Court of Appeal Supreme Court New South Wales Medium Neutral Citation: Prepaid Services Pty Ltd v Atradius Credit Insurance NV [2014] NSWCA 440 Hearing dates: 5 November 2014 Decision date: 19 December 2014 Before: Macfarlan JA at [1]; Meagher JA at [77]; Sackville AJA at [78] Decision: The appeal is dismissed with costs. [Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.] Catchwords: INSURANCE - trade credit insurance - Insurance Contracts Act 1984 (Cth) s 28(3) - respondent insurer rejected claim made by appellants under trade credit insurance policy indemnifying appellants against customer's insolvency - whether insurer entitled to reduce its liability to nil due to appellants' failure to comply with duty of disclosure - whether insurer would have issued policy if non-disclosure had not occurred - whether insurer discharged legal onus of proof by calling ultimate decision-maker despite not calling subordinate employees to give evidence - whether primary judge acted contrary to principle in Jones v Dunkel by inferring that evidence of subordinate officers would have assisted insurer's case - content of insured's evidentiary burden under s 28(3) of the Insurance Contracts Act 1984 (Cth) - appeal dismissed EVIDENCE - evidentiary onus - respondent insurer rejected claim made by appellants under trade credit insurance policy indemnifying appellants against customer's insolvency - whether insurer entitled to reduce its liability to nil due to appellants' failure to comply with duty of disclosure - whether insurer discharged legal onus of proof by calling ultimate decision-maker despite not calling subordinate employees to give evidence - content of insured's evidentiary burden under s 28(3) of the Insurance Contracts Act 1984 (Cth) Legislation Cited: Insurance Contracts Act 1984 (Cth), s 28 Cases Cited: Cornelius v Global Medical Solutions Australia Pty Ltd [2014] NSWCA 65; 98 ACSR 301 Jackson v McDonald's Australia Ltd [2014] NSWCA 162 Jones v Dunkel [1959] HCA 8; 101 CLR 298 Kuhl v Zurich Financial Services Australia Ltd [2011] HCA 11; 243 CLR 361 Minister Administering the Crown Lands Act v New South Wales Aboriginal Land Council [2014] NSWCA 69 Prepaid Services Pty Ltd v Atradius Credit Insurance NV [2013] NSWCA 252 Purkess v Crittenden [1965] HCA 34; 114 CLR 164 Strong v Woolworths Ltd [2012] HCA 5; 246 CLR 182 Watts v Rake [1960] HCA 58; 108 CLR 158 Category: Principal judgment Parties: Prepaid Services Pty Ltd (First Appellant) Optus Mobile Pty Ltd (Second Appellant) Virgin Mobile (Australia) Pty Ltd (Third Appellant) Atradius Credit Insurance NV (Respondent) Representation: Counsel: NC Hutley SC/DA McLure (Appellants) CRC Newlinds SC/TN Mehigan (Respondent) Solicitors: Minter Ellison (Appellants) Allens (Respondent) File Number(s): CA 2014/66690 Decision under appeal Jurisdiction: 9111 Citation: Prepaid v Atradius (No 2) [2014] NSWSC 21 Date of Decision: 2014-02-07 00:00:00 Before: McDougall J File Number(s): SC 2009/298684 HEADNOTE [This headnote is not to be read as part of the judgment] On 24 August 2007 the respondent ("Atradius") issued the appellants (collectively "Optus") with a trade credit insurance policy insuring Optus against the insolvency of Bill Express Ltd ("BXP"), one of Optus' largest customers. Following BXP's entry into voluntary administration on 8 July 2008, Optus made a claim on Atradius under the policy. Atradius rejected the claim. By judgment of 7 June 2012, McDougall J sitting in the Commercial List held that Atradius was entitled to avoid the policy by reason of Optus' fraudulent non-disclosure of payment plans that had been entered into between Optus and BXP. Alternatively, if that non-disclosure was not fraudulent, his Honour found that Atradius was entitled to reduce its liability under the policy to nil in accordance with s 28(3) of the Insurance Contracts Act 1984 (Cth). That section provides that where an insured fails to comply with its duty of disclosure, "the liability of the insurer in respect of a claim is reduced to the amount that would place the insurer in a position in which the insurer would have been if the failure had not occurred ...". On appeal, the Court of Appeal set aside the primary judge's findings and remitted the proceedings to him for a redetermination of the issue of whether Atradius was entitled to reduce its liability to nil by reason of what the Court found was a non-fraudulent misrepresentation by Optus with respect to the payment plans with BXP. By judgment of 7 February 2014, McDougall J determined the remitted issue by concluding that if Optus had made proper disclosures regarding the payment plans in its insurance proposal form, Atradius would not have issued the policy to Optus. Accordingly, his Honour held that Atradius' liability was reduced to nil and it was entitled to judgment on Optus' claim. Held, dismissing the appeal (per Macfarlan JA; Meagher JA and Sackville AJA agreeing): (1) Atradius had the legal onus of satisfying the Court that it would not have issued the subject insurance policy if the relevant misrepresentation/non-disclosure had not occurred and that s 28(3) of the Insurance Contracts Act therefore applied to defeat Optus' claim. Nevertheless, Optus had an evidentiary burden of establishing that it would have provided information to Atradius to attempt to explain the position in relation to the undisclosed BXP payment plans. This evidentiary burden extended to identifying the content of the information that Optus would have provided ([52]). (2) Optus sought to discharge its evidentiary onus through the evidence of Mr Naven and Mr McQuade. The primary judge was entitled to treat the information that would have been obtained by Atradius for the purpose of considering the significance or otherwise of the payment plans as that identified by Mr Naven. Optus cannot reasonably contend that there was, or may have been, other information that Atradius might itself have obtained from BXP (or elsewhere) that might have impacted on Atradius' decision. In preparing its case, Optus had the opportunity to obtain from BXP or its former officers such information as might have been relevant. Atradius was entitled to present its case on the basis of the information that Optus identified ([58]). (3) This conclusion is strengthened by the absence of questions put to Mr Magee in cross-examination suggesting that there might have been available other identified information that might have affected his conclusion and caused him to approve the issue of the subject policy to Optus ([59], [62]). (4) Atradius' calling of Mr Magee as the ultimate decision-maker was sufficient to discharge its legal onus of proof, despite not calling his subordinates to give evidence. It does not accord with common sense, nor with the evidence as called, to contemplate that when Mr Magee was fully informed he would allow the views of his subordinates, on an issue assigned by the company structure to him as the senior credit underwriter, to prevail over his own ([66]). Further, it was not incumbent upon Atradius to prove each step that would have been taken within its organisation in the hypothetical circumstance that s 28(3) of the Insurance Contracts Act required to be addressed. Section 28(3) does not specify any particular mode of proof that need be adopted by the insurer. It is sufficient for it to prove on the balance of probabilities what the outcome would have been in the hypothetical circumstance. Atradius did this ([71]). (5) The primary judge did not act contrary to the principle in Jones v Dunkel [1959] HCA 8; 101 CLR 298 by assuming or inferring that Mr Magee's subordinates would have recommended against issuing the subject policy. Nor did his Honour assume or infer that they would have recommended that the policy be issued. Rather, his Honour did not draw any positive inference about what their recommendations would have been. This was in conformity with Jones v Dunkel as he proceeded upon the basis that their evidence would not have provided positive assistance to Atradius' case, yet did not infer that their evidence would have been adverse to that case ([74]). Judgment 1MACFARLAN JA: On 24 August 2007 the respondent ("Atradius") issued to the appellants (collectively referred to as "Optus") a trade credit insurance policy insuring Optus against the insolvency of Bill Express Ltd ("BXP"), one of Optus' largest customers. 