(2001) 39 ACSR 545 Reported Decision : [2001] NSWSC 928 [2001] ACL Rep 325 NSW 380 New South Wales Supreme Court CITATION : GIO Australia Holdings Ltd v. Stewart Horner Steffey [2001] NSWSC 928 CURRENT JURISDICTION: Equity Division Commercial List FILE NUMBER(S) : SC 50156/99 HEARING DATE(S) : 18 October 2001 JUDGMENT DATE : 19 October 2001 GIO Australia Holdings Limited [Plaintiff] PARTIES : Stewart Horner Steffey [Defendant] Macquarie Bank Limited [First Cross Defendant, Second Cross Claim] JUDGMENT OF : Palmer J A.G. Bell [Plaintiff] COUNSEL : Justin T. Gleeson SC, M.J. Leeming [Defendant] L.C. Buchanan (Solicitor) [First Cross Defendant] Minter Ellison [Plaintiff] SOLICITORS : Corrs Chambers Westgarth [Defendant] Clayton Utz [First Cross Defendant] CATCHWORDS : PRACTICE AND PROCEDURE - Application for determination of separate question under Part 31 Rule 2, Supreme Court Rules - principles to be applied - complex issues of fact raising questions of credit - separate question raises too much hypothesis and risk of futility. Held: Application for trial of separate question refused. LEGISLATION CITED : Supreme Court Rules - Part 31 Rule 2 Corporations Law (as it then was) - s.232(4), s.995(2) CASES CITED : Tallglen Pty Ltd v Pay TV Holdings Pty Ltd (1996) 22 ACSR 130 DECISION : Application for trial of separate question refused. 1 These proceedings arise out of the take-over of GIO Australia Holdings Limited ("GIO") by AMP Limited which was announced on 11 August 1998 and completed in January 1999. The Plaintiff in the proceedings is GIO and the Defendant, Mr Steffey, was its Managing Director and Chief Executive Officer between 1 July 1998 and 15 January 1999. 2 Before the Court is a Notice of Motion filed by Mr Steffey in these proceedings seeking an order pursuant to Part 31 Rule 2 of the Supreme Court Rules for the separate determination of what amounts to the whole of his Amended Cross Claim in the proceedings. Ancillary relief is also claimed, to which I will return at the conclusion of this judgment. 3 It is necessary to explain, as briefly as may be, what are the principal issues in the proceedings. 4 By its Amended Summons, GIO sues Mr Steffey for damages or compensation for which he is claimed to be liable as a result of alleged wrongful acts or omissions as GIO's Managing Director and Chief Executive Officer in causing GIO to enter into a success fee agreement with Macquarie Bank Limited ("Macquarie") on 17 December 1998, and another success fee agreement with Chase Securities Australia Limited ("Chase") on 27 December 1998. 5 GIO alleges that on 8 December the GIO Board had agreed to pay Macquarie and Chase a success fee in circumstances where a take-over offer was made to GIO shareholders by AMP on terms acceptable to the Board and was recommended by it, or in other specified circumstances. 6 On 9 December 1998 AMP increased its offer price for GIO shares from $4.75 to $5.35 per share. Each of the success fee agreements contained a term providing that the success fee was payable if AMP made a higher offer for GIO shares than its initial offer of $4.75. GIO alleges that as AMP had already increased its offer price for shares to $5.35 at the time that the agreements were executed, payment of a success fee to each investment bank was guaranteed. It alleges that the success fee agreed with each investment bank was contrary to the success fee arrangements which had been approved by the GIO Board on 8 December 1998. It says that Mr Steffey did not inform the GIO Board that he had authorised or entered into agreements on behalf of GIO with Macquarie and Chase containing success fee arrangements contrary to the Board's approval of 8 December 1998. 7 Pursuant to the terms of the success fee agreements, the GIO has paid a total of $9,460,000 to Macquarie and Chase. 8 GIO claims that Mr Steffey's conduct, in authorising and committing GIO to agreements with Macquarie and Chase which contained, in effect, a guaranteed success fee on a basis different from that which had been approved by the GIO Board, was in breach of his authority and in breach of his duties to GIO. GIO claims damages or compensation equivalent to the amount of the success fee paid, plus interest and costs. The claims are founded upon alleged breaches by Mr Steffey of his duty as a director of GIO to exercise due care and diligence, imposed by s.232(4) of the Corporations Law (as it then was), breach of fiduciary duty, breach of duty not to make improper use of his position to gain advantage for Macquarie or Chase, breach of contract, and breach of s.995(2) of the Corporations Law . 