AMP Financial Planning Pty Ltd v CGU Insurance Limited [2008] FCAFC 74

FEDERAL COURT OF AUSTRALIA

AMP Financial Planning Pty Ltd v CGU Insurance Limited [2008] FCAFC 74 Corporations Law, Pt 7.6 Div 6, s 817, s 819 AMP Financial Planning Pty Ltd v CGU Insurance Ltd (2004) 139 FCR 223 related AMP Financial Planning Pty Ltd v CGU Insurance Limited (No 2) [2004] FCA 1397 related CGU Insurance Ltd v AMP Financial Planning Pty Ltd (2007) 237 ALR 420, (2007) 81 ALJR 1551, (2007) 62 ACSR 609, [2007] HCA 36 related Saffron v Societe Miniere Cafrika (1958) 100 CLR 230 cited Handley, Res Judicata, 3rd ed, paras 201, 202, 205 AMP FINANCIAL PLANNING PTY LTD ACN 051 208 327 v CGU INSURANCE LIMITED ACN 004 478 371 VID 1422 OF 2008

MOORE, EMMETT & GYLES JJ

9 MAY 2008

MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY VID 1422 OF 2008

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN: AMP FINANCIAL PLANNING PTY LTD

ACN 051 208 327

Appellant

AND: CGU INSURANCE LIMITED

ACN 004 478 371

Respondent

JUDGES: MOORE, EMMETT & GYLES JJ

DATE OF ORDER: 9 may 2008

WHERE MADE: MELBOURNE

THE COURT ORDERS THAT:

1. The cross appeal be dismissed. 2. The cross appellant pay the cross respondent's costs of the cross appeal. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY VID 1422 OF 2008

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN: AMP FINANCIAL PLANNING PTY LTD

