Reported Decision : (2006) 14 ANZ Insurance Cases 61-710 New South Wales Court of Appeal CITATION: Teoh v QBE Insurance (Australia) Ltd [2006] NSWCA 281 HEARING DATE(S): 6 September 2006 JUDGMENT DATE: 19 October 2006 JUDGMENT OF: Giles JA at 1; Bryson JA at 32; Young CJ in Eq at 59 DECISION: Appeal dismissed with costs. CATCHWORDS: Contract - travel agent - application for on demand guarantee - declaration that no reason to doubt that applicant will be able to comply with its obligations - and that declarant not aware of any circumstances not disclosed which might influence acceptance of the risk - agreement to compensate for "breach" of declaration - declarant knew but did not disclose applicant's difficult financial circumstances and fact that an employee managing a branch office had been convicted of fraudulent misappropriation - construction of declaration and whether breached - in particular, whether it was necessary that declarant knew that undisclosed circumstances might influence acceptance of the risk. D LEGISLATION CITED: Insurance Contracts Act 1984 Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447; Goodwin v The National Bank of Australasia Ltd (1968) 42 ALJR 110; Lee v Jones (1864) 17 CB (NS) 482; 144 ER 194; CASES CITED: London General Omnibus Company Ltd v Holloway [1912] 2 KB 72; National Mortgage & Agency Co of New Zealand Ltd v Stalker [1933] NZLR 1182; Phillips v Foxall (1872) LR 7 QB 666; Smith v Bank of Scotland (1813) 1 Dow 272; 3 ER 697. PARTIES: Boon Sooi Teoh - Appellant QBE Insurance (Australia) Ltd - Respondent FILE NUMBER(S): CA 40905/05 COUNSEL: Ms J Baxter - Appellant M Henry - Respondent SOLICITORS: Pancific Legal - Appellant Gray & Perkins - Respondent LOWER COURT JURISDICTION: District Court LOWER COURT FILE NUMBER(S): DC 4316/03 LOWER COURT JUDICIAL OFFICER: Ashford DCJ LOWER COURT DATE OF DECISION: 28 October 2005 LOWER COURT MEDIUM NEUTRAL CITATION: (Ashford DCJ, 20 October 2005, unreported) IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40905/05 DC 4316/03 GILES JA BRYSON JA YOUNG CJ in EQ Thursday 19 October 2006 BOON SOOI TEOH v QBE INSURANCE (AUSTRALIA) LTD Judgment 1 GILES JA: The appellant was the sole director of H & C International Pty Ltd ("H & C"), which carried on business as a licensed travel agent. H & C was a participant in a scheme for compensating customers of travel agents who failed to account for money entrusted to them. Pursuant to a trust deed made by State Ministers for Consumer Affairs on 12 December 1996, there was established the Travel Compensation Fund ("TCF") operated by a Board of Trustees ("the Board"). Amongst other things, the Board was required to be satisfied as to the financial standing of a travel agent before the agent could be licensed. 2 The Board could require, as a condition of its satisfaction, that the travel agent provide security in favour of TCF. On 10 July 2001 Mr Anthony Whittaker, Manager, Special Investigations of TCF, wrote to H & C advising that review of its accounts disclosed a deficiency of $12,000, whereby it did not meet the minimum financial criteria determined for operation of a licensed travel agency in that it had insufficient net capital and reserves. Three options for remedial action were stated. One was to provide TCF with "a/an additional guarantee (either Bank Guarantee or QBE Trade Indemnity Guarantee) … ". 3 The reference to a QBE Trade Indemnity Guarantee was to an on-demand guarantee issued by the respondent in favour of TCF under a "Guarantee Program for TCF Australia Agents" ("the programme") operated by the respondent. The respondent had been providing guarantees under the programme for some time, and there was already in place a guarantee by it for $11,500 in respect of H & C. 4 On 22 August 2001 H & C completed a "registration form" applying for a guarantee for $87,000. The registration form was framed as an application to participate in the programme, while describing the desired guarantee as an increased guarantee, and as appears from what was stated under "Procedures", see later, was submitted to an agent acting on behalf of the respondent. The agency probably explains the reference in the declaration and indemnity next set out to "you and your principals". 5 After particulars material to the application, the registration form included - "I BOON S TEOH being a Director/Partner/Sole Trader of H & C International Pty Ltd the Applicant hereby declare that a) I have no reason to doubt that the Applicant will be able to comply with its obligations b) To the best of my knowledge, information and belief and after due careful enquiry, the information contained herein is correct c) I am not aware of any circumstances which I have not disclosed to you which might influence you and/or your principals' [sic] acceptance of the risk d) In the event of you issuing the Guarantee applied for the Applicant will during the period of your principal's liability upon your request, immediately make available to you and allow you to examine or take copies of any accounts or other documents in its possession relating to its own and any Holding and/or Subsidiary Company's financial affairs. e) I am duly authorised by the Applicant to complete this form on its behalf and to make this declaration on its and my behalf. I hereby agree personally to indemnify you and your principals against actions, proceedings, claims and demands which may be brought against you or your principals and all liabilities, losses, damages, costs and expenses of whatsoever nature which you or your principals may suffer, incur or sustain through a breach of this declaration." 6 Immediately following this the registration form stated - " YOUR DUTY OF DISCLOSURE Before you enter into a contract of general insurance, with an insurer, you have a duty under the Insurance Contracts Act 1984, to disclose to the insurer every matter that you know, or could reasonably be expected to know, is relevant to the insurer's decision whether to accept the risk of the insurance and, if so, on what terms. You have the same duty to disclose those matters to the insurer before you renew, extend, vary or reinstate a contract of generally insurance. Your duty however does not require the disclosure of a matter • that diminishes the risk to be undertaken by the insurer, • that is of common knowledge: • 'that your insurer knows or, in the ordinary course of its business, ought to know, • as to which compliance with your duty is waived by the insurer. NON-DISCLOSURE If you fail to comply with your duty of disclosure, the insurer may be entitled to reduce its liability under the contract in respect of a claim or may cancel the contract. If your non-disclosure is fraudulent, the insurer may also have the option of avoiding the contract from its beginning." 