Supreme Court New South Wales Medium Neutral Citation: Malamit Pty Ltd v WFI Insurance Ltd & Ors [2016] NSWSC 1306 Hearing dates: 9 August 201615 August 201619 August 2016 (Defendant's further written submissions)30 August 2016 (Plaintiff's further written submissions) Date of orders: 16 September 2016 Decision date: 16 September 2016 Before: Sackar J Decision: See para [116] Catchwords: CONTRACTS – construction of commercial contracts – meaning of "for the benefit of" – meaning of "third party" – meaning of "on behalf of" INSURANCE – construction of insurance contracts – interpreting exclusion clauses TRUSTS – meaning of "present entitlement" – for the benefit of – discretionary trusts – unit trusts Cases Cited: Alex Kay Pty Ltd v General Motors Acceptance Corporation [1963] VR 458 CGU Insurance Ltd v Porthouse (2008) 235 CLR 103 Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 Chubb Insurance Company of Australia Limited v Robinson [2016] FCAFC 17 Commissioner of Taxation v ElecNet (Aust) Pty Ltd (Trustee) [2015] FCAFC 178 CTP Custodians Pty Ltd v Commissioner of State Revenue of the State of Victoria (2005) 224 CLR 98 Cypojayne Pty Limited v Sverre Rodskog (2009) NSWSC 301 Darlington Futures Limited v Delco Australia Pty Ltd (1986) 161 CLR 500 Digby v General Accident Fire & Life Assurance Corporation Ltd [1943] AC 121 FCT v Whiting (1942) 68 CLR 199 Federal Commissioner of Taxation v Vegners (1989) 90 ALR 547 Fraser v BN Furman (Productions) Limited [1967] 1 WLR 898 Halford v Price (1960) 105 CLR 23 Harmer v FCT (1991) 173 CLR 264 Liberty International Underwriters v The Salisbury Group Pty Ltd (in liq) & Ors [2014] QSC 240 Maye v The Colonial Mutual Life Assurance Society Ltd (1924) 35 CLR 14 McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (S99/2015; S102/2015) (2015) 256 CLR 104 Plevin v Paragon Personal Finance [2014] UKSC 61 Selected Seeds Pty Ltd v QBEMM Pty Ltd (2010) 242 CLR 336 Taylor & Anor v FCT (1970) 11 CLR 444 Wharton v Masterman [1895] AC 186 Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522 Category: Principal judgment Parties: Malamit Pty Limited (plaintiff) WFI Insurance Limited trading as Lumley General (first defendant) Arthur J Gallagher (Aus) Pty Ltd (second defendant) Martin Andrews (third defendant) Representation: Counsel: T Lynch SC, D Hand (plaintiff) J Sexton SC, A Barnett (first defendant) Unrepresented (second and third defendants) Solicitors: Baker, Mannering and Hart (plaintiff) Kennedy's (first defendant) Unrepresented (second and third defendants) File Number(s): 2015/315390 Publication restriction: N/A Judgment Nature of the proceedings 1. The current proceedings arise by reason of a dispute between the plaintiff Malamit Pty Ltd ('insured') and three defendants, WFI Insurance Ltd t/as Lumley General ('insurer'), Arthur J Gallagher Pty Ltd ('second defendant/broker') and Martin Andrews ('third defendant/employee of the broker') after a landslip occurred in July 2010 at the Lismore Business Park development site ('development'). The plaintiff claims relief including: * A declaration against the insurer, that the relevant insurance policy responds to the insured's claim for indemnity; * Damages for breach of contract against the second defendant for breaching the terms of its retainer with the insured; * Damages against the second defendant for breaching the duty of care it owed to the insured as its broker; * Damages against the second defendant under section 82 of the Trade Practices Act 1975 (Cth); * Damages against the third defendant under section 68 of the Fair Trading Act 1987 (Cth). 1. These particular proceedings will determine a single question of relief sought by the insured: a declaration that the relevant insurance policy responds to the insured's claim for indemnity made on 14 November 2014 (SOC – Relief Claimed [1]). As such, the relevant parties in these proceedings are the insured and insurer. Background of facts 1. On 1 July 2008, Treetops Lismore Pty Ltd ('Treetops'), as trustee of the Lismore Business Park Unit Trust ('Trust'), entered into a contract with the insured for the provision of 'project development and management services' at the development (Affidavit of Stephen William Hart ('ASF SWH') [11]; CB 180-208) ('Project Management Agreement' or 'PMA'). 2. On 31 October 2009, the insurer issued a policy of professional indemnity insurance ('policy') to two entities: Blue Dolphin Racing Pty Ltd ATF the MA and LA Mitchell Investment Trust and the insured, for the period of 31 October 2009 to 31 October 2010 (ASF [3]; CB 60). 