ACN 051 208 327

Appellant

AND: CGU INSURANCE LIMITED

ACN 004 478 371

Respondent

JUDGES: MOORE, EMMETT & GYLES JJ

DATE: 9 MAY 2008

PLACE: MELBOURNE

REASONS FOR JUDGMENT 1 This judgment concerns a cross appeal from a costs order made by the primary judge on 29 October 2004: AMP Financial Planning Pty Ltd v CGU Insurance Ltd (No 2) [2004] FCA 1397. The cross appeal was remitted to this Court by order of the High Court: CGU Insurance Ltd v AMP Financial Planning Pty Ltd (2007) 237 ALR 420, (2007) 81 ALJR 1551, (2007) 62 ACSR 609, [2007] HCA 36. The cross appellant, CGU Insurance Ltd, was substantially successful before the primary judge whose judgment has, in substance, been restored by the judgment of the High Court. However notwithstanding its overall success before the primary judge, CGU received only 90% of its costs on a party and party basis. In this cross appeal, CGU challenges that apportionment and seeks indemnity costs for a period. 2 In his first judgment: AMP Financial Planning Pty Ltd v CGU Insurance Ltd (2004) 139 FCR 223, the primary judge addressed 11 issues which his Honour viewed as having arisen from the pleadings and the way the proceedings were conducted by the parties. All but three of the issues were resolved in CGU's favour. However three issues were resolved in favour ofAMP Financial Planning Pty Ltd which generally concerned the proper construction of the policies of insurance. In addressing what costs order should be made, his Honour said: Since AMPFP has succeeded on the issues concerning the terms of the Policies it has achieved something which may be of benefit, depending on what happens with the unpaid claims. Therefore AMPFP is better off than it would have been had it accepted the Calderbank offer. Accordingly costs will only be on a party and party basis. Some allowance should be made for AMPFP's success on the Policies issues. These issues involved no evidence, or at any rate no evidence that was substantially contested. They occupied only a relatively small part of the final submissions, which took in turn only a day and a half out of a six day trial. I think an appropriate reduction to allow for CGU's failure on these issues is 10 per cent. 3 In this cross appeal, CGU contends that his Honour erred in resolving the three issues in AMPFP's favour and accordingly erred in making the costs order depriving CGU of all its costs and not ordering, as to some of those costs, that they be paid on an indemnity basis having regard to a Calderbank offer made by CGU on 31 August 2004. The cross appeal was drafted and CGU's submissions were made on that basis. 4 This procedure has some unsatisfactory features. Although the issues of construction were identified for trial and decided in favour of AMPFP, the trial judge declined to grant a declaration to give effect to those decisions. His Honour said (AMP Financial Planning Pty Ltd v CGU Insurance Limited (No 2) [2004] FCA 1397 at [11]–[12]): The Court has express jurisdiction to make declarations: Federal Court of Australia Act 1976 (Cth) s 21. However this power should not be directed to answering hypothetical questions: Ainsworth v Criminal Justice Commission (1992) 175 CLR 564 at 581-582. The declaration sought in the present case is hypothetical. In essence it means that CGU will be liable to indemnify AMPFP if Investors recover judgment against it in respect of unpaid claims. Accordingly I decline to make the declaration sought. There is a further practical consideration supporting that conclusion. The findings I have made in favour of AMPFP on the Policy issues will be available to it anyway by way of issue estoppel in any future litigation. 5 There was no appeal from that decision. Nonetheless, it was regarded as relevant to the question of costs that AMPFP had "achieved something which may be of benefit", thus disentitling CGU to indemnity costs. That benefit is not at all clear. It is unlikely that there would be any issue estoppel, notwithstanding the comment by the trial judge (Handley, Res Judicata, 3rd ed, paras 201, 202, 205). On one view of it, the decisions on the construction issues amounted to judicial advice. On the other hand, the conclusions reached by the primary judge on the construction issues were necessary steps in the reasoning that led to his Honour's decision to make the costs order. To that extent, it may be that the costs order itself would give rise to issues estoppel. The only way in which CGU could overcome such issues estoppel would be to succeed on the cross appeal. Dismissal of the cross appeal may have the effect of confirming any issue estoppel that otherwise arose from the costs order made by the primary judge. 6 It is convenient to set out the findings made by the primary judge which provide the context in which the terms of the policies were agreed and might operate to indemnify AMPFP. His Honour found: The applicant AMP Financial Planning Pty Ltd (AMPFP) was in 1999 and 2000 a licensed securities dealer under s 784 of the Corporations Law (the Law). In those years it was insured under professional indemnity policies (the Policies) issued by the respondent CGU Insurance Limited (CGU). AMPFP had two "securities representatives" for the purposes of Ch 7 of the Law, Mr Ashok (Andy) Pal and Mr Anthony Howarth, who conducted a financial advisory business through the medium of their company Macquarie Advisory Group Pty Ltd (MAG). As a result of advice from Pal and Howarth, many people (the Investors) made investments which subsequently failed. On becoming aware of these losses AMPFP notified CGU and sought indemnity under the Policies ......... At all material times AMPFP, a member of the AMP Group, provided financial planning advice to retail clients through a network of individuals who were authorised, through the granting of "proper authorities" under the Law, to represent AMPFP. A proper authority allowed the representative to give securities advice and recommendations on AMPFP's behalf. Under AMPFP's standard form Representatives Agreement the representative was authorised to provide financial planning advice only about financial products on AMPFP's Approved Products List published from time to time and only about financial products on that Approved Products List in respect of which the representative had been accredited to advise. The Approved Products List includes not only AMP products but those of other organisations such as BT, Colonial, MLC, Perpetual and Rothchilds. Pal and Howarth respectively held proper authorities issued by AMPFP for the periods 1 August 1996 to 2 December 1997 and 10 November 1994 to 19 June 1995. Pal also held proper authorities from Hillross Pty Ltd, another member of the AMP Group, from 30 November 1997 to 27 May 1999 and from Kamisha Corporation Pty Ltd from 1 August 1996 to 12 November 1999. Howarth also held proper authorities from Colonial Financial Services Pty Ltd from 22 June 1995 to 27 December 1996, from Financial