9 Further, GIO sues Mr Steffey for the return of redundancy payments made and other benefits provided to him upon the termination of his contract of employment on 15 January 1999. GIO alleges that the payments and benefits were made and provided by GIO in ignorance of Mr Steffey's misconduct in procuring GIO to enter into the success fee agreements with Macquarie and Chase, and that if it had known of that misconduct it would have been entitled to terminate Mr Steffey's employment immediately without making any redundancy payments. The value of the redundancy payments and other benefits is said to be $3,259,452. GIO claims that it is entitled to recover these payments and benefits as having been made under a mistake. 10 By his defence, Mr Steffey denies that the success fee agreements with Macquarie and Chase were entered into without authority or approval from the Board of GIO and denies any wrongdoing on his part in connection with the execution of those agreements or the payments made thereunder to Macquarie and Chase. He says further that Macquarie's fee agreement was, in any event, never binding on GIO and that GIO has failed to mitigate its loss by suing Macquarie for repayment of the whole or some part of its fee. He admits that he received certain sums on termination of his employment but denies receiving the remainder of the amounts claimed by GIO. 11 Further, and in the alternative as a defence by way of estoppel, Mr Steffey repeats and relies upon the matters pleaded in his cross claim against GIO. He alleges that in June 1998 GIO represented to him, inter alia, that it would arrange insurance in respect of any liability which he might incur as a director of GIO, subject only to the requirements of underwriters as to the form of any policy document and the availability of cover. He alleges that he relied upon that representation in accepting appointment as Chief Executive Officer of GIO and in not arranging for himself the appropriate insurance. Such insurance, he claims, has not been arranged by GIO in terms which would have indemnified him in respect of the claims which GIO now makes against him in the Amended Summons, whereby his reliance on GIO's representations has operated to his detriment. Mr Steffey alleges that GIO is, accordingly, estopped from asserting its claims against him. 12 By his Cross Claim, Mr Steffey alleges, so far as is now relevant, that it was a term of his employment contract with GIO that GIO would arrange insurance in respect of any liability which he might incur as a director. In breach of that term, he says, GIO arranged insurance which did not indemnify him in respect of any claim which GIO itself might make against him, so that he is now uninsured in respect of the claims made by GIO in these proceedings. He alleges that at all material times such insurance would have been available under a policy arranged through Heath Group Australasia Pty Ltd ("the Heath Policy") and that the Heath Policy would have provided that where a claim was made against the insured the underwriter would have advanced the costs and expenses of defending the claims made by GIO. 13 By reason of the alleged breach of contract by GIO in failing to arrange the stipulated insurance, Mr Steffey alleges that he has suffered and will suffer damage in that he has not received, and will not receive, the promised indemnity in respect of costs and expenses in defending GIO's claims against, in respect of costs and expenses in prosecuting a Second Cross Claim which he has brought against Macquarie, and in respect of any amount for which he may ultimately be found liable to GIO or Macquarie in these proceedings. 14 Accordingly, Mr Steffey claims against GIO damages for breach of contract and an order that GIO indemnify him and keep him indemnified in respect of costs and expenses incurred and to be incurred in defending the claims made against him by GIO and in prosecuting his second cross claim against Macquarie. He also claims indemnity in respect of any liability by way of damages and costs which he may incur to GIO and Macquarie in respect of these proceedings. 15 By its defence to Mr Steffey's cross claim, GIO denies that it was obliged to arrange the insurance for Mr Steffey as alleged and denies that Mr Steffey does not have insurance in respect of the liability to GIO claimed in the GIO's Amended Summons. Further, and of critical importance to the questions arising on this Notice of Motion, GIO says that the wrongful conduct of Mr Steffey in procuring GIO to enter into the fee agreements with the Macquarie and Chase which it alleges in its Amended Summons was wilful conduct involving a wilful breach of Mr Steffey's duties as a director. Consequently, it says, the insurer under the Heath Policy would have been entitled to disclaim liability under Clause 4(d) of that Policy. 