3. In July 2010, there was a landslip at the development (ASF SWH [12]). 4. On or about 11 August 2010, the insured notified the insurer of the landslip (ASF [4]). 5. On 17 September 2014, as trustee of the Trust (ASF [5], [21], [54]), Treetops commenced New South Wales Supreme Court proceedings 2014/00273874 in respect of approximately $3,229,732.34 of alleged losses incurred as a result of the landslip. Treetops brought the action against the first to third defendants, who were engineers, town planners and consulting surveyors forming the partnership "Newton Denny Chapelle", and their employed civil engineer, the fourth defendant. Treetops alleged that the first to fourth defendants acted negligently, breached their relevant contracts with Treetops and breached the Fair Trading Act 1987 (NSW) in performing their services for Treetops at the development. 6. On or about 14 November 2014, the insured notified the insurer that it had been named as a concurrent wrongdoer in these proceedings for allegedly breaching its contract with Treetops and negligently providing project management services. 7. On or about 14 November 2014, the insured made a claim for indemnity under the policy in respect of these proceedings (NSWSC 2014/00273874) (ASF [5]). 8. On or about 21 January 2015, Treetops filed an amended Technology and Construction List Statement alleging negligence and breach of contract by the insured in acting as 'Project and Development Manager' at the development. Treetops alleged that the insured, as the fifth defendant in proceedings 2014/00273874, breached the PMA and tortious duties of care it owed to Treetops by: a) Relying on the advice and certification of engineers, Newton Denny Chapelle, as to geotechnical matters when it should have engaged, or advised Treetops to engage, additional geotechnical expertise or consultants in relation to the development and the occurrence of the symptoms of the landslip on or around 7 July 2010; b) Failing to promptly take, or advise Treetops to take, remedial measures to address the symptoms of the landslip following their initial occurrence on or around 7 July 2010, or to otherwise respond with all reasonable and necessary urgency to the occurrence of those symptoms; c) Permitting or acquiescing in, or otherwise failing to prevent, the continuation of works at the development after 7 July 2010. 1. On 9 July 2015, the insurer refused the insured indemnity. Relationships between the various relevant entities 1. From 18 January 2008 to 3 November 2015, Mr Mark Mitchell ('Mr Mitchell') was the director, secretary and sole shareholder of Treetops (ASF [14]). At present, Treetops has three directors who are Mr Mitchell, Mr Gow and Mr Lees (Transcript 33). 2. The Lismore Business Park Unit Trust is a unit trust. Treetops is the trustee of the Trust. Initially, all units in the Trust were held by Mr Mitchell. As at 31 October 2009, the Trust had various unitholders including, most relevantly for these proceedings, Northern Rivers Property Pty Ltd, Markmitt Pty Ltd, Blue Dolphin Racing Pty Ltd and Yamba Caravan Parks Pty Ltd (Affidavit of SWH [9]; CB 79-93). On 22 March 2011 (Affidavit of SWH [9]), the units held by Yamba Caravan Parks Pty Ltd were transferred to Mitchell Moran Family Holdings Pty Ltd and PJ & SL Mitchell Family Holdings Pty Ltd (Affidavit of SWH [10]). 3. Since the insured's incorporation on 20 February 2008, Mr Mitchell has been the insured's sole director and Blue Dolphin Racing Pty Ltd ('Blue Dolphin') has been its sole shareholder (Affidavit of SWH [15]). Since 20 February 2008, Mr Mitchell and Ms Linda Ann Mitchell have been shareholders in Blue Dolphin, respectively owning 50% of shares issued (ASF [15]). 4. Northern Rivers Property Pty Ltd's shareholders include Blue Dolphin Racing Pty Ltd (ASF [52]). 5. Markmitt Pty Ltd's shareholders include Ms Linda Mitchell (ASF [59]). 6. Yamba Caravan Parks Pty Ltd's shareholders are Mr David Mitchell, Ms Linda Mitchell, Ms Joanne Mitchell and Mr Paul Mitchell (ASF [58]-[61]) Relevant clauses of the policy 1. Clause 2 is the insuring clause. "Clause 2.1: WE agree to indemnify the INSURED for any CLAIM for compensation first made against the INSURED and reported to by US during the INSURANCE PERIOD in respect of any civil liability resulting from any breach of professional duty by the INSURED in its conduct of its PROFESSIONAL BUSINESS." "Clause 2.2: WE also agree to pay DEFENCE COSTS either incurred by US or incurred by the INSURED with OUR prior written consent." 