed”—a test which his Honour said is the “now commonly accepted test”, citing Dawson J’s observation in Federal Commissioner of Taxation v The Myer Emporium Limited (No 1) [1986] HCA 13; 160 CLR 220 at 223.

18    I accept that the test stated by Heerey J in Henderson sets a higher bar than the test stated by McKerracher J in Nichol in this respect. However, in the normal run of cases, I doubt that, when it comes to exercising the discretion in a practical way, much will turn on the difference.

Consideration

19    Obviously enough, the whole point of Dr Darshn holding insurance with Avant was to protect him from the financial burden of claims made against him in his professional capacity as a surgeon, including his need to meet the cost of defending himself in legal proceedings brought on those claims. The fact that the proceeding below was expedited recognised that the likely financial burden on Dr Darshn in defending the claims made against him in the TCI proceeding would be considerable and that, if Avant was bound to indemnify him under the Avant policy, Dr Darshn should not be exposed to that financial burden or the consequences of meeting his defence costs out of his own pocket, for any longer than is necessary.

20    The contest about whether Avant is liable to indemnify Dr Darshn under the Avant policy in respect of claims made in the TCI proceeding has been fought. Dr Darshn has won on that question; Avant has lost. What is more, Avant’s conduct in denying liability under the Avant policy has been found wanting by the primary judge’s finding that Avant breached its duty of utmost good faith in rejecting Dr Darshn’s claim for indemnity.

21    Of course, Avant is entitled to exercise its right of appeal. However, due recognition must be given to the fact that it is appealing from a judgment and orders which find support in what are (if I may say so) obviously carefully prepared and comprehensive reasons. I do not intend by that observation to express any particular view about Avant’s prospects of success in its appeal. What I do note, however, is that this is not a case where the appellant has pointed to some manifest or obvious error in the judgment appealed from that indicates, without the need for an overly-detailed analysis, that the appeal has greater prospects of success than simply being arguable.

22    In these circumstances, I do not think that Avant’s exercise of its right of appeal should visit upon Dr Darshn the financial risks of denying him the present fruits of his victory. To do so would place him, financially, back to where he started in relation to his claim to be indemnified in relation to the TCI proceeding. He has the added burden of costs incurred in achieving his victory and, of course, now has the further burden of costs in defending that victory. The imposition of these added and further burdens has exacerbated, and will exacerbate, his current financial position. In that regard, he is in a worse financial position than when he started—and yet he has a judgment which says that Avant is legally obliged to indemnify him in respect of claims made in the TCI proceeding and that, in rejecting his claim for indemnity, it breached its duty of utmost good faith.

23    I do not accept Avant’s submission that, if no stay is granted, and the appeal is successful, the prospects of it recovering the costs ordered to be paid will be negligible. The evidence does not justify that conclusion. I do accept, however, that there is a risk that Avant might not be restored to its position pre-payment. But the existence of that risk is not such as to persuade me that a stay should be granted, for the following reasons.

24    First, sight should not be lost of the fact that Dr Darshn’s current financial position is, in part, a reflection of the fact that Avant has denied him indemnity. In other words, Dr Darshn’s current financial position is bound up inextricably with Avant’s conduct: He v Huang [2017] VSCA 102 at [63]-[64].

25    Secondly, Avant is prepared to face the risk of non-recovery in relation to the payment of Dr Darshn’s Legal Defence Costs in the TCI proceeding from 23 August 2021. Given the assumption of that risk, I do not see a persuasive basis for accepting that the same risk should not be borne by Avant in relation to Legal Defence Costs in the period up to 23 August 2021 or, indeed, that Avant should not also bear the risk of non-recovery in relation to the costs incurred by Dr Darshn in the proceeding below.

26    Thirdly, I am not persuaded by Avant’s submission that there is no evidence before the Court that, should the stay be granted, Dr Darshn’s legal advisers will not continue to act for him. His solicitor, Mr Ishak, has said that Dr Darshn has already paid his firm $494,000 for costs and disbursements and currently owes $703,000 (including GST) on that account in respect of both proceedings. A significant portion of this is for counsel’s fees which have fallen due for payment but remain unpaid. Mr Ishak has confirmed that no immediate demand has been made by his firm for payment. But he has also confirmed that neither his firm nor counsel have agreed to act for Dr Darshn on a speculative, contingency, or pro bono basis.

27    I do not think that Dr Darshn’s legal representatives should be placed in the position, in the context of the present application, of making and declaring an election, now, as to whether or not they will to continue to represent Dr Darshn, depending on whether or not a stay is granted. Mr Ishak has deposed that neither his firm nor counsel have accepted any obligation to continue to act for Dr Darshn in this appeal in the event that the amount currently due and owing for legal costs and disbursements remains unpaid. Mr Ishak has deposed that there is a real risk that a stay would deny Dr Darshn legal representation in the appeal. Mr Ishak has not been challenged on that statement and I see no reason not to accept it.

28    I am fortified in that view by Avant’s decision not to seek a stay on the operation of the declaration made on 23 August 2021, and its stated intention to pay Dr Darshn’s Legal Defence Costs in the TCI proceeding from that date. As I have recorded, Avant advanced its decision in this regard as a reason why Dr Darshn would not be prejudiced—at least in his defence of the TCI proceeding—by the stay being granted. Mr Ishak’s firm currently represents Dr Darshn in the TCI proceeding. Avant’s decision reflects its acceptance of the reality of the risk that Dr Darshn faces of losing his legal representation if his legal costs and disbursements are not paid. That risk is now focused on Dr Darshn losing his legal representation in this appeal. I do not think that Dr Darshn should be exposed to that risk.

29    Mr Ishak has deposed that, if Dr Darshn is wholly or substantially successful in his lump sum costs application (for $795,350), and in recovering close to or all of his incurred costs in the TCI proceeding (approximately $316,000), this will likely leave him with substantial funds to defend the appeal. Even if a lesser amount is awarded, Mr Ishak advances the prospect that Dr Darshn will be in a position to discharge his liabilities to Mr Ishak’s firm and other creditors. In that event, Mr Ishak has expressed the expectation that his firm would be willing to continue to act for Dr Darshn with a substantially reduced exposure to unpaid fees. He has also advanced the prospect that, if necessary, and in those circumstances, arrangements could be made to ensure that Dr Darshn’s counsel are retained.

30    In all the circumstances, and weighing the competing contentions of the parties, I am not persuaded that a stay should be granted. Avant has not demonstrated a proper basis for a stay that is fair. In coming to this conclusion, I wish to make it clear that I do not accept Dr Darshn’s submission that Avant has delayed in bringing its appeal. Further, I have reached my conclusion that a stay should not be granted regardless of whether the appeal is expedited. In other words, I do not accept that expedition of the appeal would provide a sufficiently substantial reason to grant the stay that is sought.

Disposition

31    For these reasons, the relief claimed in prayer 2 of the interlocutory application dated 3 September 2021 will be refused. Avant should pay Dr Darshn’s costs of and incidental to the hearing of its claim for that relief.

Associate:

Dated:    17 September 2021