Wilkie v Gordian Runoff & Anor [2005] NSWSC 873

New South Wales Supreme Court

CITATION : Wilkie v Gordian Runoff & Anor [2005] NSWSC 873

HEARING DATE(S) : 25 August 2005

JUDGMENT DATE : 31 August 2005

JURISDICTION : Equity Division

JUDGMENT OF : McDougall J at [1]

DECISION : Please refer to judgment

CATCHWORDS : INSURANCE - directors' and officers' liability insurance policy - where accepted that insurer obliged to pay insured's defence costs - whether amounts required to be paid within reasonable time - whether payment in advance to counsel of cancellation fees reasonable - whether amount of cancellation fees reasonable - question of amount to be referred to under UCPR 20.14

CASES CITED : Wilkie v Gordian Runoff Ltd (2005) 79 ALJR 872

Daniel Wilkie (Plaintiff) PARTIES : Gordian Runoff Limited (formerly GIO Insurance Limited) (First Defendant) Markel Syndicate 702 at Lloyds, London (formerly known as R E Brown Syndicate at Lloyds, London) (Second Defendant)

FILE NUMBER(S) : SC 4880/03

I M Jackman SC (Plaintiff) COUNSEL : R C Beasley (Defendants)

Speed & Stracey Lawyers (Plaintiff) SOLICITORS : Henry Davis York Lawyers (Defendants)

LOWER COURT JURISDICTION :