7 After provision for signature, in this case being signed by the appellant, the registration form stated under "Procedures" - "• Complete & sign Registration Form and fax to Aviation Credit Solutions … • ACS will fax you a fax Invoice/Quotation confirming the Guarantee Fee due, with payment instructions. • You arrange payment of the Guarantee Fee as instructed and fax copy of payment confirmation to ACS. • Upon verification of payment, QBE will issue the Guarantee to TCF. • For information contact: … " 8 On 3 November 2001 the respondent issued an on-demand guarantee in favour of TCF for $87,000. On 21 January 2002, following a request to increase the amount of the guarantee, it issued an on-demand guarantee in favour of TCF for $128,000. There was no evidence of a registration form in relation to the further increased guarantee for $128,000, but it was accepted that the appellant's agreement to indemnify in the registration form of 22 August 2001 extended to indemnity following payment by the respondent pursuant to demand made under that guarantee. 9 On 19 February 2002 TCF demanded payment of $128,000 under the guarantee for that sum. The respondent paid $128,000 to TCF. At a later time TCF refunded $49,055. 10 The respondent claimed from the appellant $78,495 and interest as loss suffered through breach of the appellant's declaration. While there had been other issues at the trial, and other issues had been foreshadowed in the grounds of appeal and the pre-hearing written submissions, at the hearing of the appeal the sole issue was whether there had been breach by the appellant of the declaration in the registration form. Ashford DCJ had held that there had been a breach of the declaration in that para (c) was "untruthful", and the appellant submitted that her Honour was in error in so holding. The respondent applied for leave to rely, by a notice of contention, on breach of para (a). 11 In addition to its principal office, H & C had a branch office in York Street, Sydney. The branch office was managed under the day to day supervision of an employee of H & C, Mr Benny Chan. On 24 September 1999 Mr Chan had been convicted of fraudulent misappropriation, described by the judge as "fraud against a travel agency". As at 22 August 2001 the appellant was aware of the conviction. Neither Mr Chan's management of the branch office nor the conviction was disclosed to the respondent. 12 H & C had traded at a loss for the financial years ended 30 June 2000 and 30 June 2001, and had accumulated losses of $60,481 as at 30 June 2001. In the accounts as at 30 June 2001 it had current assets of $183,344, principally receivables of $138,352, and current liabilities of $157,066; the major receivable was a loan of $99,303 from Mr Chan. None of these matters was disclosed to the respondent. 13 Mr Martin Took, National Manager of the Surety Division of the respondent, gave evidence in paras 24 and 25 of his affidavit that each and every of the following circumstances "would have influenced [the respondent's] acceptance of the risk", namely that - (a) Mr Chan was the person in charge of day to day conduct of H & C's branch office; (b) Mr Chan had a previous conviction for fraud; (c) Mr Chan would not be a fit and proper person to be a licensee if he were to apply for a travel agent's licence; (d) Mr Chan was indebted to H & C for $99,303 and if that loan was not included as an asset of H & C as at 30 June 2001 then H & C's current liabilities would have significantly exceeded its total assets; and (e) as at 30 June 2001 H & C had a loss provision of $60,481. 14 Mr Took said also - "26. Each and every circumstance outlined in paragraph 24 above would also have influenced QBE in determining whether to issue the First On Demand Guarantee and the Second On Demand Guarantee. 27. If QBE had known that H & C employed a person who had a previous conviction for fraud as the manager of its York Street Branch, then QBE would not have issued the First On Demand Guarantee and the Second On Demand Guarantee in favour of TCF. 28. If QBE had been made aware of the financial circumstances of H & C as at 22 August 2001, and made aware of the information contained in the Financial Statements, those circumstances would have influenced the plaintiff's decision to accept the risk of providing the First On Demand Guarantee and the Second On Demand Guarantee to the TCF. In those circumstances, the First On Demand Guarantee and the Second On Demand Guarantee would not have been provided." 15 Mr Took's cross-examination left this evidence intact. There was no contrary evidence as to what matters were material to the respondent's decision to issue an on-demand guarantee. 16 The judge said that the appellant promised, for consideration, "to indemnify [the respondent] in the event of loss suffered by it by reason of the guarantee having been issued on reliance upon an untruthful declaration". The nub of her reasons was - "[The appellant] had an obligation to disclose information of which he was made aware by the registration form he signed on 22 August 2001. Mr Took gave evidence that he had been aware the first defendant employed a person as a branch manager who had a prior conviction for fraud [the respondent] would not have issued an 'on demand' guarantee nor would such guarantees have been issued had he been aware of [H & C's] financial circumstances as at 22 August 2001. From the financial statements it seems [H & C] was trading at a loss in June 2000 and June 2001 and there was also a large loan to Mr Chan which appears to be the company's largest asset. As at August 2001 [the appellant] was aware of ongoing investigations by TCF as to [H & C's] financial viability. I am satisfied [the appellant] was aware of all those matters and that in such circumstances the signing by him of the registration form and its declaration in his capacity as a director of [H & C] was untruthful with at least two material non disclosures being the financial viability of [H & C] and the fact of Benny Chan's employment in a position of trust and his fraud conviction." 