2Following BXP's entry into voluntary administration on 8 July 2008, Optus made a claim on Atradius under the policy. Atradius rejected the claim. 3By a judgment of 7 June 2012 ([2012] NSWSC 608) McDougall J sitting in the Commercial List found that Atradius was entitled to avoid the policy for fraudulent non-disclosure by Optus of payment plans agreed between Optus and BXP and alternatively, if that non-disclosure was not fraudulent, that Atradius was entitled to reduce its liability under the policy to nil. As the existence of payment plans was the subject of a specific question in the insurance proposal form, there was, on these findings, equally a misrepresentation. In the context of the facts of this case no distinction need be drawn between a non-disclosure and a misrepresentation. 4His Honour's alternative finding was an application of s 28(3) of the Insurance Contracts Act 1984 (Cth) which, in the event of the insured's failure to comply with its duty of disclosure, reduces the insurer's liability in respect of a claim "to the amount that would place the insurer in a position in which the insurer would have been if the failure had not occurred ... ". 5On appeal, this Court set aside the primary judge's findings and remitted the proceedings to him for a redetermination of the issue of whether Atradius was entitled to reduce its liability to nil by reason of what the Court found was a non-fraudulent misrepresentation by Optus with respect to the payment plans ([2013] NSWCA 252). 6On 7 February 2014 the primary judge determined the remitted issue by concluding that if Optus' proposal for insurance "had given truthful and complete answers in respect of the payment plans, Atradius would not have issued the policy" ([2014] NSWSC 21 at [133]). It followed that Atradius' liability was reduced to nil and it was entitled to judgment on Optus' claim. 7On the present appeal, Optus challenges that finding on the grounds that: "a. the respondent had the onus of proving that it would not have issued a policy at all, but failed to call its employees (Mr Athaide, Mr Choo and members of the Local Credit Committee) who would have played an essential role in any such decision; b. contrary to the principle in Jones v Dunkel (1959) 101 CLR 298 at 308, 312 and 320-1, the learned primary judge inferred, in effect, that the evidence of Mr Athaide and Mr Choo and the members of the Local Credit Committee would have assisted the respondent, in that his Honour implicitly found at [116]-[120] that their enquiries would have been limited to the information referred to in the affidavit of the appellant's Mr Naven and that based on such information, they would have recommended to Mr Magee [Atradius' relevant decision-maker] that a policy not issue". 8For the reasons that appear below, I consider that these grounds of appeal should be rejected and Optus' appeal dismissed. THE FACTUAL CIRCUMSTANCES Atradius' personnel 9Atradius' Special Products division, within which the present policy fell, comprised two distinct underwriting "streams". 10First, the "policy underwriting" or "commercial" stream was concerned with such matters as negotiation of the terms and conditions of the policies and relations with customers. This stream was headed by Ms Jane Johnson who was deputy head of the Special Products division and Director of Special Products for Northern Europe and the Asia-Pacific region, and based in London. Ms Joanne Shaw, based in Australia and head of Special Products for Australia, reported to her. 11The other "stream" was concerned with credit underwriting, involving (so far as relevant to the present case) an assessment of the creditworthiness of the proposed insured's debtor which was the subject of the application for credit insurance. The head of this stream was Mr Mark Magee who was based in Cardiff, Wales. Mr Peter Athaide, who was based in Australia and was then the only credit underwriter in the Special Products division here, reported to him. He was assisted by a four person Local Credit Committee which set review limits for buyers from Optus. It acted on information provided by an employee of Atradius who had been assigned to monitor the position of the particular buyer (the "buyer owner"). In the case of BXP, the buyer owner was Mr Choo. Optus' relationship with BXP 12The primary judge described BXP's business as follows: "10 BXP operated a retail distribution network throughout Australia. It controlled more than fourteen thousand point of sale terminals which were physically located in the premises of small retailers and service stations. A consumer who wished to buy access to the telecommunications network operated by Optus Mobile or Virgin Mobile could use a BXP terminal to pay an agreed price, presumably by way of debit or credit card. When the payment was authorised, the consumer would receive a printed receipt, which recorded the information on an e-voucher. That information comprised, or included, a personal identification number (PIN). When the consumer entered the PIN into his or her mobile phone, the amount of air time for which the payment had been made would become available." 13His Honour noted that the evidence suggested that BXP sold between $5 and $6 million worth of Optus Mobile pre-paid airtime weekly (Judgment [13]) and that Optus claimed that when BXP ceased to trade it was indebted to the Optus companies for amounts in excess of $62 million (Judgment [23]). The limit of indemnity under the policy issued to it by Atradius was $30 million. If Atradius is liable under the policy, its liability is for 90 per cent of the loss, or a maximum of $27 million (Judgment [23]). 14In relation to BXP's payment history, it is sufficient to note that on three occasions in the period November 2005 to February 2007, BXP agreed with Optus to make additional payments to bring it back into line with the contractual 21 day payment terms. These were the "payment plans" with which the present appeal is concerned. The first was agreed on 3 November 2005 and involved BXP paying $5 million by 20 December 2005. The second, agreed on 16 August 2006, required BXP to make three payments of $3 million over 90 days (subject to a later rescheduling) and the third, of 27 February 2007, required BXP to make five additional payments of $1 million each during March 2007. 