1. Clause 3.3 of the policy provides: "Consultants, Subcontractors and Agents: Claim against the INSURED resulting from the conduct of any consultant, subcontractor or agent in the PROFESSIONAL BUSINESS of the INSURED and for whose acts, errors or omissions the INSURED is liable. WE will not cover the consultant, subcontractor or agent." 1. Clause 5.1 of the policy provides: "Interpretation In the POLICY: (a) Person includes individuals, partnerships, bodies corporate and associations. (b) The singular includes the plural and the masculine includes the feminine. (c) The headings are for descriptive purposes only." 1. Clause 6 of the policy contains the 'Definitions. The most relevant clauses in this section are: "Clause 6.1: CLAIM means any civil proceedings brought by a third party against the INSURED for compensation. … Clause 6.6: FAMILY MEMBER means the INSURED's: (a) Legal or de facto spouse, domestic partner or companion; (b) Parent, or the parent of the INSURED's legal or defacto spouse, domestic partner or companion; (c) Children and children of (a) and (b) above; (d) Siblings. ... Clause 6.10: INSURANCE PERIOD means the period specified in Item 4 of the Schedule, as 31 October 2009 to 31 October 2010. Clause 6.11: INSURED means: (a) The person, partnership, company, SUBSIDIARY or other entity, specified as the INSURED in the Schedule; and (b) Any person who is during the INSURANCE PERIOD a principal, partner, director or employee of the person, partnership, company, SUBSIDIARY or other entity, specified as the INSURED in the Schedule, but only while acting in the course of the PROFESSIONAL BUSINESS. … Clause 6.19: SUBSIDIARY means any entity which by virtue of any applicable legislation or law is deemed to be a SUBSIDIARY of the INSURED or in which the INSURED owns or controls, directly or indirectly 50% of the issued voting shares of such entity. Clause 6.20: WE/US/OUR means DUAL Australia Pty Ltd, as agent of the Underwriter named in the Schedule under the heading "Underwriters"." 1. Clause 7 of the policy contains the 'Exclusions'. The most relevant clause in this section relates to the "Associates" exclusion and is: "Clause 7.15: WE will not cover the INSURED, including for DEFENCE COSTS or other loss, in respect of: (a) Any CLAIM by, on behalf of or for the benefit of any INSURED; (b) Any CLAIM by, on behalf of or for the benefit of any SUBSIDIARY; or (c) Any CLAIM by, on behalf of or for the benefit of any FAMILY MEMBER of the INSURED, unless the FAMILY MEMBER is acting without any prior direct or indirect solicitation or co-operation from the INSURED, irrespective of the capacity in which the claim is brought." The parties' submissions 1. Although I will return to them below in greater detail, it is convenient to briefly set out the parties' respective arguments. 2. The insured submits that the insurer's refusal of indemnity is unjustified. Conversely, the insurer argues that it has no liability to the insured because Treetops was not a third party to satisfy the insuring clause, or alternatively, the claim came within one of three exclusions in the policy (D [3]). First, the defendant claims that Treetops is not a "third party" under the policy and therefore the proceedings against Malamit are not a "claim" to engage the insuring clause. Secondly, the insurer contends that the claim is excluded because it is "by, on behalf of, or for the benefit of" an insured, being Mr Mitchell. Thirdly, that the claim is excluded because it is "by, on behalf of, or for the benefit of" a subsidiary of the insured, being Treetops. Fourthly, that the claim is excluded because it is "by, on behalf of, or for the benefit of" a family member of the insured. Relevant legal principles Interpretation of contracts 1. Written commercial contracts must be interpreted objectively. 