17 The judge accordingly held that the appellant "breached his declaration". 18 Implicit in the judge's decision was that " circumstances … which might influence you and/or your principals' acceptance of the risk" in para (c) of the declaration meant either circumstances which objectively might influence the respondent's acceptance of the risk or circumstances which subjectively to the respondent might influence its acceptance of the risk; and that one or other of these was made out because, on the evidence of Mr Took, the circumstances in question would have influenced the respondent's acceptance of the risk by causing it to decline to issue the on demand guarantee. The untruthfulness to which the judge referred was because the appellant was aware that H & C employed as a branch manager a person who had a prior conviction for fraud and was aware of H & C's financial circumstances. 19 The appellant submitted that this was an incorrect construction of the registration form, and that on its proper construction para (c) of the declaration referred to circumstances which subjectively to the appellant might influence the respondent's acceptance of the risk; in short, that it should be understood as a declaration that the appellant was not aware of any undisclosed circumstances which he was aware might influence the respondent's acceptance of the risk. 20 The appellant gave evidence. If that were the correct construction of para (c), questions might be expected directed to his awareness at the time of whether Mr Chan's managerial position and conviction for fraud, and whether H & C's financial position including its significant indebtedness to Mr Chan, might influence the respondent's acceptance of the risk. He gave no such evidence in chief. Counsel for the respondent attempted to ask the appellant whether he understood at the time that the fact that Mr Chan had been convicted of fraud might influence whether or not the respondent would grant a guarantee to H & C. Objection as to form was taken to the questions, and they were rejected. It is not easy to see why they were rejected, but cross-examination on awareness of circumstances which might influence the respondent's acceptance of the risk was not further attempted. There was no cross-appeal complaining of the rejection of the questions. 21 In the result, the appellant submitted, on the construction of para (c) for which he contended there was no evidence that the declaration in that paragraph had been breached. 22 Reference to untruthfulness is, with respect, unhelpful. The question is whether on the proper construction of para (c) the declaration was breached. "Breach" was not used in its normal sense, but clearly enough meant that what was declared was not at the time correct (paras (a), (b), (c) and (e)) as well as was not thereafter carried out (para (d)). 23 The submissions for the appellant came down to the following. The registration form gave no indication to the declarant as to what might influence the respondent's acceptance of the risk. The material under "Your Duty of Disclosure" did not do so, because the on-demand guarantee was not a contract of general insurance. From notation of a TCF file number on the registration form, the declarant would have known that the respondent had access to another source of information when deciding whether or not to accept the risk. In those circumstances, para (c) should not be construed so as to require the declarant to commit, on pain of liability if the declarant was incorrect, to something which the declarant was not necessarily in a position to know, objective materiality or non-materiality to acceptance of the risk; still less to materiality or non-materiality subjective to the respondent. It was enough that the declarant correctly asserted the declarant's state of mind as to non-materiality. This, it was suggested, was supported by what appeared under "Procedures", which treated issue of the guarantee as all but automatic in response to the application. 24 I do not think the last suggestion is of significance; clearly there was occasion for the respondent to decide whether or not to issue the guarantee, even if an adverse decision was not spelled out as a possible step in the procedure. There is force in the other submissions, but in my opinion they should not prevail. 25 The respondent was not being asked to enter into a contract of general insurance, but it was being asked to issue an on demand guarantee which TCF could and no doubt would call upon if the travel agent failed to account for money entrusted to it. The respondent had a keen interest in matters material to whether it would be called upon to pay under the guarantee, including the travel agent's governance and financial position, akin to that of an insurer entering into a contract of insurance. This would have been obvious to the declarant, and the purpose of paras (a), (b) and (c) of the declaration was to respond to the respondent's interest and provide recourse if the response was incorrect. 26 The inappropriate material under "Your Duty of Disclosure" was not explained, but underlined the respondent's interest and that, as was apparent from para (c) of the declaration, the declarant was to disclose to the respondent circumstances of which the declarant was aware which might influence acceptance of the risk. On the natural reading of para (c), the non-awareness was of circumstances of a particular description, the description having an objective meaning (" … which might influence …"). Paragraph (c) did not express non-awareness of circumstances whose description included awareness of their materiality to acceptance of the risk. 27 It would not be a practical construction of para (c) to tie the disclosure to the declarant's state of mind as to materiality. That would give an advantage to the obtuse declarant or the declarant who gave no thought to what might be material to acceptance of the risk. A construction giving sensible commercial operation to the declaration, in accordance with its purpose, should be preferred if properly available. 