15On 29 June 2007 Mr Stephen Naven, Optus' General Manager of Credit Management, reported to Ms Jeann Low, the Chief Financial Officer of Optus' parent company, that BXP had failed to make a payment of $6 million due that day, resulting in an increase in Optus' overall exposure to BXP being $28.6 million. Ms Low responded in an email of the same date by describing Optus' relationship with BXP as a "very serious situation and dicey" and saying "we really need to be careful". 16On 6 July 2007 Mr Naven provided Ms Low with an analysis of BXP's ability to keep paying its debts to Optus. He concluded that BXP was not "in immediate danger of collapse" and that: "In summary I think they have the capacity to pay in the short to medium term, but we should continue to monitor their funding arrangements and the success of their growth strategy. We should also look to have the credit insurance in place asap to ensure we are covered in the event of an adverse change". The inception of the credit insurance 17On 13 June 2007 Mr Blair McQuade, Acting Managing Director of the companies comprising Optus, sought board approval for the purchase of trade credit insurance in respect of BXP and four of Optus' other largest debtors. Ms Low approved the purchase of insurance in relation to BXP on 9 July 2007. 18On 22 August 2007 Optus' broker submitted a completed insurance proposal form to Atradius. Relevantly, the proposal stated the following: "Credit Terms 21 days with weekly settlement for Prepaid and Optus, 7 days Virgin Customers has [sic] traded 7-10 days from due date on occasion Have you ever experienced any difficulties in certification procedures or payment delays in dealing with this buyer? If so, please provide details. Yes - in reducing payment terms from 28 days to 21 days Have you ever extended or rescheduled a due date or changed the terms of payment after shipment to this buyer, or put this buyer on a payment plan? If so, please provide details No". 19In his judgment of 7 June 2012 the primary judge found that the negative answer to the last question was incorrect as the payment plans referred to in [14] above had been agreed between Optus and BXP. His Honour found that the answer was a fraudulent misrepresentation. In its judgment of 8 August 2013 this Court however concluded that Atradius had not shown that the answer was otherwise than an innocent mistake and had not therefore shown that it was fraudulent. 20Atradius issued the credit insurance policy to Optus on 24 August 2007. THE COURSE OF EVIDENCE 21As the erroneous answer in the proposal form had not been shown to have been given fraudulently, the issue before the primary judge at the remittal hearing was whether Atradius had established, for the purposes of s 28(3) of the Insurance Contracts Act, that if a correct answer had been given, it would not have issued the policy. (It was not contended that in that event Atradius might have issued the policy but on different terms.) The remittal hearing proceeded on the basis of the evidence that was given at the first hearing before the primary judge. Not only the content, but also the sequence, of the evidence is relevant to the resolution of the s 28(3) issue. I therefore describe below the proposed evidence that the parties made available to each other and the order in which that occurred. Mr Magee's statement of 19 February 2010 (Atradius) 22In his witness statement of 19 February 2010 Mr Magee said that the limit of cover under the subject policy was such that his subordinate Mr Athaide did not have authority to approve its issue, with the result that Mr Magee's approval was required. (This witness statement of Mr Magee was not separately tendered at the hearing but its content is apparent from his amended statement of 2 November 2010, and the fact that it was served on Optus is apparent from the affidavits of Mr McQuade and Mr Naven to which I refer below.) 23Mr Magee identified a number of factors that as a matter of practice he would take into account in considering whether to underwrite such a policy, including the financial standing of the insured's debtor and its ability to meet payments as they fell due. 24Mr Magee continued: "45. If, prior to the time the Policy was issued, I was informed that Prepaid had entered into payment plans, I would not have underwritten the Policy unless I was absolutely satisfied that: (a) there were reasons to explain why Prepaid had put Bill Express on a payment plan that were unconnected with the financial position [of] Bill Express; or (b) the issues which caused Prepaid to enter into a payment plan with Bill Express had been finally resolved and were very unlikely to recur; and (c) the customer had improved their internal credit control procedures to spot potential payment problems as early as possible so that these could be dealt with in the most effective way possible. 46. The reasons that I would not have underwritten the Policy are otherwise the same as those I have set out in paragraph 39 above, the only difference being that I regard entering into a payment plans [sic] as even stronger evidence of a high insolvency risk or future problems, because there is rarely any explanation for a payment plan other than that the buyer does not have the financial resources to pay its debts on time". 25The reasons in paragraph 39 of his statement to which Mr Magee referred included his belief that "a history of late payments and inability to pay debts on time [is] evidence of a high insolvency risk or future problems which I would not be prepared to underwrite". Mr Naven's affidavit of 21 May 2010 (Optus) 26Mr Naven did not refer directly to Mr Magee's statement but his affidavit was clearly intended as a response to that statement. Mr Naven noted that Atradius contended (through Mr Magee) that it would not have issued the subject policy "unless it was satisfied that there were reasons to explain why PPS [Optus] had put BXP on a payment plan that were unconnected with the financial position of BXP". Mr Naven did not refer to Mr Magee's other two conditions but said that if Atradius had communicated to Optus an intention to decline to issue the policy for non-satisfaction of the condition that he did mention, he would have expected Mr McQuade to seek his assistance in preparing a response. 27Mr Naven then said that he set out thereafter "the analysis I believe I would have prepared on the credit-worthiness of BXP, had I been asked to prepare one for use in negotiations with Atradius in August 2007" (at [9]). Notably, Mr Naven did not say that he would have attempted to show that the condition last referred to (that any payment plan was unconnected to the financial position of BXP) was satisfied or that either of the other two conditions stated by Mr Magee in his statement were satisfied (see [24] above). 28Mr Naven said that if he had been asked to prepare an analysis of BXP in August 2007 for use in negotiations with Atradius, he would have "covered the same points" as he did in his email of 6 July 2007 (see [16] above) but "would have done so in more detail in order to justify [his] conclusion that BXP would be able to meet its debts to the Optus group in the short to medium term" ([12]). He identified information to which he would have had regard, including current BXP financial statements or management accounts, and said that he would have requested BXP to provide him with such statements or accounts. On that basis, he said that he assumed that BXP would have made available to him two identified financial statements. 