2. Most recently, in Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (S99/2015; S102/2015) (2015) 256 CLR 104, French CJ, Nettle and Gordon JJ explained at [46]-[52]: "[46] The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose. [47] In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract. [48] Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning. [49] However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding "of the genesis of the transaction, the background, the context [and] the market in which the parties are operating". It may be necessary in determining the proper construction where there is a constructional choice. The question whether events, circumstances and things external to the contract may be resorted to, in order to identify the existence of a constructional choice, does not arise in these appeals. [50] Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties' statements and actions reflecting their actual intentions and expectations. [51] Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption "that the parties ... intended to produce a commercial result". Put another way, a commercial contract should be construed so as to avoid it "making commercial nonsense or working commercial inconvenience". [52] These observations are not intended to state any departure from the law as set out in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales and Electricity Generation Corporation v Woodside Energy Ltd. We agree with the observations of Kiefel and Keane JJ with respect to Western Export Services Inc v Jireh International Pty Ltd." (citations omitted) (See the judgments of Bell and Gageler JJ at [119]-[121] and Kiefel and Keane JJ at [107]-[113] which are of similar effect). 1. Neither party in the present proceedings contends that any ambiguity arises on the construction of the contract. Interpretation of insurance contracts 1. However, there are some legal principles which are peculiar to the interpretation of insurance contracts. 2. It is accepted that a 'liberal approach' will be adopted in the construction of insurance contracts in favour of an insured, and that in the case of ambiguity the contra proferentem rule is applied against the insurer: Maye v The Colonial Mutual Life Assurance Society Ltd (1924) 35 CLR 14 at 22; Halford v Price (1960) 105 CLR 23 at 30, 34; McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 ('McCann') at [74(4)]; Liberty International Underwriters v The Salisbury Group Pty Ltd (in liq) & Ors [2014] QSC 240 at [31]. 3. In McCann at 589 [22], Gleeson CJ, referring Hydarnes Steamship Co v Indemnity Mutual Marine Assurance Co [1895] 1 QB 500 at 504 per Lord Esher MR and Lake v Simmons [1927] AC 487 at 509 per Viscount Sumner, said: "A policy of insurance, even one required by statute, is a commercial contract and should be given a businesslike interpretation. Interpreting a commercial document requires attention to the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure." (accepted in Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522 at 528-529 [15] per Gleeson CJ, McHugh, Gummow and Kirby JJ; CGU Insurance Ltd v Porthouse (2008) 235 CLR 103 at 116 [43] per Gummow, Kirby, Heydon, Crennan and Kiefel JJ; Chubb Insurance Company of Australia Limited v Robinson [2016] FCAFC 17 at [98] per Foster, Robertson and Davies JJ) 1. Gleeson CJ, McHugh, Gummow and Kirby JJ stated in Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522 at [16]: "In construing the Policy, as with other instruments, preference is given to a construction supplying a congruent operation to the various components of the whole." (see also Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at 381‑382 [69]-[71]) Interpreting exclusion clauses 1. In Darlington Futures Limited v Delco Australia Pty Ltd (1986) 161 CLR 500 at 510-511, Mason, Wilson, Brennan, Deane and Dawson JJ explained: "[T]he interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in case of ambiguity…[T]he principle, in the form in which we have expressed it, does no more than express the general approach to the interpretation of contracts and it is of sufficient generality to accommodate the different considerations that may arise in the interpretation of a wide variety of exclusion and limitation clauses in formal commercial contracts between business people where no question of the reasonableness or fairness of the clause arises". 1. Similarly, in Selected Seeds Pty Ltd v QBEMM Pty Ltd (2010) 242 CLR 336 at 344 [29], French CJ, Hayne, Crennan, Kiefel and Bell JJ stated: "According to general rules of construction, whilst regard must be had to the language used in an exclusion clause, such a clause must be read in light of the contract of insurance as a whole, thereby giving due weight to the context in which the clause appears." (see also Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 at 510) 1. A court will endeavour to construe an exclusion clause in a manner consistent with the commercial purpose of the contract of insurance, and where possible, avoid the exclusion operating so as to substantially defeat the indemnity granted by the policy and render the policy 