28 In contract law generally a contracting party is not uncommonly committed to an objective standard although not necessarily in a position to know its application. In insurance law an insured's duty of disclosure extends to a matter that a reasonable person in the circumstances would be expected to know to be a matter relevant to the insurer's decision whether to accept the risk and, if so, on what terms, see Insurance Contracts Act 1984 s 21(1). Paragraph (c) does not describe the circumstances by the standard of the reasonable declarant's knowledge of their materiality, but it expresses that the declarant is not aware of undisclosed circumstances which objectively, on the standard of the reasonable person in the position of the respondent, might influence the respondent's acceptance of the risk. 29 Questions could arise as to circumstances of common knowledge or circumstances already known to the respondent. They did not arise in the present case, and where breach of the declaration is involved would be answered by causal considerations. 30 The judge did not expressly find that H & C"s employment of Mr Chan as a branch manager and his conviction for fraud, or H & C's financial circumstances, objectively might have influenced the respondent's acceptance of the risk. In my view she did so impliedly, but there can be no doubt that the first of these circumstances, at the least, was within para (c) as I have construed it. There was breach of the declaration, because the appellant was aware of that circumstance and what was declared was not at the time correct. 31 It is not necessary to consider leave to rely on breach of para (a) of the declaration. In my opinion, the appeal should be dismissed with costs. 32 BRYSON JA: Mr Teoh, second defendant in the District Court, appeals from judgment for $109,381.37 given by her Honour Judge Ashford in the District Court at Sydney on 28 October 2005 in favour of QBE Insurance (Australia) Ltd (QBE) the respondent, plaintiff in the District Court. QBE issued an "on demand guarantee" dated 3 November 2001 for $87,000 and a second on demand guarantee for $128,000 on 21 January 2002. These obliged QBE to make payment on demand to Travel Compensation Fund (TCF) and were part of arrangements made to satisfy TCF of the financial responsibility of H&C International Pty Ltd (H&C), a company controlled by Mr Teoh which carried on travel agency business. TCF had an obligation to pay claims to customers whose travel arrangements had not been properly conducted by travel agents, and required to be satisfied of the financial responsibility of travel agents before it gave them licences. There were several ways in which TCF might be so satisfied, but if TCF was not satisfied that a travel agent had sufficient resources of its own it was common for TCF to accept a guarantee of this kind. QBE had a well-established and regular course of business in issuing such guarantees on payment on fees. 33 If QBE incurred a loss under a guarantee it would, as a matter of course, be entitled to have the loss made good by the travel agent. QBE also commonly required an indemnity by a director or partner of the travel agent. Mr Teoh gave QBE an indemnity, and QBE's claim was based on it. 34 TCF received claims relating to the business of H&C, and called up the guarantee for $128,000. QBE paid that amount to TCF, and later received a refund of the balance after TCF had paid claims out of the $128,000. QBE sued H&C, and also Mr Teoh, and claimed the net amount after the refund, together with interest, including interest on the higher amount until the refund was made. QBE discontinued the proceedings against H&C, but pressed its claim against Mr Teoh, at a hearing of three days in May 2005. 35 The indemnity and contractual promise which Mr Teoh gave to QBE is set out in the registration form which performed the functions of an application by H&C to QBE for issue of a guarantee to TCF and also of an agreement by Mr Teoh personally as a director of H&C to indemnify QBE. Decision turns on the construction of this document and not on insurance law or on general doctrines of law. After a number of particulars relating to the guarantee, the form contains a passage, mainly in print but completed in handwriting, which relates to Mr Teoh's indemnity. This passage is: (Black 1/54) "I B.S. Teoh (Print Full Name) being a director/partner/sole trader of H&C Pty Ltd the applicant hereby declare that a) I have no reason to doubt that the Applicant would be able to comply with its obligations b) To the best of my knowledge, information and belief and after due careful enquiry, the information contained herein is correct c) I am not aware of any circumstances which I have not disclosed to you which might influence you and/or your principals' acceptance of the risk d) In the event of you issuing the Guarantee applied for the Applicant will, during the period of your principal's liability upon your request, immediately make available to you and allow you to examine or take copies of any accounts or other documents in its possession relating to its own and any Holding and/or Subsidiary Company's financial affairs. e) I am duly authorised by the Applicant to complete this form on its behalf and to make this declaration on its and my behalf i) I hereby agree personally to indemnify you and your principals against actions, proceedings, claims and demands which may be brought against your or your principals and all liabilities, losses, damages, costs and expenses of whatsoever nature which you or your principals may suffer, incur or sustain through a breach of this declaration." The words "a director" in the first line of the passage quoted are circled, so as to state that Mr Teoh was a director. 