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

McDOUGALL J

31 August 2005

4880/03 DANIEL WILKIE v GORDIAN RUNOFF LIMITED (formerly GIO Insurance Limited) JUDGMENT 1 HIS HONOUR: The plaintiff (Mr Wilkie) is an insured under a Directors' and Officers'/Company Reimbursement policy of insurance (the policy) issued by the defendants (the insurers). By the insuring clause, the insurers agreed to pay on behalf of Mr Wilkie "all Loss arising from any Claim … by reason of any Wrongful Act" where the claim both occurred and was notified to the insurers during the period of insurance. Mr Wilkie has been charged with a number of offences. It does not appear to be disputed that the charges arise out of a Wrongful Act or Acts, as that expression is defined in the policy; nor that the criminal proceedings thereby amount to a Claim, as that word is defined in the policy. 2 By cl 9 of the automatic extensions under the policy, the insurers must pay Mr Wilkie's defence costs associated with that claim, on the conditions set out, where (as has happened) they have elected not to take over and conduct the defence or settlement of the claim. It is not disputed that the costs incurred and to be incurred by Mr Wilkie in defending the charges are "Defence Costs" as that expression is defined in the policy. The preliminary question 3 The insurers claimed that they were not liable under cl 9 of the automatic extensions because they had denied liability. That claim was dealt with, and disposed of in favour of Mr Wilkie, by the High Court of Australia in an appeal from the determination of a preliminary question in these proceedings: Wilkie v Gordian Runoff Ltd (2005) 79 ALJR 872. The preliminary question is set out at 874 [14] as follows: "In circumstances where: 1. The [appellant] wrote to the [respondents] and notified a claim ('the ASIC Claim') as described in the affidavit of [the appellant's solicitor] sworn 16 September 2003; 2. The [respondents] on 25 September 2003 wrote to the [appellant] stating that '[the first respondent] and [the second respondent] deny indemnity for the claim pursuant to the terms of Exclusion 7 of the Policy'; 3. The [appellant] has not admitted that his conduct falls within Exclusion 7; 4. The conduct referred to in Exclusion 7 has not been 'subsequently established to have occurred following the adjudication of any court, tribunal or arbitrator'; and 5. The [appellant] does not, for the purposes of the determination of this separate question, allege that the [respondents] acted other than in good faith in writing the letter referred to in paragraph 2 above, then: Are the [respondents] free of any obligation to indemnify the [appellant] under Extension [9] of the Policy when the basis relied upon by the [respondents] in their letter of 25 September 2003 was solely Exclusion 7 of the Policy?"" 4 The Court held that the question should be answered "no". The parties now accept that the insurers are liable to pay defence costs in accordance with cl 9, and subject (among other things) to the conditional right of recovery for which that clause provides. Mr Wilkie's application 5 By an amended notice of motion filed in Court on 25 August 2005, Mr Wilkie sought the following relief: "1. (a) the first defendant pay to the plaintiff 60% of his reasonable defence costs of the claim by ASIC notified to the defendants by the plaintiff on 20 November 2002 or alternatively on 2 June 2003 ('The ASIC Claim") within fourteen days of a demand for payment being made by the plaintiff to the first defendant; (b) the second defendant pay to the plaintiff 40% of his reasonable defence costs of the ASIC Claim within fourteen days of a demand for payment being made by the plaintiff to the second defendant; 2. (a) the first defendant pay to the plaintiff $67,150.34 within seven days of the date of this order; (b) the second defendant pay to the plaintiff $44,766.90 within seven days of the date of this order;". 6 Prayer 1 relates to defence costs incurred and to be incurred by Mr Wilkie from time to time, with the exception of certain fees required by his counsel to be paid in advance. Those fees, which include in substance an element for cancellation, are the subject of prayer 2. 7 I heard that application in the Equity duty list. I concluded that I would make a declaration of entitlement to advancement of defence costs substantially in terms of cl 9, but that I would not grant the precise relief sought in prayer 1. I was not prepared to grant relief in accordance with prayer 1 because, even assuming that the insurers' obligations under cl 9 were conditioned (either as a matter of construction or as a matter of implication) by some requirement of payment within a reasonable time, I could not be satisfied prospectively, and in respect of any claim that might be made in the future, that 14 days (or any other period) would be reasonable. As to prayer 2, I concluded that it was reasonable in all the circumstances for Mr Wilkie to have entered into agreements with counsel to pay cancellation fees. However, I concluded, I was not satisfied as to the amounts. I therefore concluded that the question, whether the amounts themselves were reasonable, should be referred to an expert in costs assessment. 8 I indicated my conclusions to the parties. They thereupon agreed on orders that were necessary to give effect to the conclusions that I had reached, and I made those orders. I said that I would give reasons later for my conclusions on prayer 2. These are those reasons. 9 I did not in terms give reasons for declining to make orders as sought by prayer 1. I did, however, say in the course of argument substantially what I have said above: that I was not satisfied that it would be appropriate to make such orders having prospective effect where (by definition) the relevant circumstances that might bear on the question of a reasonable time were not known. 10 The making of the declaration of entitlement does little to resolve the practical controversy between the parties, particularly where (as the correspondence between their respective solicitors makes clear) the insurers accept that the effect of the High Court's decision is to require them to pay defence costs under cl 9: see, for example, a letter of 24 May 2005 from the insurers' solicitors to Mr Wilkie's, where the insurers' intention to pay reasonable defence costs in accordance with cl 9 was confirmed. The real dispute was as to the time said to be necessary to assess those costs (both as to purpose and as to amount) as "reasonable" or otherwise; and thereafter physically to make payment. Each party accepted that this could not happen, as a literal reading of cl 9 might suggest, immediately each item of costs was incurred. But they could not agree on the timing that should be substituted (at least in practice) for a literal reading of cl 9. 11 In those circumstances, the declaration will not quell the real controversy. However, given the impossibility of foreseeing all situations in which further payments might be demanded pursuant to cl 9, it seemed to me to be wholly inappropriate to grant relief, whether by way of declarations of right or by way of mandatory orders, in the terms sought by prayer 1. The consequence of the declaration that I have made is to leave it to the good sense and good faith of the parties to work out a regime that will ensure that Mr Wilkie's defence is funded as swiftly as reasonably possible, whilst reserving to the insurers an adequate opportunity to assess all claims made upon them. No doubt the parties can return to Court if either feels that the contractual regime is not being honoured; but I would hope that this would not prove to be necessary. Was it reasonable for Mr Wilkie to agree to pay cancellation fees? 12 Mr Wilkie has retained solicitors and senior and junior counsel (who did not appear before me on this application) for the defence of the charges. He has entered into a retainer and costs agreement with the solicitors. That costs agreement relates to their fees only. The solicitors have retained counsel. It is however a term of that retainer that counsel will not look to the solicitors for payment of their fees, and will look only to Mr Wilkie. Accordingly, Mr Wilkie has entered into costs agreements with counsel. 