'practically illusory': Alex Kay Pty Ltd v General Motors Acceptance Corporation [1963] VR 458 at 462-463; Fraser v BN Furman (Productions) Limited [1967] 1 WLR 898 at 905-906; Liberty International Underwriters v The Salisbury Group Pty Ltd (in liq) & Ors [2014] QSC 240 at [31]. "Third party" 1. In Chubb Insurance Company of Australia Limited v Robinson [2016] FCAFC 17 at [130], Foster, Robertson and Davies JJ explained: ""Third party" when used in the professional services exclusion clause is not defined in the GTC or in the D&O policy. We think that that expression, when used in the professional services exclusion clause, means a person or entity which is not a party to the D&O policy and which is not insured under that policy. The persons and entities insured under that policy were RBG itself (as the "Principal Organisation"), RBG's subsidiaries and executives employed by RBG and/or one or more of its subsidiaries. It follows that, if professional services are rendered to RBG or one of its subsidiaries (such as Reed), those services would not be rendered to a "third party" within the meaning of that expression in the exclusion clause. The services must be rendered by a person or entity which is insured under the D&O policy to a person or entity which is outside the Reed group of companies (emphases in original)." 1. In Digby v General Accident Fire & Life Assurance Corporation Ltd [1943] AC 121 at 127, Lord Simon LC said: "I think that the governing conception is that the insurer is one party to the contract and the policyholder another party, and that claims made by others….may be naturally described as claims made by third parties." Consideration 1. As I have already indicated, the insurer defends its refusal of Malamit's claim for indemnity under the Policy on four alternative bases. However, upon my analysis below, there are in fact only three bases to be considered. Third Party 1. The Policy provides indemnity in respect of a "Claim", which I have already noted, is defined as "…any civil proceedings brought by a third party against the insured for compensation" (cl 6.1). 2. The Plaintiff's submission is succinct. It correctly contends that "third party" is not expressly defined in the Policy. It also points out that the named parties to the contract were WFI, Blue Dolphin Racing Pty Limited (ATF MA and AL Mitchell Trust) and Malamit Pty Limited. 3. Uncontroversially, it submits that Treetops is not a party to the contract. The Plaintiff submits that it follows that the Treetops Claim is therefore one by a "third party" to the contract. 4. In part, the gravamen of the Defendant's denial of indemnity is that at all relevant times each of Malamit (the Insured) and Treetops (the Claimant) were controlled by the same individual, Mr Mitchell. From a practical point of view, it is submitted that if the Policy does respond then Malamit would be liable for a claim in respect of which Mr Mitchell would be giving instructions on both sides of the record. In that context, the Defendant submits that it could not be suggested sensibly that Treetops was a "true" third party in the sense that it was separate or unconnected from the insured. I observe in passing that Mr Mitchell is himself an insured by reason of clause 6.11(b). 5. In addition, the Defendant contends that the interpretation of both the insuring clause and the exclusions, in context, are consistent with the commercially sensible proposition that any insurer would not want to be liable for a claim where the insured's defence depends on instructions and evidence from the claimant. Whilst this may undoubtedly be an unsatisfactory outcome, it seems to me that it is one which could not be avoided, if properly construed, the Policy led to that outcome. 6. The Defendant accepts that Treetops does not fall within the definition of Insured in the Policy. However, the Defendant submits that "in construing any insurance policy, the words of any such policy are not to be construed according to their strictly philosophical or scientific meaning, but in their ordinary and popular sense" (D [20]). The Defendant also submitted that the Policy should be construed in the same manner as any other commercial agreement, by giving primary effect to the language used by the parties, so as to give the policy a sensible commercial meaning. That proposition is undoubtedly correct. 