Wisdom Pty Ltd from 30 December 1996 to 29 January 1998, from Hillross from 3 December 1997 to 27 May 1999, from Personal Investment Planners Pty Ltd from 4 August 1999 to 17 November 1999 and from Segue Portfolio Planners Pty Ltd from 23 December 1999 to 12 July 2000. In May 1999 Hillross discovered that Pal and Howarth had traded outside their proper authorities and in a manner contrary to their Hillross Representatives Agreements. Of particular concern was an investment in Hibiscus Spas Pty Ltd (Hibiscus). Pal was a director of Hibiscus, which was under administration. Pal and Howarth offered their resignations as agents and representatives and returned their proper authorities, which were then suspended. Following a two week review Hillross formed the opinion that under the terms of its securities dealers licence it was obliged to notify ASIC of possible breaches of the Law. That review revealed that approximately $3.4 million of client funds had been invested and lost in Hibiscus. Hillross terminated Pal and Howarth's proper authorities and notified clients that the relationship between Hillross and AMPFP and Pal and Howarth had ended. ............. Hibiscus was a manufacturer of spas. Pal was a director and investor in the company. Clients had placed money in "shares" which were never issued, and "debentures" which were never registered, at a time when Hibiscus was in deep financial trouble. It appears to have been accepted by those at the meeting that Hibiscus was not suitable for even the most speculative investor. 7 As to the circumstances in which the policies issued in 1999 and 2000, his Honour found: ....the circumstances which must be taken to have been known to the parties include the fact that AMPFP was a licensed securities dealer, that it would be likely to give proper authorities to securities representatives and that the statutory vicarious liability imposed by the Law would apply to it. Further it is to be inferred that there was nothing unusual about securities representatives having proper authorities on behalf of more than one dealer. 8 It is convenient to set out the terms of the policies necessary to consider the three issues determined in AMPFP's favour by the primary judge. Clauses 3.1 and 3.2 of the policies provided: 3.1 We provide cover up to the Policy Limit (see Section 5) for Claims for Civil Liability (including contractual liability) arising from the conduct of the Insured Professional Business Practice which Claims: (a) are made against the Insured (or, those referred to in section 4.2 of this policy) while this Policy is in force; and (b) We are told that out in writing as soon as reasonably possible while this Policy is in force; and (c) Arise from an act, error or omission on or after the Retroactive Date specified in the Schedule. 3.2 The types of Claim We cover We provide this cover in respect of any of the following types of Civil Liability Claim arising in the conduct of the Insured Professional Business Practice: (d) Breach of duty (including a duty of confidentiality). (e) Defamation. (f) Loss of or damage to Documents which were in the Insured's physical custody or control at the time of loss or damage. (g) Dishonest, fraudulent, criminal or malicious acts or omissions by an Employee or Principal of the Insured (but there is no cover to that Employee or Principal for these Claims). (h) Infringement of any patent, copyright, design or trademark. (i) Breaches of the Trade Practices Act 1974 or similar Fair Trading legislation enacted throughout Australia (but not for criminal liability). The words or phrases appearing in bold type in these clauses are defined in cl 12 of the Policies, with one exception. "Civil Liability" is defined in 12.1 as meaning liability for damages costs and expenses which a civil court orders the insured to pay on a claim and "Claim" is defined in 12.2 as meaning, relevantly, any originating process in a legal proceeding claiming compensation against and served on an insured. "Insured Professional Business Practice" is defined in cl 12.10 as "The business of provision by the Insured of the professional services stated in the Schedule". These in turn are defined as: "Finance, Investment and Insurance Advisors, Licenced Security Dealers and Mortgage Originators". 9 Clause 4.1 provides that "the conduct of the Insured Professional Business Practice by or on behalf of the Insured" includes: " … acts, errors or omissions of agents or consultants of the Insured while undertaking work which is reasonably incidental to the conduct by the Insured of the Insured Professional Business Practice and for which the Insured is liable." 10 Clause 6.3(e) of the Policies provided: "6. We do not cover any of the following Claims (or losses): … 6.3 Assumed duty or obligation Claims: … (e) arising from any business not conducted for or on behalf of the Insured firm or Incorporated body." 11 Special condition 4 provided that the Insured shall be indemnified " … in accordance with the terms, conditions, exceptions and limitations of this Policy in respect of its liability as a principal and licensed securities dealer for acts or omissions of its authorised representatives, but only on the basis that CGU Professional Risks Insurance retain the rights of subrogation against the authorised representatives." 12 The first of the three contentious issues addressed by the primary judge was whether the civil liability claims of the investors were within the terms of clause 3.2. His Honour concluded the claims were. He reasoned that the investors alleged Pal gave negligent advice as a result of which they suffered loss and damage, that involved a breach by the defendant of a duty to the plaintiff and AMPFP was alleged to be liable under s 817 or s 819 of the Corporations Law, characterised by the primary judge as a form of statutory vicarious liability. CGU challenges this reasoning. It submits that the statutory liability created by the Law was not akin to vicarious liability and indeed s 819 seeks to create a form of liability in circumstances where vicarious liability based on principles of agency will not exist. Liability created by that section is not comprehended by clause 3.2. 13 We do not agree. The policies as a whole, and special condition 4 in particular, indemnify AMPFP for liability arising from the acts or omissions of its authorised representatives. We see no reason to construe clause 3.2 as not including indemnity for liability for breaches of duty of authorised representatives for which, whether by statute or the common law, AMPFP can be held liable. 