13 The hearing of the charges is expected to occupy some 6 to 12 weeks. There will be a substantial amount of work to be done beforehand. It is apparent that both senior and junior counsel will be required to devote at least 2 months, and it may be in excess of 4 months, to virtually full time work in preparation for the hearing of the charges and for the hearing itself. In those circumstances, each counsel required payment in advance of an amount equal to 20 days' fees, on the basis that the amount would be payable regardless of the duration of the hearing (or, indeed, regardless of whether the hearing proceeded at all). 14 The ordinary situation is (and, at least in theory, the universal situation once was) that the lay client instructed a solicitor; the solicitor retained counsel; counsel looked only to the solicitor for the payment of their fees; and the solicitor looked to the client for payment of all fees (including counsel's fees). Those days have passed. However, even when that was the position, it was customary for solicitors to require clients to put them in funds to pay estimated disbursements, including counsel's fees, before undertaking work; specifically, before retaining counsel. The reasons why this was so are obvious. 15 In circumstances where counsel do not have the ability to require the solicitor to pay their fees, it is to be expected, I think, that they would require some assurance for the payment of their fees. Since they do not look to the solicitor, that assurance cannot come from having money on account of their fees in the solicitor's trust account. It is therefore not surprising that, as they may now do, counsel require payment in advance of some part of their fees. 16 Particularly where counsel are retained to defend criminal charges, it is hardly surprising that they require some security for the payment of their fees. They cannot hold fees in trust, because they cannot operate trust accounts. But they can be paid in advance. That is what has happened here. It is hardly unreasonable; quite the contrary. 17 Equally, it is a fact of life that where counsel are retained to work exclusively on one matter, they must reject all other offers for work during the currency of that retainer. Even with capable counsel, it is not always possible to go out and find other work in replacement if such a retainer comes to an end abruptly, unexpectedly and early. Thus, it is common for counsel retained in such matters to require an agreement to pay some sort of cancellation fee. Whether or not that practice is reasonable depends, I think, more on the amount of the fee demanded, and the events by reference to which it is payable, rather than the concept. Some hint of this appears in the correspondence in the present case. 18 On 19 August 2005, the insurers' solicitors wrote to Mr Wilkie's solicitors. In relation to the cancellation fees, they said: "Firstly, in our experience cancellation fees are no longer generally paid to counsel. However, given the estimated hearing time of 8 to 12 weeks, our clients will consider an agreement to pay some cancellation fees but certainly not for the equivalent of 20 days, which in our view is excessive. Further, our clients do not consider it reasonable or standard practice for payment to be required up front." 19 They then dealt with the terms on which the cancellation fees might be paid, including that "cancellation fees are only to be paid in the event counsel is unable to obtain other work during" the period referable to the amount of the fee. 20 Although the letter maintained that cancellation fees are not generally payable, I do not think that it can be said that it is unreasonable to agree to pay them: particularly as part of the price of retaining (as Mr Wilkie has done) competent and experienced senior and junior counsel to defend complex charges, in circumstances where an adverse outcome would be devastating for Mr Wilkie both personally and professionally. 21 Further, as to whether or not cancellation fees are "generally paid to counsel", there was evidence to the contrary of the assertion made in the letter from which I have just quoted. Mr Wilkie's solicitor, Mr Scott, swore that in his experience "where court proceedings are expected to run for more than one month, it is not uncommon for counsel to seek and obtain substantial cancellation fees". The generality of that evidence, and its apparent basis in Mr Scott's substantial civil rather than criminal practice, means that it cannot be given dispositive weight. Nonetheless, Mr Scott was not challenged on that evidence; and, for what it is worth, it does tend to cut across the assertion made in the letter to which I have referred. (In this context, I note that although the insurer's solicitor swore an affidavit annexing, among other things, that letter, she did not contradict what Mr Scott had said in his affidavit, and did not swear, on the basis of her experience, to the statement of current general practice as to cancellation fees that I have quoted.) 22 For those reasons, I concluded, as I have said, that it was reasonable for Mr Wilkie to act as he did in agreeing to pay fees in advance and in agreeing to paying cancellation fees. That conclusion does not, however, extend to the amount (either in value or as a multiple of a number of days) agreed. Amount of the cancellation fees 23 As I have said, the fees agreed to amount in substance to 20 days' – or 4 working weeks' – fees. There was conflicting evidence, none of it satisfactory, as to the reasonableness of that quantification of the cancellation fees. For the insurers, it was submitted that if I were not satisfied that the fees agreed to be paid were reasonable, then I should simply dismiss prayer 2. However, I think, that approach would not be consistent with the Court's obligation to determine all questions (or real questions) in dispute, and to do so as quickly and as cheaply as possible subject to doing so justly. 24 Although (as I have said) the insurers did not concede that any element of cancellation fee was reasonable, there is nonetheless some flavour, in the correspondence from which I have quoted, that their real concern was as to the amount of the fees agreed. It seemed to me appropriate, in the absence of compelling evidence, to refer this question to someone with undoubted experience in the field of assessment of fees. That is why I so concluded, and so ordered. Simply to dismiss the application, in circumstances where I was satisfied in principle that it was reasonable both to agree to pay a cancellation fee and to pay it in advance, because I was not satisfied as to the amount struck me as being entirely inappropriate: not just by reference to the requirements of justice to which I have referred, but also by reference to the obligations of utmost good faith owed by each party under a contract of insurance to the other. 25 It was not suggested that the reference would take long; and it was agreed that the expert, as well as having regard to the evidence that was put before the Court, could rely on her own experience to inform herself of relevant circumstances (cf UCPR r 20.20(2)(b)). It was, and is, my view that such a procedure, allowing as it will for the parties to put submissions to the referee, is the quickest, and most likely the cheapest, way of resolving the question of quantification. ******