29Mr Naven also said that in preparing his analysis he would have sought information about BXP's trading history with Optus. He said that a report prepared for Optus by Ms Jennifer Hookey of McGrathNicol dated 21 May 2010 (and tendered in the proceedings by Optus) would have provided the information that he wanted ([27]-[28]). 30Mr Naven then concluded as follows: "38. Overall, my assessment of BXP in August 2007 would have been that it was a low risk of becoming insolvent in the short to medium term. The objective financial data showed an overall trend of improvement. Although the delays in payment and the imposition of payment plans give off a first impression of a company suffering from a cash flow problem, my assessment would have been that these 'problems' were a direct product of PPS insisting on payment within 21 days, when the likelihood is that many of BXP's debtors would be paying on 30 day terms". Mr Magee's amended statement of 2 November 2010 (Atradius) 31In his amended statement, Mr Magee said that he had reviewed a series of Optus' internal communications which were pessimistic about BXP's ability to pay its debts. These included Ms Low's email of 29 June 2007 (referred to in [15] above). 32He reiterated the view expressed in his original statement that he would not have approved the underwriting of the policy if he had been aware of the Optus/BXP payment plans. Paragraph 45 of his original statement (see [24] above) was numbered 46 in his amended statement. Ms Johnson's statement of 2 November 2010 (Atradius) 33Ms Johnson said that if she had been aware of the payment plans she would have regarded BXP as an unacceptable credit risk and declined to quote for the issue of a policy to Optus to insure it against its risk in relation to BXP. Mr McQuade's affidavit of 21 December 2010 (Optus) 34Mr McQuade sought to explain the circumstances in which the insurance proposal form was prepared and submitted. He asserted that the erroneous answer in it concerning payment plans was an innocent mistake. 35He concluded as follows: "66. If I had been asked by Atradius to explain my views about BXP's credit-worthiness, I would not have confined myself to pointing out that BXP had regularly paid after the due date ... or that I had concerns about BXP's access to working capital. A proper analysis of BXP is more sophisticated than that. In addition to the matters I have referred to above, I would have pointed out that: (a) although BXP regularly paid a few days after the due date, it always paid in the end; (b) BXP was likely to be viable in the short to medium term because all the major Australian telecos [sic] depended on BXP and Epay to distribute their products. Withdrawing support to BXP would result in disruption to the telcos' revenue stream; (c) BXP's cash flow problems were in part the consequence of its rapid and successful growth. The longer BXP continued to trade, the more likely it was that its cash flow position would improve, because its non-recurrent capital costs should reduce over time; (d) BXP had taken steps to address the cash flow shortages by seeking and obtaining funding from financiers; (e) BXP had a valuable supply network for e-Vouchers, which included major retailers such as Coles". Mr Magee's statement of 7 April 2011 (Atradius) 36Mr Magee responded to the affidavits of Mr Naven and Mr McQuade by concluding as follows: "38. If, prior to the time the Policy was issued, I had been provided with the Naven Analysis and the McQuade Analysis [the former being Mr Naven's affidavit of 21 May 2010 and the latter being Mr McQuade's conclusions set out in [35] above], this would not have persuaded me to approve the Policy. The main reasons for this are: (a) if I become aware that a potential insured has entered into payment plans with a buyer, in my judgment as a credit underwriter, this is a clear indicator that a company is experiencing financial difficulties. If I had been told that Prepaid had entered into payment plans, in order to approve a limit for a policy covering Bill Express debt, I would have required strong, concrete evidence that the payment plans were not the result of financial difficulties in Bill Express; (b) on the basis of the Naven and McQuade Analyses, I would not have been confident that the payment plans and late payments were unconnected with the financial position of Bill Express; and (c) I would have remained extremely concerned about the fact that Prepaid had agreed payment plans with Bill Express and that Bill Express had to borrow money to finance those payment plans". 37Mr Magee went on to give more detailed reasons for his conclusion. Ms Johnson's statement of 7 April 2011 (Atradius) 38Ms Johnson responded to the affidavits of Mr Naven and Mr McQuade as follows: "40. Both the Naven Analysis and the McQuade Analysis largely contain information which is relevant to the credit underwriting of the Bill Express risk. If the information had been sent to me by my colleagues in Australia, and had not been reviewed by the credit underwriters, I would have forwarded this to Mark Magee for his comments. If Mark Magee did not consider Bill Express to be an acceptable credit risk, the decision to decline the risk could not be changed as a policy cannot be issued without approval from the credit underwriters". Ms Shaw's affidavit of 6 May 2011 (Atradius) 39As noted above at [10], Ms Shaw reported to Ms Johnson. Ms Shaw said that if she had been aware of the payment plans she would only have issued the subject policy if she obtained express instructions to do so from both Ms Johnson and Mr Magee. Mr Magee's cross-examination 40The following exchanges occurred in the course of Mr Magee's cross-examination: "Q. You were heavily dependent upon the technical skills of your team to analyse the current information, being the accounts, plus any further information which might arise before the risk actually incepted? A. Yes. Q. You were not going to second guess the decision of the Australian Local Credit Committee? A. That is true. Q. And, indeed, you considered them much better placed to assess this risk than you, given their knowledge of the local conditions? A. Yes. Q. And had any adverse information needed to be looked at after 26 July, the people you would have expected to do the task would have included Mr Athaide? A. Yes. Q. Mr Choo, as the buyer/owner? A. Yes. Q. And the Local Credit Committee? A. And, also, Joanne Shaw as well, as the special product underwriter. Q. And, possibly, people in Cardiff as well? A. Yes. Q. And what would have occurred in that situation is, some form of analysis or written report would have been provided to you for your consideration? A. Yes. Q. And if the Local Credit Committee of Australia remained comfortable with the risk in the light of any further information, that would have been a very significant factor in your thinking? A. Yes. Q. Indeed, because you were not in the business of second guessing them, if they looked at the further adverse information and maintained the overall limit, most probably, you would have kept your decision intact as well? A. Yes. Q. Now, could you go to your statement of April 2011? You give some evidence from paragraph 33 and following about how you might have responded if certain additional information had been placed before you? A. Yes. Q. Would you accept that, as a procedural matter, if additional information had arisen after 26 July, the steps that you would have expected to be taken