7. In addition, the Defendant submits that in resolving the meaning of the term of "third party", the court is obliged to look at the context in which that phrase appears and one should construe those words according to their natural and ordinary meaning, in the light of the Policy as a whole. That would involve taking into account the balance of the Policy, including the various exclusions in the Policy for claims "by, on behalf of or for the benefit of" any Associates (cl 7.15). 8. This approach by the Defendant to the construction of this Policy is in my view the correct one. The vice with the Plaintiff's approach on this aspect of the Policy is that it is somewhat myopic. It is reasonable and commercially sensible, at least for the insuring clause (cl 2.1), the definitions of Claim (cl 6.1) and Insured (cl 6.11), together with what are the exclusions of "Associates" (cl 7.15), to be read together. In my view, that provides a more comprehensive and accurate guide to what is meant by "third party". 9. In summary, the meaning of third party in the Policy must in my view be a person who is not a party to the contract, not an insured as defined and not an associate for the purposes of cl 7.15. 10. As I view the matter, if Treetops comes within the definition of "subsidiary" in the policy, it could not be regarded as a third party because it is an associate, as defined. 11. Treetops was an entity in which an Insured (Mr Mark Mitchell, as defined) owned 100% of the shares, at the relevant time. Treetops was therefore a "SUBSIDIARY" as defined (cl 6.19). 12. On the other hand, the Plaintiff submits that the definitions of "insured" and "subsidiary" both refer to and contemplate the Policy operating by reference to "entities" not possessed of legal personality, for example, partnerships and unincorporated associations. (cls 5.1(a), 6.11(a)). 13. The Plaintiff also submits, that properly understood, the claimant is not Treetops itself but either the Lismore Business Park Unit Trust or perhaps Treetops in its capacity as trustee of the Lismore Business Park Unit Trust. Further, the Plaintiff submits that even if Treetops is a subsidiary of an Insured, this does not matter because it is not the entity that has brought the claim. 14. I regard the Plaintiffs' submission on this point as incorrect and somewhat artificial. The Plaintiff in the relevant Supreme Court proceedings is Treetops the corporation. It is the legal entity which is said to have suffered loss. True it is that Treetops brings the action as a trustee (ASF [53]), but in my view that is immaterial. It is also true that the Policy is intended to cover "persons" as defined, whether individuals, partnerships, corporate entities or unincorporated entities (cl 5.1(a) and cl 6.11). So much is clear. 15. Critically, in my view, clause 7.15 of the Policy excludes cover for any claim by any "SUBSIDIARY" but importantly "irrespective of the capacity in which the claim is brought" (cl 7.15). Even though the corporate entity (Treetops) purporting to make a claim does so in its capacity as trustee, the definition of "SUBSIDIARY" is met because of the requisite level of ownership of Treetops, under clause 6.19. It seems to me that the precise manner in which Treetops conducts its business and brings its claim is immaterial, by reason of the express concluding words of clause 7.15. 16. I consider the claim by Treetops as one brought "by" a "SUBSIDIARY", as defined. As such, the "CLAIM" is excluded because it is by Treetops as an "Associate". Hence in my view, as a matter of construction, Treetops could not be regarded as a third party for the purposes of the policy. On that basis, the Plaintiff was right to refuse indemnity and the proceedings must be dismissed. However, other arguments have been advanced by the Defendant and I propose to deal with them. An Insured? 1. The question posed here is whether the Treetops claim can be properly characterised as one "by, on behalf of or for the benefit of any insured" (cl 7.15(a)). 2. The exclusion clause (cl 7.15) requires an Associate, as defined, to have brought the claim itself, or for a claim to have been brought "on behalf of" or "for the benefit of" an Associate. The first criterion will perhaps be more easily met than the latter two. The first will often be capable of being satisfied as a matter of simple uncontested fact. The latter two may require some form of evaluation. For example, satisfaction of the criterion "on behalf of" would generally be resolved by determining the existence of some agency: Plevin v Paragon Personal Finance [2014] UKSC 61 at [30]. 