16 Finally, GIO alleges that it is entitled in equity to set off Mr Steffey's liability to it for damages and compensation as claimed in the Amended Summons against any liability which it may have to Mr Steffey for breach of the alleged covenant to arrange insurance in terms of the Heath Policy. There are other defences raised by GIO with which it is not now necessary to deal. 17 The principles upon which the Court acts in determining whether to order decision of a separate question are now well settled. The Court has a discretion, both inherent and under Part 31 Rule 2 of the Supreme Court Rules, which is ultimately guided by the necessity to do justice as between the parties on the facts and circumstances of each particular case. There must also be taken into account the desideratum expressed in Part 1 Rule 3(1) of the Rules, that the disposal of proceedings should be "just, quick and cheap" . 18 Within these broad parameters, certain considerations are recognised as moving the Court's discretion for or against an order for determination of a separate question. As was said by Giles CJ Comm Div (as his Honour then was) in Tallglen Pty Ltd v Pay TV Holdings Pty Ltd (1996) 22 ACSR 130, at 141-2: "In the ordinary course all issues in proceedings should be decided at the one time, but separate decision of a question may be appropriate where, for example, the decision of the question is critical to the outcome of the proceedings and (at least if decided in one way) will bring the proceedings to an end. In particular circumstances the separate decision of a question may be appropriate even if it will not bring the proceedings to an end, such as where there is a strong prospect that the parties will agree upon the result when the core of their dispute is decided or where the decision will obviate unnecessary and expensive hearing of other questions, but such occasions must be carefully controlled, lest fragmentation of the proceedings (particularly when the exercise of rights of appeal is borne in mind) brings delay, expense and hardship greater than that which the making of an order was intended to avoid. It is often the case that the need to make findings of fact for a decision of the separate question, especially findings which may involve issues of credit, tell strongly against the making of an order because related facts, and renewed issues of credit, will or may arise at a later stage in the proceedings. Experience teaches that it should be able to be seen with clarity that decision of a separate question will be beneficial in the conduct of the proceedings and the resolution of the parties' dispute." 19 Paragraph 1 of Mr Steffey's Notice of Motion seeks an order that the following question be decided separately from and prior to any other question in the proceedings: "Whether [GIO] must advance to [Mr Steffey] his reasonable and necessary costs and expenses incurred in the defence of the proceedings, on an ongoing basis, as and when they are incurred (including costs already incurred), in accordance with and subject to the terms of [the Heath Policy] ." 20 It is apparent from the issues raised in the pleadings and from the formulation of the proposed separate question to be tried that a decision on that separate question will by no means bring to an end, or even shorten, the trial of GIO's proceedings against Mr Steffey for breach of duty as a director or employee and for repayment of termination payments and benefits, nor will it bring to an end or shorten the trial of Mr Steffey's second cross claim against Macquarie. Those proceedings will remain to be determined. 21 Moreover, trial of the separate question, which involves in reality the trial of all issues raised in the First Cross Claim and the Defence thereto, will raise seriously disputed questions of fact, many of which are common to the GIO's claims against Mr Steffey and Mr Steffey's cross claim against Macquarie. Amongst such common issues are, for example, whether Mr Steffey breached his duties to GIO and, if so, whether those breaches bear the character of "wilful breach of duty" within the meaning of those words in Clause 4(d) of the Heath Policy. That clause in the Heath Policy excludes from cover a loss, which includes costs and expenses of litigation, arising from or in any way involving wilful breach of duty in relation to GIO. 22 The issue as to whether or not there was a breach by Mr Steffey of his duties to GIO and whether that breach was wilful will in itself require the whole of the relevant dealings between Mr Steffey, the GIO Board of Directors, Macquarie and Chase to be examined. That is, most if not the whole of the whole subject matter of GIO's proceedings against Mr Steffey founded upon breach of duty will be ventilated in the trial of the proposed separate question and again in the trial of GIO's proceedings on the Amended Summons. 