would be these. First of all, Mr Athaide would need to redo his assessment of the buyer and tell you whether he maintained his positive recommendation? A. Yes. Q. Secondly, it would have become even more important to ensure that the submission you were asking him for was actually done, as opposed to forgotten in the paperwork? A. Yes. Q. Thirdly, you would have wanted Mr Choo, as the buyer/owner, to update his analysis of the buyer? A. Yes. Q. And you would have been particularly interested in whether his risk rating of 6 out of 10 remained, or moved in an unfavourable, or favourable direction? A. I would be more interested if it moved unfavourable [sic]? Q. I'm sorry? A. I would be more interested if it was an unfavourable move. Q. Yes. 5 or 4 wouldn't matter, but 7 would start to be trouble you [sic]? A. Yes. Q. If Mr Choo remained, essentially, intact around the 6 level, that would have given you considerable comfort in maintaining the decision you had made? A. Yes. Q. If he was in the 7 or 8, you would have needed to look more closely at his further work? A. Yes. Q. And given the matter had gone to the Australian local credit committee, you would have been very interested to see what view they had formed? A. Additional material, yes" (Transcript pp 273-275). THE EARLIER JUDGMENTS The primary judgment of 7 June 2012 41The primary judge said that he accepted the evidence of Mr Magee set out in [24] above and that Mr Magee was a witness who, in general, sought to give truthful and accurate evidence (Judgment [236]). He continued: "237 Further, Mr Magee presented as a careful, competent and experienced senior credit underwriter. I have no doubt that he was thoroughly conversant with the relevant material. I have no doubt that he was aware of the significance of payment plans. I have no doubt, had a correct answer been given in relation to payment plans and had that been conveyed to him (as it should have been), he would have acted as he said, in para 46 of his statement dated 2 November 2010, he would do. 238 In this context, I do not accept that Mr Magee's position or function was of some secondary or minor kind. On the contrary, he was the senior person in the credit approval stream of the special products division, just as Ms Johnson was the senior person in the policy underwriting stream. (In each case, of course, there were limits of authority, and higher authorities residing elsewhere; but the particular proposal did not invoke the need to go beyond Mr Magee and Ms Johnson.) In the ordinary way, material relevant to credit underwriting approval should have gone to Mr Magee. Had it done so (and I am satisfied that a correct answer, disclosing the existence of the payment plans, would have done so), then his central significance becomes clear." 42The primary judge concluded "that if correct answers had been given in relation to the question asking for details of payment plans, Atradius would not have issued the policy when it did" (Judgment [240]) and said: "242 What might have happened, if the correct answers had been given, is a matter of speculation. I incline to the view that, as Mr Magee said, a policy might have been issued (on unspecified terms and at an unspecified premium rate) had there been given an explanation, satisfactory to Mr Magee, of the payment plan issue. But since the evidence and submissions did not cover that point, it is unnecessary to go further." The Court of Appeal judgment of 8 August 2013 43Meagher JA (with whom Emmett JA and I agreed) referred to the operation of s 28(3) of the Insurance Contracts Act as follows: "71 This provision requires an inquiry as to the position the insurer would have been in if the relevant misrepresentation had not been made. It is the same as would be made if the insurer was claiming damages for misrepresentation in the amount by which it seeks to have the insured's claim reduced. Accordingly, it must establish on the balance of probabilities what it says its position would have been if the misrepresentation had not occurred. That is so notwithstanding that the hypothesis upon which the reduction of liability is based is not an historical fact. By its defence Atradius claimed it was entitled to reduce its liability to nil because it would not have entered into any policy which would have covered all or part of the appellants' claim. Accordingly, it was necessary for the primary judge to determine whether Atradius had established on the balance of probabilities that it would not have issued a policy to the appellants which would have provided any insurance of the BXP defaults." 44Having referred to oral evidence of Mr Magee, including that quoted in [40] above, his Honour said: "91 This evidence is relevant to whether, on the balance of probabilities, Atradius would not have issued a policy. Whilst the appellants had the evidentiary burden of establishing that they would have provided further information which sought to explain the position in relation to the payment plans, the onus of proving on the probabilities that such a policy would not have issued remained on the respondent. Whether that burden had been discharged required consideration of the evidence referred to above. The primary judge has not done that. I do not read his Honour's observation at [242] as a finding that the probabilities were that no satisfactory explanation would have been forthcoming and resulted in the issue of a policy. His Honour's statement that what might have happened 'is a matter of speculation' is inconsistent with the making of such a finding." 45For these reasons, the Court concluded that the finding at first instance that Atradius was entitled to reduce its liability to nil should be set aside and that the question of whether it was so entitled should be remitted to the primary judge for re-determination. The primary judgment of 7 February 2014 46Accepting Meagher JA's description of Mr McQuade's hypothetical participation in the provision of further information as "peripheral at best" ([92]), the primary judge took the view that Mr McQuade's views did not add anything of substance to the evidence of Mr Naven. As a result, he indicated that he would thereafter focus on Mr Naven's affidavit and Mr Magee's reaction to it (Judgment [77]). 47Likewise, his Honour concluded that, not being part of the credit assessment "stream", the roles of Ms Shaw and Ms Johnson were not of present significance and that it was Mr Magee's view that was of importance (Judgment [78]-[91]). 48His Honour therefore concluded that, bearing in mind his acceptance of Mr Magee's evidence and Mr Magee's position as the senior credit underwriter, the question to be addressed was whether Mr Magee would have approved the policy being written if he had been aware of the payment plans or, more particularly, whether the information that Optus would have submitted to him in response to an expression of concern as to those payment plans would have satisfied one or more of the conditions that Mr Magee identified in his evidence (see [24] above) (Judgment [111]). 49His Honour took the view that there was no reason to think that any more information would have been provided to Optus than was identified in Mr Naven's evidence and that this therefore represented the "best case" that Optus could have put to Atradius to persuade it to issue the policy (Judgment [116], [120]). 