36 After further passages the document bears the signature of Mr Teoh and the date 22 August 2001. The references to principals are explained by directions for the registration form to be forwarded to a firm which appears to have been the agent of QBE. A further passage headed "Your Duty of Disclosure" says: "YOUR DUTY OF DISCLOSURE Before you enter into a contract of general insurance, with an insurer, you have a duty under the Insurance Contracts Act 1984 to disclose to the Insurer every matter that you know, or could reasonably be expected to know, is relevant to the insurer's decision whether to accept the risk of the insurance and, if so, on what terms. You have the same duty to disclose those matters to the insurer before you renew, extend, vary or reinstate a contract of general insurance. Your duty however does not require the disclosure of a matter - that diminishes the risk to be undertaken by the insured; - if it is of common knowledge; - that your insurer knows or, in the ordinary course of its business, ought to know; - as to which compliance with your duty is waived by the insurer. NON-DISCLOSURE If you fail to comply with your duty of disclosure, the insurer may be entitled to reduce its liability under the contract in respect of a claim or may cancel the contract. If your non-disclosure is fraudulent, the insurer may also have the option of avoiding the contract from its beginning." 37 These were appropriate statements for an insurer to make to a person proposing for insurance. Mr Teoh was not going to enter into a general contract of insurance. The statement was not an appropriate statement to make to H&C when applying for a guarantee to issue: even less was it appropriate to be made to a Declarant such as Mr Teoh. Its own terms show this. The statement about the effects of non-disclosure is obviously and completely inconsistent with the workings of the declaration and the liability assumed by a director under it. 38 The Declaration dated 22 August 2001 related to an application for a guarantee for $87,000. Circumstances in which, after a guarantee for $87,000 was issued, the further guarantee for $128,000 was issued do not clearly appear, but in my understanding it was not disputed that the guarantee for $128,000 was issued, at the wish and to the knowledge of Mr Teoh, on the basis of his declaration. 39 It is not in dispute that paras (a) to (e) were contractual promises by Mr Teoh to QBE for consideration. Their effect is that Mr Teoh personally promised to indemnify QBE against claims and losses incurred "through a breach of this declaration." For QBE to succeed it was necessary for QBE to establish breaches and to prove that the balance of the money paid out and the interest lost was a loss incurred "through a breach of this declaration": The Statement of Claim does not distinctly identify what are said to be breaches and which of paras (a) to (e) were said to have been broken. The Trial Judge's judgment does not closely identify the matter on which she adjudicated, but the terms in which (judgment [34] Red 14) the Trial Judge expressed conclusions, taken in the context of the preceding passages, indicate that her Honour was of the view that she was ruling on an alleged breach of para (c). Although the Statement of Claim was far from distinct, I am of opinion that the Trial Judge was correct in ruling on para (c) having regard to to the terms of paragraphs 15, 16 and 17 of the Statement of Claim which (para 16) echo the words of para (c) and (para 15) make allegations of matters of which Mr Teoh was said to have been aware which can be related to a claim of breach of para (c). 40 The learned Trial Judge's conclusion was: 34. I am satisfied the second defendant was aware of all those matters and that in such circumstances the signing by him of the registration form and its declaration in his capacity as a director of the first defendant was untruthful with at least two material non disclosures being the financial viability of the first defendant and the fact of Benny Chan's employment in a position of trust and his fraud conviction. 41 There was no evidence that Mr Teoh was aware that the financial viability of H&C might influence QBE's decision and there was no evidence that he was aware that the adverse circumstances of Mr Chan might influence QBE's decision. The Trial Judge did not state any clear basis for the implied finding that those subjects would influence QBE's decision and may well have regarded that as a matter of which she could take judicial notice. 42 There are difficulties of understanding para (a) and its reference to "its obligations". The alternatives appear to be that the reference is to the obligations to QBE which H&C was proposing to incur by obtaining a guarantee, or that the reference is to compliance with all its financial obligations (or as a further alternative, its financial obligations relevant to its travel agency business under the supervision of TCF). In what I go on to say I have adopted the broadest view, referring to all H&C's financial obligations. This is the reading for which the respondent's counsel contended; although I do not think it is at all clear that this is correct. This is the reading most favourable to the respondent: if QBE does not succeed on that reading, it cannot succeed on any other. 43 In his opening address at the trial counsel for the respondent used expressions which showed that his claim was based upon paras (a) and (c) and also on para (b). It is difficult to see to what information para (b) relates or how reliance on para (b) could carry the matter further. In the course of cross-examination of Mr Teoh some questions were put to him which, if their relevance is considered, can probably be attributed to an attempt to set up a case under para (a). These questions did not result in any significant concession by Mr Teoh which might have a bearing on para (a). It can be understood from the terms of the judgment that the Trial Judge did not regard the claim under para (a) as before her for adjudication; that view is well supported by the terms of the Statement of Claim. 