23 I am unable to accept a submission to the contrary made by Mr Gleeson SC, who appears with Mr Leeming of Counsel, and who has argued the Motion most cogently on behalf of Mr Steffey. Mr Gleeson says that whether or not Mr Steffey is entitled to the relief which he seeks in the cross claim, and which would be determined on the trial of the separate question, is essentially a matter of construction, first of Mr Steffey's employment agreement with GIO and, second, of Clause 7 of the Heath Policy. Mr Gleeson says that Clause 7 of the Heath Policy, on its true construction, would have required the insurer to advance the costs and expenses of Mr Steffey incurred in defending the GIO proceedings and prosecuting his cross claim against Macquarie, until such time as there was a determination in those proceedings that Mr Steffey had been guilty of wilful breach of duty within the exclusionary provisions of Clause 4(d) of the Heath Policy, whereupon Mr Steffey would have been obliged to repay to the insurer whatever the insurer had paid to him under Clause 7. It therefore does not matter to the success of Mr Steffey's Cross Claim or to the determination of the proposed separate question, says Mr Gleeson, whether as a matter of fact Mr Steffey has been guilty of wilful breach of his duties to GIO. It does not matter, he says, because the Heath Policy would still have provided for Mr Steffey's costs and expenses of this litigation up until its final conclusion. The Court would therefore order GIO to pay damages to Mr Steffey by way of indemnity in respect of legal costs incurred and to be incurred as the proceedings progress to final determination, subject to an obligation on the part of Mr Steffey to repay those damages if it is found the Heath Policy insurer would have been entitled to disclaim and recover legal costs and expenses by reason of Mr Steffey's wilful breach of duty. 24 At this stage of the proceedings I should refrain from expressing any view as to what appears to be a highly novel proposition of law urged by Mr Gleeson, namely, that in an action at law for damages for breach of a contract terminated prior to commencement of the proceedings, the Court is able, in its ancillary equitable jurisdiction, to order a defendant to pay damages prospectively and progressively by way of indemnity as and when the occasion of indemnity arises. A decision on such an important question of law should not be made until all relevant factual issues have been determined. It is highly undesirable that a difficult and novel point of law be determined in the somewhat artificial context of the trial of a separate question 25 Nor I should I express any view as to the competing constructions of Clause 7 of the Heath Policy advanced by Mr Gleeson and Mr Bell, who appears for GIO. 26 It seems to me, in short, that to try as a separate question an issue of construction of an insurance policy, which was never in fact issued by an insurer to Mr Steffey, which GIO in its Defence to the Cross Claim does not admit could have been obtained, which GIO says did not exist at the time it was required to obtain an insurance policy for Mr Steffey, and which GIO says it had no obligation to arrange, is to embark upon a course fraught with the risk of futility, with consequent waste of money, time and resources. Quite simply, there is too much hypothesis and there are too many disputed facts. 27 Further, in a trial of the separate question sought by Mr Steffey, GIO could not be shut out from leading evidence to support its assertion that Mr Steffey had been guilty of wilful breach of duty and that he was liable to repay in excess of $3M paid in respect of termination benefits. In addition to being admissible on the issue of equitable set off raised by GIO as a defence to the Cross Claim, such evidence may well be admissible because Mr Steffey seeks final equitable relief, on a discretionary basis, as far as future indemnity for costs and expenses is concerned. 28 Much of the evidence adduced on the hearing of the separate question would, doubtless, raise complex factual issues. Findings of credit would almost inevitably have to be made. The Judge who heard the separate question would probably be prevented from hearing the remainder of the proceedings between the parties. Another Judge could well reach different conclusions on the same issues of fact and credit. 29 In my opinion, if an order for separate determination were made as sought by Mr Steffey, there would be a high probability of fragmentation of these proceedings, resulting in reduplication of cost and expense for the parties, reduplication of Court time involved in hearing and determining common issues of fact and significant delays while rights of appeal were pursued. Even more importantly, there is a high risk that at the end of the exercise it would be found to have been futile, creating more problems than it resolved. 30 For these reasons, I decline to make the order sought in paragraph 1 of Mr Steffey's Notice of Motion filed on 3 July 2001. It follows that I must also refuse the relief sought in paragraph 2 of the Motion. It has been agreed that the Motion should be stood over to a date to be fixed for argument as to the relief sought in paragraph 3. 31 I will hear submissions as to costs of the Motion when all claims for relief thereunder have been determined. – oOo – Last Modified: 10/22/2001 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.