3. In terms of the phrase "for the benefit of", the Plaintiff submitted that an objective test must be undertaken to determine whether the claimant intended to bring its claim for the purpose of benefiting a specific person/s (Transcript 30). The Plaintiff also submitted that a benefit could not be conferred on any of the unitholders of the Trust, as all money received from the claim would be held on trust (Transcript 30). 4. However, the Defendant contended that a benefit is any advantage conferred upon a person by the "flow" of money that would come from the insured if the claim was paid out (Transcript 28). 5. The Defendant reiterates that Mr Mitchell is an insured, as he was a director or employee of Malamit and in day to day control of the relevant project and development management activity at the development (cl 6.11(b)). 6. On this aspect of the matter, the Defendant particularly focussed on the notion of "benefit" and submitted that at the time the claim was brought, Mr Mitchell was the sole shareholder of Treetops, a shareholder in Markmitt Pty Ltd and Yamba Caravan Parks Pty Ltd, which were both unitholders, and the ultimate shareholder in Northern Rivers Property Pty Ltd, also a unitholder in the trust. The Defendant submits that if the Treetops claim against Malamit was ultimately successful it would be to the benefit of those who have an interest in the trust. Accordingly, the Defendant submits that the claim by Treetops against Malamit was and is for the benefit of an insured, Mr Mitchell. The Defendant argued that the notion of a benefit was "very broad" (Transcript 24) and extended not only to the unitholders of the Trust but also to shareholders of the unitholders. Because Mr Mitchell had an "interest in the Trust" as a shareholder in one of the unitholders, then the claim was for his benefit and the "insured" exclusion applied (D [33]). The Defendant again calls in aid cl 7.15 and the immateriality of the capacity in which the claim is brought. 7. More particularly, in relation to the Trust, the Defendant submits that the trustee holds the Trust Fund on trust for members (cl 4.1.1 of the Deed) and further, that the trustee is responsible for the collection, receipt and obtaining of all dividends, all rents and other income from investments of the Trust Fund (cl 6.1.1 of the Deed). Notwithstanding the trustee's discretion to make a determination in accordance with the cls 6.1 and 6.2, the members are "presently entitled" to the income of the trust subject to the payment of appropriate expenses and/or presently entitled to the capital of the Trust (cl 6.3.5(a) and (b)). 8. Largely due to the state of the evidence, it is at this point that in my view the Defendant's case falters. In my view, the notion of benefit cannot be looked at in the abstract. It cannot be merely a theoretical benefit. The words "for the benefit of" must be looked at in context. Here there is simply no evidence as to the stage or state of the development. There are no financial records to suggest one way or the other whether there is income or capital capable of being distributed to unitholders. It should be observed that the landslip did occur in 2010 and Treetops has made a claim for substantial damages. However, there is simply no other evidence of the financial state of the trust, or even a prognosis as to the future financial state of the trust. 9. The Plaintiff emphasised that the Treetops claim is brought "by" Treetops as trustee. Further, it submitted that a claim by a trustee for indemnity is not brought "on behalf of or for the benefit of" the persons interested in the relevant trust but rather an activity undertaken by the trustee for its own benefit (P [5.4]). In this regard, the Plaintiff relies upon the Queensland Supreme Court decision of Flanagan J in Liberty Mutual Underwriters t/as Liberty International Underwriters v The Salisbury Group Pty Ltd (in liq) & Ors [2014] QSC 240. In this case, it was said that the relevant claim was an activity undertaken by the trustee on its own behalf and not on behalf of any persons interested in the relevant trust. 10. In Liberty Mutual, the insured was the trustee of a discretionary trust which had allegedly received misleading and deceptive and/or negligent advice from a financial advisor, the representative of which was the husband and/or father respectively of the insured's director and shareholders. In that event, the Plaintiff insurer sought a declaration that it was entitled to refuse indemnity by reason of certain exclusion clauses in the relevant policy. 