44 The respondent did not before the hearing of the appeal give notice of contention or in any other way indicate a claim that the decision should be upheld on a ground not stated in the judgment, that is, as an award of damages for breach of para (a). In the course of his argument, and at the prompting of a member of the court, counsel for the respondent sought leave to file and rely on a notice of contention to the effect that the judgment should be upheld on this ground: "1. That, in breach of para (a) of his declaration dated 22 August 2001, Boon Sooi Teoh had reason to doubt that H&C Pty Ltd would be able to comply with its obligations." 45 When dealing with the facts which supported this contention, counsel referred to the terms of the audited accounts of H&C for the financial year ended 30 June 2001, which certainly show that H&C was not in a strong financial position and that the decision of TCF to require a guarantee was well based. To illustrate the company's apparent vulnerability, among its current assets were receivables of $138,352 of which $99,303 was a loan to Benny Chan, who is shown by other evidence to have been recently convicted of fraud and to have been unsuccessful in an attempt to obtain a licence as a travel agent. Evidence of later events shows that Mr Chan was deeply involved in events in which the conduct of at least one business operated by H&C failed. However there is no evidence that shows that the loan to Mr Chan was not recoverable; and no indication of any source of doubt on that matter except the indications of his bad character. 46 Another indication of vulnerability is that the current liabilities of H&C of $157,066 included bank overdrafts totalling $87,549 and several other loans, including $9,592 to Milinaba Pty Ltd (which I refer to again later). Only $26,892 of the creditors and borrowings represented trade creditors. The large amount of current liabilities indicates dependence on continued goodwill of lenders. The non-current liabilities of $40,660 consisted entirely of loans from Mr Teoh himself. The equity shown in the balance sheet was Issued Capital $68,101 against which were set off Accumulated Losses of $60,481; leaving a total equity of $7,620, approximately equalling the net assets. 47 From the accounts, several sources can be seen for possible adverse turns of events to which H&C was highly vulnerable. However these adverse events did not happen. The company's accounts do not indicate reasons why the company could not continue trading and in the course of doing so meeting its financial obligations, and in particular its obligations to persons protected by TCF. 48 When cross-examined, after being referred to TCF having notified him in July 2001 that TCF considered that H&C had insufficient net capital and reserves to remain a licensed travel agent (Black 2/385), Mr Teoh acknowledged that as at 22 August 2001 he knew that H&C had to take some steps to redress its insufficiency of capital and reserves in order to continue to operate the licensed travel agency (Black 2/388V). Mr Teoh said (Black 2/389-390) to the effect that he had no reason to doubt that H&C would be able to meet its financial obligations and did not doubt it because H&C was a subsidiary of Milinaba Pty Ltd which had sufficient funds to meet whatever demands were made on H&C. He agreed that obtaining funds from a related company was the only way by which H&C could meet its financial obligations. 49 The respondent did not in its evidence in chief tender any evidence which would tend to show that Mr Teoh knew what might influence QBE's acceptance of the risk. Cross-examination at 400K-N showed that he understood that the indemnity meant that he personally was going to indemnify QBE if the declaration was untrue. He was asked in cross-examination: (Black 2/383O) "Q. And, sir, to your mind when you signed the form on 22 August 2001 the fact that Mr Chan had been convicted for fraud was a fact that might influence QBE granting a guarantee to H&C?" This question was objected to and was rejected as were two re-formulations of it; the rejection of this evidence was not challenged, to do which a cross appeal would have been necessary. Re-opening the rejection of these questions was not sought, and the probable outcome of re-opening those rulings would be a new trial. Neither party sought a new trial in any event. 50 Cross-examination established clearly that Mr Teoh did not disclose in any way the fact that Mr Chan had been convicted of fraud. After the cross examiner had drawn Mr Teoh's attention (Black 2/387) to a number of adverse circumstances in the company's financial statements, and to Mr Chan's conviction: (Black 387I) "Q. You had reason to doubt, didn't you, as at 22 August 2001 that H&C would be able to meet its financial commitment? A. No." Later, after Mr Teoh's attention had been drawn to correspondence from and concerns expressed by TCF he was (again) asked: (Black 2/389I) "Q. You had reason to doubt, didn't you, that H&C would be able to meet its financial obligations as at 22 August 2001. Isn't that right? A. No." 51 When pressed with this he said (Black 389N-U) to the effect that he did not have a doubt, and that H&C was a subsidiary of Milinaba Pty Ltd which (Black 2/390E) had sufficient funds to meet whatever demands were made on H&C; and that (Black 390L-N) the only way in which H&C could meet its financial obligations was through obtaining funds from the related company. 52 No evidence showed that Mr Teoh was wrong or unreasonable in putting his confidence in Milinaba. The onus lay on QBE, when relying on breach of para (a), to show on the balance of probabilities that Mr Teoh had reason to doubt that H&C would be able to comply with its obligations. The evidence left the matter as I have outlined, with Mr Teoh having verified in evidence his belief in the availability of support, which he acknowledged was necessary, from the related company. A finding of breach of para (a) cannot be made unless this evidence is simply disregarded; there are no rational grounds in my opinion for rejecting it, or for coming to the conclusion that the matter given in evidence by Mr Teoh did not leave him in the state of mind indicated by para (a). 