50His Honour continued: "121 In his second statement dated 7 April 2011, Mr Magee set out the reasons why the Naven material was (or would have been) insufficient to satisfy his concerns (as expressed at para 46 of his first statement). Optus did not put on further evidence to meet the criticisms of the Naven material that Mr Magee advanced. Nor was Mr Magee cross-examined on the basis that his concerns were not genuinely held, or that they were factually, logically or otherwise unsound. Instead, as I have noted, the approach taken was to suggest that Mr Magee would have caused further inquiries to be made, and obtained further information, and acted on the whole of whatever the outcome might have been. 122 The significance of the matter referred to by Mr Magee in para 46(c) of his first statement, as to Optus' credit control procedures, appears clearly and consistently from his cross-examination. I have set out some of the relevant passages already. It was never put to Mr Magee that this was not a matter of key importance to him. Nor was it put to him that the material that had been supplied was sufficient to alleviate it. On the contrary, as the references already given show, it is clear that Mr Magee regarded that concern as remaining a live issue notwithstanding the material through which he was taken in cross-examination, on the basis that, hypothetically, it would have been supplied to him. ... 126 The other, and equally decisive, point is that there is nothing in the Mr Naven material that could be regarded as capable of meeting the second substantial requirement of Mr Magee: that he be absolutely satisfied of improvements in Optus' internal credit procedures so as to enable it to pick up problems very early in the piece. That may explain why the cross-examination of Mr Magee did not challenge directly his evidence that the Naven material would not have persuaded him to issue the policy. 127 I am fortified in my ultimate acceptance of this aspect of Mr Magee's evidence by the absence of a direct challenge to it. If it were intended to put a submission that, in light of the answers that were obtained in cross-examination on this point, the evidence could not be correct and should not be accepted, that should have been put squarely. 128 In essence, Mr Magee did say what he himself would have done (more accurately, decided) based on the Naven material. The failure to challenge that evidence directly undermines in a fundamental way the basis of Optus' case, as summarised in the first paragraph of transcript quoted at [96] above. 129 Thus, I do not think that it is necessary to consider what further inquiries might have been made, what responses might have been given, what if any further inquiries those responses might have provoked, and so on through an ever-branching maze of hypothetical inquiry and response. Mr Magee stated his concerns. Optus sought to answer them. Mr Magee said that the answer was insufficient. His reasons for saying that were not challenged directly, and in any event appear to be sound. And the material proffered in any event simply did not address one of his requirements. ... 131 To my mind, the way that Optus has run this aspect of its case (and I do not intend to be disrespectful in putting matters this way) is to put up a smokescreen, so as to attempt to disguise the obvious reality that BXP was, at the relevant time, a most unappealing credit risk (as Optus itself recognised), and that the best that Optus could say about BXP had been shown to be insufficient to meet the concerns expressed by Atradius." 51For these reasons, the primary judge concluded that Atradius would not have issued the policy if Optus had given truthful and complete answers to the questions in the proposal form, with the result that s 28(3) of the Insurance Contracts Act applied to defeat Optus' claim. RESOLUTION OF THE APPEAL 52As Optus submitted and Atradius accepted, Atradius had the legal onus of satisfying the Court that it would not have issued the subject insurance policy if the relevant misrepresentation/non-disclosure had not occurred and that s 28(3) of the Insurance Contracts Act therefore applied to defeat Optus' claim. Nevertheless, as Meagher JA pointed out in this Court's earlier judgment (see [44] above), Optus had an evidentiary burden of establishing that it would have provided information to Atradius to attempt to explain the position in relation to the BXP payment plans. In my view this evidentiary burden extended to identifying the content of the information that Optus would have provided. 53The term "evidentiary burden" or "evidential burden" may be used in a number of different senses. In Strong v Woolworths Ltd [2012] HCA 5; 246 CLR 182, Heydon J described the sense relevant to the present case as follows: "53. In the second sense, 'evidential burden' refers to circumstances in which a plaintiff calls evidence sufficiently weighty to entitle, but not compel, a reasonable trier of fact to find in the plaintiff's favour. There is then said to be an 'evidential burden' in the sense of a 'provisional' or 'tactical' burden on the defendant: if the defendant fails to call any or any weighty evidence, it will run a risk of losing on the issue - that is, a risk that at the end of the trial the trier of fact will draw inferences sufficiently strong to enable the plaintiff to satisfy the legal (ie persuasive) standard of proof. The 'provisional' or 'tactical' burden raises the question whether a defendant should as a matter of tactics 'call evidence or take the consequences, which may not necessarily be adverse'" (citation omitted). 54This evidentiary burden was referred to by the plurality in Purkess v Crittenden [1965] HCA 34; 114 CLR 164 at 168 as "the burden of proof in the sense of introducing evidence". Their Honours instanced its operation by referring to the earlier decision in Watts v Rake [1960] HCA 58; 108 CLR 158 in the following terms: "We understand that case to proceed upon the basis that where a plaintiff has, by direct or circumstantial evidence, made out a prima facie case that incapacity has resulted from the defendant's negligence, the onus of adducing evidence that his incapacity is wholly or partly the result of some pre-existing condition or that incapacity, either total or partial, would, in any event, have resulted from a pre-existing condition, rests upon the defendant" (ibid). 55Their Honours went on to say, with reference to Watts v Rake: "It was, in effect, pointed out that it is not enough for the defendant merely to suggest the existence of a progressive pre-existing condition in the plaintiff or a relationship between any such condition and the plaintiff's present incapacity. On the contrary it was stressed that both the pre-existing condition and its future probable effects or its actual relationship to that incapacity must be the subject of evidence (i.e. either substantive evidence in the defendant's case or evidence extracted by cross-examination in the plaintiff's case) which, if accepted, would establish with some reasonable measure of precision, what the pre-existing condition was and what its future effects, both as to their nature and their future development and progress, were likely to be. That being done, it is for the plaintiff upon the whole of the evidence to satisfy the tribunal of fact of the extent of the injury caused by the defendant's negligence" (ibid). 