14 The second contentious issue addressed by the primary judge was whether the claims of the investors arose in the course of the "Insured Professional Business Practice" of AMPFP. His Honour concluded they did. He noted the inclusion in the section identifying the persons to whom cover was provided, section 4, the reference in clause 4.1 to the acts, errors or omissions of agents or consultants of the insured (AMPFP) as being conduct to which the policies applied. That is, conduct of agents or consultants was to be treated as conduct of the "Insured Professional Business Practice". His Honour also noted special condition 4 providing indemnity to AMPFP in respect of its liability as principal for acts or omissions of its authorised representatives. His Honour concluded that the obvious purpose of special condition 4 was to provide indemnity for the kind of liability which AMPFP might incur by way of statutory extension of common law principles of agency. To otherwise construe the policies would, as his Honour noted, involve a "very uncommercial construction". 15 CGU submits this involves a misconstruction of the policies. It submits that clause 4.1 did not extend the indemnity provided under clauses 3.1 and 3.2 beyond the liability that AMPFS would have for acts, errors or omissions of its agents or consultants pursuant to common law principles of agency. Special condition 4 should not be construed as extending the ambit of the cover provided by the policy, but as doing no more than expressly identifying, perhaps for the avoidance of doubt, a particular type of liability for which indemnity was granted. Moreover that wider construction of the special condition created a direct inconsistency with a clear and unambiguous provisions of exclusion clause 6.3(e). Properly construed, the reference in special condition 4 to liability as "a principal" should be viewed as concerning liability for the acts of others tied to common law principles of agency. 16 In our view, the primary judge was correct. Firstly there is no direct inconsistency with clause 6.3(e) if the wider view is taken of the liability as principal for which indemnity is provided. It simply means that the expression "on behalf of" in clause 6.3 (e) is to be treated as having a correspondingly wider, rather than narrower, field of operation. Secondly there is nothing to suggest that the expression "liability as principal" in special condition 4 is to be treated as concerning only liability arising under the common law as principal of an agent. Special condition 1 refers to "dealers representatives". Special condition 3 refers, inter alia, to "licensed security dealers". Special condition 4 refers to liability "as principal and licensed securities dealer" for acts and omissions of its "authorized representatives". Those descriptions clearly point to the statutory regime for licensing of principals and representatives in relation to dealing in securities that had then been in force for some years, a feature of which was the extended liability of the principal for the actions of representatives by virtue of the operation of Pt 7.6 Div 6 of the Corporations Law. The burden of the special condition is to provide indemnity for liability attaching to AMPFP as a result of the conduct of its authorised representatives. The special condition does not, in terms, limit indemnity to liability arising in one but not other ways. It is accepted that the relevant part of special condition 4 is not an exception to an exception but a "stand alone" provision. 17 The third contentious issue determined by the primary judge was whether the claims of the investors were excluded from the indemnity by clause 6.3(e). His Honour concluded they were not. He indicated that if there was a conflict between clause 6.3(e) (without indicating that he accepted there was) special condition 4 was designed to make clear that AMPFP was indemnified for liability of securities representatives to which it had given proper authorities and in relation to whom the statutory vicarious liability imposed by the Law would apply. His Honour indicated that special condition 4, as a clause super added to a printed form, should be given greater effect. 18 CGU submits that special condition 4 was expressly subject to exceptions and limitations in the policy. Clause 6.3(e) was such an exception or limitation and its operation was not limited by the special condition. Even if it be accepted that the parties were aware that AMPFP was a licensed securities dealer and would have given proper authorities to securities representatives and the statutory vicarious liability imposed by the Law would apply to it, it can be inferred, CGU submits, that this would indicate that the adoption of clause 6.3(e) was clearly intended to exclude liability under the Law. Indeed CGU submits that it is not conceivable that the parties would have intended anything else. We do not accept this. The nature of AMPFP's business, as described by the primary judge in the passage quoted at [6] above, can be assumed to have been known by both the insured and the insurer at the time the policies were written. It would make little business sense for AMP not to have sought and secured cover in relation to this obvious source of potential liability, namely liability under the Law. The primary judge was correct in rejecting CGU's contention to the contrary. 19 CGU raised a further ground in its notice of appeal, which was supported by a brief paragraph in its written submissions to the Full Court. CGU contends that, quite apart from the merits of the questions of construction of the policy, the primary judge erred in determining the construction questions in circumstances where there was no direct evidence from investors of their dealings with PAL and Horwarth and AMPFP therefore failed, as his Honour found, to establish by admissible evidence that it was legally liable to the investors. CGU contended that, in circumstances where the onus lay upon AMPFP to establish that the claims in respect of which it sought indemnity were claims concerning a head of civil liability comprehended by clause 3.2, there was no evidence capable of satisfying that onus. 20 There are difficulties with that ground. CGU was party to a procedure whereby identified issues were isolated for decision. It should not be allowed to approbate and reprobate as to that (Saffron v Societe Miniere Cafrika (1958) 100 CLR 230 per Dixon CJ, McTiernan and Menzies JJ at 240). As we have indicated above, the decisions on the construction issues, on one view, amount to judicial advice, in the absence of findings on factual questions that raise the construction questions. That is, in effect, why his Honour declined to make a declaration of right. In truth, it may have been inappropriate that his Honour determined the construction issues in the hypothetical circumstances that prevailed. Nevertheless, since the issues were argued and the decision on the issues constituted part of the reasoning for his Honour's decision to make the costs order, from which the cross appeal is brought, this is not a ground upon which the costs order should be set aside. 21 The cross appeal should be dismissed with costs. I certify that the preceding twenty-one (21) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Moore, Emmett and Gyles.