53 In my opinion there is no substantial basis in the evidence for QBE to rely on the alleged breach of para (a). Paragraph (a) was not put in issue in the appropriate way by making any recognisable allegations of breach of it in the Statement of Claim. The references made to para (a) during the hearing did not claim the Trial Judge's attention as calling for adjudication; and in view of the state of the evidence, this is not surprising. In my opinion leave to file the notice of contention should not be granted. If leave is granted, the contention should not be upheld. 54 Counsel for QBE contended that in its context para (c) should be construed from an object viewpoint and did not turn on the subjective awareness of either Mr Teoh or of QBE, of what might influence acceptance of the risk. Interpretation of para (c) is not easy. It may be that the reference to awareness is a reference to awareness of the existence of circumstances which from an objective point of view might influence QBE's acceptance of the risk; or the reference might be circumstances which Mr Teoh was aware might influence such a decision. The registration form did not give Mr Teoh, or a person in his position, any indication of what would or might influence QBE's acceptance of the risk: and nothing else referred to in the evidence gave any indication either. The registration form does not refer to what might be relevant to the decision of a hypothetical reasonable insurance company in deciding whether or not to issue a guarantee and accept the risk. There is no statement anywhere in the document of what might be regarded as having any influence on acceptance of the risk. Materiality is not something to be decided in the abstract, and relates to what in fact might influence QBE. 55 In my opinion the subject matter of (c) is, throughout, matters of which the declarant was aware. That is the subject inherently indicated by the opening words "I …hereby declare that" as well as by the introductory words of para (c) "I am not aware …". This reading also has some support in the words used to state the circumstances in which the declarant is liable to QBE: "… a breach of this declaration." In my opinion what para (c) requires the declarant to say is what he knows about; he is not required to answer, or to warrant that he knows how to answer hard questions about how QBE comes to decisions in the course of its business, decisions about which he has not been told anything. 56 Paragraph (c) and the Declaration as a whole do not put it before the declarant to make a positive statement about what material facts there are; they only ask what is in the declarant's mind. The respondent's argument requires a reading in which halfway through para (c) its subject turns away from the opening statement of what the declarant is aware of and becomes a statement about what objectively might influence QBE's acceptance of the risk. In my opinion the words used do not support such a turn. What the declarant is declaring and warranting is the state of his awareness about the whole of the matter in (c), not the state of his awareness about a circumstance which objectively has a certain force whether or not he knows that it has. The language used shows that in using it Mr Teoh was stating what he was aware of: he was revealing his state of mind. A warranty that some facts existed, or did not exist, coupled with acceptance of contractual liability if the warranty was wrong, irrespective of the warrantor's knowledge, would not be expressed as this was. As the appellant's counsel contended, reliance on para (c) brought with it the need for QBE to prove what Mr Teoh did know and also to prove that Mr Teoh was aware that what he knew was material to the assessment of risk by QBE. 57 Legal rules and habits of mind about the extent of the duty of utmost good faith when proposing for insurance do not apply to Mr Teoh's declaration: he was not proposing for insurance, there was not to be any insurance and he was offering to be a surety. There is no room to use implications favourable to QBE to add anything to the words Mr Teoh signed his name to. There is not in any evidence to which the Court of Appeal was referred any material which could tend to establish awareness of Mr Teoh of what might influence QBE's acceptance of the risk under consideration. That being so the Trial Judge's conclusion expressed at paragraph [34] was not correct. 58 It will be seen from the terms of the Trial Judge's conclusion in her para [34] that her Honour acted on a view to the effect that para (c) required absence of awareness of the existence of circumstances, not absence of awareness of the significance of those circumstances in influencing acceptance of the risk. In taking this view the Trial Judge acted on a wrong view of the meaning and effect of para (c). In my opinion the Trial Judge's conclusion that there was a breach of para (c), and a breach of the declaration, was not correct. The Trial Judge should have disposed of the proceedings in favour of the appellant, and the appeal should be allowed with costs in the Court of Appeal and in the District Court. 59 YOUNG CJ in EQ: The facts and circumstances have been well set out in the judgments of Giles and Bryson JJA and it is unnecessary for me to repeat them. 60 The essential question is whether the appellant "breached" his declaration in the registration form to participate in the guarantee programme for travel agents by declaring that: "(a) I have no reason to doubt that the Applicant will be able to comply with its obligations … (c) I am not aware of any circumstances which I have not disclosed to you which might influence you and/or your principals' acceptance of the risk." 61 It is relevant that the registration form also drew attention to duties of disclosure under the Insurance Contracts Act 1984 and that there might be consequences if there was non-disclosure. Although the contract was not a contract of insurance, it is to my mind not without significance that attention was drawn to the obligations of disclosure and the consequences of non-disclosure. 62 The contract was a contract of guarantee and the respondent was in the position of a surety to the authority administering the Travel Agents Compensation Fund of the obligations of the company controlled by the appellant. 