56In the present case, Atradius led evidence that if Mr Magee had known of the payment plans entered into between Optus and BXP, he would not have approved issue of the subject trade credit policy to Optus in the absence of Optus satisfying him of certain identified matters. Optus ran the risk that if it did not lead evidence of matters that it would have put before Atradius to attempt to persuade it to issue the policy notwithstanding the existence of the payment plans, the Court might accept Mr Magee's evidence and conclude that Atradius' defence succeeded. Understandably, Optus sought to guard against this possibility by calling (through Mr Naven and Mr McQuade) evidence that it would for this purpose have submitted identified material to Atradius. In the absence of evidence that Atradius would in August 2007 have had access to further material that Optus was not able to access in 2012 for the purpose of the present proceedings, the material in Mr Naven and Mr McQuade's affidavits represented the ambit of the material required to be considered by the Court when determining whether Atradius had discharged its legal burden of making good its defence. 57Optus adduced the evidence from Mr Naven and Mr McQuade referred to in [26]-[30] and [35] above. Mr Naven's evidence (the primary judge and the parties accepted that Mr McQuade's evidence added nothing significant to Mr Naven's evidence) identified the additional information that he would have sought to acquire to enable preparation and presentation to Atradius of an analysis of BXP's financial position. This included information that he would have requested from BXP. In his affidavit, Mr Naven went on to assume that BXP would have provided him with two identified financial statements (see [28] above). Likewise, he said that he would have sought information about BXP and Optus' trading history. He then identified the information contained in Ms Hookey's report as that which would have satisfied his enquiry (see [29] above). 58Contrary to Optus' submission on appeal, the primary judge was in my view entitled to treat the information that would have been obtained by Atradius for the purpose of considering the significance or otherwise of the Optus/BXP payment plans as that identified by Mr Naven. As I have said, Optus had an evidentiary onus to identify the information that it would have provided to Atradius. It sought to do this through Mr Naven and Mr McQuade. I do not consider that Optus can reasonably contend that there was, or may have been, other information that Atradius might itself have obtained from BXP (or elsewhere) that might have impacted on Atradius' decision. In preparing its case, Optus had the opportunity to obtain from BXP or its former officers, whether by way of subpoena or otherwise, such information as might have been relevant. Atradius was entitled to present its case on the basis of the information that Optus identified. 59In my view the primary judge was correct to conclude that Mr Naven's evidence represented "the best case that Optus could put forward to persuade Atradius to accept the risk, in the light of the (hypothetically disclosed) existence of three payment plans ... " (Judgment [116]). I am fortified in that conclusion by the absence of questions put to Mr Magee in cross-examination suggesting that there might have been available other identified information that might have affected his conclusion. 60Optus submitted that the fact that Mr Magee did not say in his second statement of evidence that the third (and presumably also the second) of the conditions he had stipulated in his first statement (see [24] above) would have remained unsatisfied in the hypothetical situation, notwithstanding the submission of material to the effect of Mr Naven and Mr McQuade's analyses, meant that that condition (or those conditions) should be regarded as satisfied (written submissions, [24]). 61However, the affidavits of Mr Naven and Mr McQuade did not expressly address those conditions and it was not suggested to Mr Magee in cross-examination that either the second or third condition (or indeed the first) would have been satisfied. The position was thus that Mr Magee had stated in his first statement of evidence that satisfaction of the conditions was essential, Optus' evidence at best addressed the questions only indirectly and in his amended first and second statements Mr Magee maintained his position that the policy would not have issued. Mr Magee's evidence, at least so far as it related to those conditions, could not fairly be rejected in the absence of it being put to him in cross-examination that the conditions would have been satisfied and the reasons why that was so. 62At times in its submissions, Optus appeared to suggest that the report prepared by Mr Choo, the officer of Atradius responsible for monitoring the position of BXP (see [11] above), contained information favourable to Optus' position that was not in the affidavits of Mr Naven or Mr McQuade. However this submission, even if correct, cannot assist Optus because the relevant material was not put to Mr Magee in cross-examination with reasons as to why, contrary to Mr Magee's evidence, it would have caused him in August 2007 to approve the issue of the trade credit insurance policy to Optus. 63It follows that Optus' submission that the primary judge erred in excluding from consideration "the effect of any interaction between Ms Shaw, Mr Athaide, Mr Choo [on the one part] and BXP [on the other part]" (written submissions, [21(b)]) should be rejected. That interaction could only have been of significance to support Optus' case to the extent that it produced additional information that might have impacted on Atradius' decision. However, as I have said, if such information existed and might have been obtained by Atradius in August 2007 upon inquiry of Optus, it was for Optus to bring it forward in the proceedings. It was not for Atradius to prove the negative, that is, that no such further information would have been forthcoming. 64The other error in the primary judge's approach asserted by Optus in its written submissions is that that approach assumed "an exchange of information directly between [Mr Magee] and Mr Naven, without the input of Ms Shaw, Mr Athaide, Mr Choo and the [Local Credit Committee which] would never have occurred" ([21(a)]). 65This submission was supported by Optus' oral submission that, in order to discharge its legal onus, it was necessary for Atradius to lead evidence not only as to what the outcome of its deliberations would have been but also as to the process by which that outcome would have been achieved. It said that this was necessary because Mr Magee gave evidence that he would have had regard to the views of the other persons just referred to. Thus Optus contended that if there would have been "input" from other people material to the decision-maker's conclusion, it was necessary for the insurer to prove what that input would have been. 66These submissions were supported by reference to evidence that Mr Magee gave in cross-examination to the effect that he would have had regard to "input" from Mr Choo, Mr Athaide and the Local Credit Committee (see [40] above). However, in my view the effect of Mr Magee's evidence, when read as a whole, was that it was essentially for the provision of information and the analysis thereof (if Mr Magee did not himself undertake that analysis) that Mr Magee would have looked to these subordinate officers. It was not suggested to Mr Magee in cross-examination that if he had had as much information as they had and had the opportunity to analyse it that he would have allowed their views, or the view of one of those persons, to prevail over his own. It does not accord with common sense to contemplate that when Mr Magee was fully informed he would allow the views of his subordinates, on an issue assigned by the company structure to him as the senior credit underwriter, to prevail over his own. 67That is not to minimise the role of the subordinate employees. In many cases they would no doubt have provided information in the form of a summary upon which the senior officer would act with the assistance of the subordinates' views. In the absence of cross-examination providing a basis to conclude otherwise, common sense suggests that if in such a situation a subordinate's view differed from the senior officer's prima facie view, the senior officer would want to be apprised of the full set of facts founding the subordinate's view, so as to enable the senior officer to reach his or her own final conclusion. 