63 It is quite clear that a contract of guarantee is not a contract uberrimae fidei, Goodwin v The National Bank of Australasia Ltd (1968) 42 ALJR 110, 111 per Barwick CJ and Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447, 454 per Gibbs CJ and 463 per Mason J. 64 However, in equity with such a contract, as Lord Eldon said in the Scots appeal of Smith v Bank of Scotland (1813) 1 Dow 272 at 292; 3 ER 697, where there is a fidelity guarantee for a servant's trustworthiness obtained from a financial institution and the master knew that the servant had been guilty of embezzlement or other improper conduct then: " … holding him out as a trust-worthy person, knowing, or having ground to believe, that he was not so; then it was agreeable to the doctrines of equity, at least in England, that no one should be permitted to take advantage of such conduct, even with a view to security against future transactions of the agent." 65 After the procedural reforms of the 1850s in England, because the equity would give rise to an absolute unconditional and perpetual injunction, the principle mentioned by Lord Eldon was able to be pleaded as a defence on equitable grounds at common law. This was the situation in Phillips v Foxall (1872) LR 7 QB 666. The plea in that case on equitable grounds was that the defendant had granted a security bond guaranteeing the honesty of one John Smith, a servant of the plaintiff. However, the plaintiff had known of prior defalcations in the course of Smith's service and she had not disclosed that. The Full Court of Queen's Bench on demurrer held the plea to be good. 66 From there, the common law developed so that by 1912 it could be said that an employer cannot enforce a fidelity bond against the surety in respect of subsequent dishonesty of a servant even though the non-disclosure by the employer of the previous dishonesty of the servant was not fraudulent: London General Omnibus Company Ltd v Holloway [1912] 2 KB 72, 82 (CA). 67 Indeed, the proposition is put a little more widely in the authorities. In the Goodwin case Barwick CJ said at 111 of a contract of guarantee given to a bank: "The transaction between the appellant and the respondent was not of a class calling for the fullest disclosure – it was not uberrimae fidei. But it is settled law that a bank in the position which the respondent occupied in relation to the appellant is only bound to disclose to the intending surety anything which has taken place between the bank and the principal debtor 'which was not naturally to be expected' or as was put by Pollock MR in Lloyd's Bank Ltd v Harrison (cited in Paget's Law of Banking 7th ed (1966) p 583), 'The necessity for disclosure only goes to the extent of requiring it where there are some unusual features in the particular case relating to the particular account which is to be guaranteed." 68 Gibbs CJ repeated those words in Amadio at 455 adding: "The reason why a creditor is bound to reveal to an intending surety anything in the transaction between himself and the debtor which the surety would expect not to exist is that a failure to make disclosure in those circumstances would amount to an implied representation that the thing does not exist … ". 69 Accordingly, in my view one must read clause (c) of the declaration in the light of the general obligation already imposed by equity (and as a result of procedural reforms recognised by a court of common law such as the District Court). That obligation as was pointed out in the London General Omnibus Company case is not restricted to situations where the person proposing the guarantee is fraudulent or wilfully conceals something, but also applies in situations where that person has knowledge of a matter which is an unusual factor and where a reasonable person in the shoes of the person proposing that the guarantee be granted would consider that it was so little to be expected that a person would continue in their service an employee who had already committed fraud as a travel agent that that matter would need to be disclosed. (This test is in the words of Blackburn J in Lee v Jones (1864) 17 CB (NS) 482, 506; 144 ER 194, 204 suitably amended to fit the facts of the present case). I should add that it is clear on the authorities that the position with a fidelity guarantee is more onerous on the proposer for the guarantee than in the case of a guarantee of a person's bank account; see the London General Omnibus Company case at 82 and National Mortgage & Agency Co of New Zealand Ltd v Stalker [1933] NZLR 1182, 1186. 70 It is with this background that one must construe para (c). The respondent required more than the general law requirement of disclosure and so it did two things: (1) drew attention to the duty of disclosure (even though in a rather obscure way); and (2), more importantly, required a declaration that the proponent was not aware of circumstances which might influence acceptance of the risk. At the very least this covered the duty under the general law to disclose all matters which might affect the risk which the person issuing the guarantee would not naturally expect to have occurred. One such matter would be that the travel agent was continuing to employ in the responsible position of branch manager a person who had been convicted of fraud in connection with his work as a travel agent. 71 Accordingly, albeit by a different route, I have reached the same view as Giles JA has on the construction of para (c). It follows that I agree with the conclusion reached by Giles JA. 72 I might add that I have been involved as a judge in a series of cases recently both at first instance and on appeal where the problem has been caused by commercial people taking too little care in the use of pre-printed forms which their agents distribute to prospective customers and then not sufficiently supervising the appropriateness of the forms returned when the contract is made. The present case appears to fit into this category. In such cases I am not as concerned as some of my brother and sister judges of trying to give some commercial meaning to a set of nonsense documents where the responsibility for the problem is on the issuer of the documents. However, having got that general warning off my chest I will say no more. ********** 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.