68The hypothetical situation that Mr Magee dealt with in his evidence was analogous because he stated what his decision would have been upon the basis of the material identified by Mr Naven and Mr McQuade, which can be taken to be the whole of the material that favoured approval of the policy. It is a fair inference that if the issue had come to him as a result of advice from his subordinates recommending that the policy issue notwithstanding the payment plans, Mr Magee would have ensured that he had all of the information that they had and then made his own decision. The questions put to him in cross-examination did not postulate such a situation and nothing he said in cross-examination suggested that he would have acted otherwise in such a situation. 69Mr Magee accepted the proposition put to him in cross-examination that he was "heavily dependent upon the technical skills of [his] team to analyse the current information, being the accounts, plus any further information which might arise before the risk actually incepted" (Transcript p 273). This was consistent with his utilisation of his subordinates in many, if not most, situations to save him the time and effort of analysis. It did not involve an acceptance by Mr Magee that he did not have the skills to analyse the information himself if, as occurred for the purposes of his evidence, it was all put before him in detail. Indeed, his experience and seniority strongly suggested otherwise. The same comment may be made about his acceptance shortly thereafter in cross-examination of the proposition that the Local Credit Committee was "much better placed to assess [the] risk than [he], given their knowledge of the local conditions" (Transcript p 274). 70Mr Magee also accepted in cross-examination propositions that he was "not going to second guess the decision of the Australian Local Credit Committee" and that "if the Local Credit Committee of Australia remained comfortable with the risk in the light of any further information, that would have been a very significant factor in [his] thinking" (Transcript pp 273-4: see [40] above). However, neither these questions nor any others put to Mr Magee addressed the question, to which I have suggested above (see [66]) that there is a common sense answer, of whether Mr Magee would have accepted his subordinates' recommendations, if in conflict with his own prima facie view, without ensuring that he was apprised of the full facts upon which those recommendations were made and acting upon his own view after consideration of those facts. 71Contrary to Optus' submission, it was not incumbent upon Atradius to prove each step that would have been taken within its organisation in the hypothetical circumstance that s 28(3) of the Insurance Contracts Act required to be addressed. Section 28(3) does not specify any particular mode of proof that need be adopted by the insurer. It is sufficient for it to prove on the balance of probabilities what the outcome would have been in the hypothetical circumstance. Atradius did this. 72Optus submitted that the primary judge inferred that the evidence of Mr Athaide, Mr Choo and the members of the Local Credit Committee would have assisted Atradius' case, whereas he should have inferred, in accordance with the principles stated in Jones v Dunkel [1959] HCA 8; 101 CLR 298 at 308, 312 and 320-1, that it would not have assisted Atradius. Optus referred in this regard to Judgment [116], [119] and [120]. 73However, the point that his Honour made in those paragraphs was that, by reason of the evidentiary onus on Optus to identify the information that would have been available to Atradius and Optus' attempt to discharge that onus through Mr Naven and Mr McQuade's evidence, the affidavits of those witnesses should be regarded as putting forward Optus' best case in this respect. As I have held (see [59] above), this approach was correct. It follows that there was no room for an inference that any of the subordinate officers might have been able to obtain any further relevant information to produce to Mr Magee. 74The primary judge did not, as Optus appeared to suggest, assume or infer that the subordinates would have recommended against issuing the policy. Nor did his Honour assume or infer that they would have recommended that the policy be issued. Rather, his Honour did not draw any positive inference about what their recommendations would have been. This was in conformity with Jones v Dunkel as he proceeded upon the basis that their evidence would not have provided positive assistance to Atradius' case, yet did not infer that their evidence would have been adverse to that case (Kuhl v Zurich Financial Services Australia Ltd [2011] HCA 11; 243 CLR 361 at [64]). 75There remained the question of whether, the principle in Jones v Dunkel apart, Atradius discharged its legal onus of proof despite not calling those subordinate officers to give evidence. However, as I have already indicated (see [66]-[68] above), its calling of Mr Magee as the ultimate decision-maker was sufficient to discharge that onus. The sufficiency of Atradius taking that course is able to be tested, as I have done, by asking whether, on the evidence as called, recommendations of the subordinates that the policy issue would, or might on the balance of probabilities, have led to Mr Magee making a different decision to that to which he deposed. My reasoning above indicates that that question should be answered in the negative. 76For the reasons I have given, Optus' two grounds of appeal (see [7] above) should be rejected. As to ground (a), the fact that Atradius did not call Mr Magee's subordinates to give evidence did not preclude it from discharging its onus of proving that s 28(3) of the Insurance Contracts Act was applicable. As to ground (b), the primary judge did not act contrary to the principle in Jones v Dunkel by inferring that the evidence that Mr Magee's subordinates would have given, if called to give evidence, would have assisted Atradius' case. As a result, the appeal should be dismissed with costs. 77MEAGHER JA: This appeal should be dismissed with costs for the reasons given by Macfarlan JA. 78SACKVILLE AJA: I agree with the orders proposed by Macfarlan JA and with his Honour's reasons. ********** 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. Decision last updated: 19 December 2014