11. The learned trial judge had to interpret the phrase "on behalf of" which appeared in the policy, but was not defined in it. In refusing declaratory relief, Flanagan J observed that as the damages claim of the Plaintiff in the main proceedings (a company called Treadstone) was not made by the corporate trustee in any representative capacity or as agent, it could not be seen to be making the claim "on behalf of" the beneficiaries of the discretionary trust. 12. In this court, the Defendant contended that Liberty Mutual was not relevant in the current proceedings for a number of reasons. Apart from different insuring clauses and differently worded exclusions, it submitted that the case involved a discretionary trust whereas the relevant trust here is a unit trust, the terms of which are very different to the trust in Liberty Mutual. 13. However, the Plaintiff submitted that even upon the assumption that the claim is brought for the benefit of the unitholders, the Treetops claim could still not be one brought for Mr Mitchell's benefit because he was not a unitholder. 14. As already observed, Mr Mitchell, although the sole shareholder of Treetops, held no units in the Trust and at best, did so indirectly through other corporate entities. In my view, on the present evidence, there is no basis to conclude that the proceedings have been brought on Mr Mitchell's behalf, let alone for his benefit. I am of course cognisant of ASF [14] and [16]-[21]. 15. In coming to that view, it is important to keep in mind a number of fundamental notions about trusts. A trust is a personal obligation binding on the legal owner of property to deal with this property for the benefit of the beneficiaries of the trust. Unlike a company, a trust – including a discretionary trust is not a separate legal entity. In law, a trustee is not recognised as having any additional or qualified legal personality. However, a trustee of a trading trust is personally liable to creditors and can be sued or bankrupted or wound up, if appropriate. 16. It is also important to acknowledge that the expression 'discretionary trust' is used to identify a species of express trust – one where the entitlement of beneficiaries to income or the corpus, or both, is not immediately ascertainable. The beneficiaries are selected from a nominated class by the trustee or some other person, and this power may be exercisable once, or from time to time: Federal Commissioner of Taxation v Vegners (1989) 90 ALR 547 at 551-2 per Gummow J. 17. It has been said that a discretionary trust has no fixed meaning and is used to describe particular features of certain express trusts: Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 at 234. 18. In Cypojayne Pty Limited v Sverre Rodskog (2009) NSWSC 301 at [41], Brereton J stated that the members of the class of beneficiaries in a discretionary trust are objects of a power, rather than beneficiaries in a strict sense. They do not have a proprietary legal or equitable interest in the trust fund, though they do have a right to the due administration of the trust and can hold the trustee to the terms of the trust. 19. On the other hand, a unit trust may or may not be a discretionary trust and a priori assumptions as to the nature of unit trusts under the general law and principles of equity do not assist and are apt to mislead. All depends upon the terms of the particular trust: CTP Custodians Pty Ltd v Commissioner of State Revenue of the State of Victoria (2005) 224 CLR 98 at [15]. 20. The concept of a unit trust has been considered most recently in Commissioner of Taxation v ElecNet (Aust) Pty Ltd (Trustee) [2015] FCAFC 178 in the joint judgment of Pagone and Edelman JJ at [88] – [93]. 21. In that case, the primary judge, Davies J described a "unit trust" as a trust where persons were entitled to a beneficial interest capable of being described as a unit in any of the income or property of the trust. In the appeal, Pagone and Edelman JJ indicated that in their view the concept of a unit trust did not necessarily require that the "units" involve beneficial interests. Further, that it may be possible for a "unit trust" to exist where the interest of the beneficiaries is contingent and "a unit trust" will not necessarily exist simply because it is possible to point to a single beneficiary with some interest in either income or property of the trust estate. Their Honours were there, of course, concerned with the meaning of "unit trust" for the purposes of the Income Tax Assessment Act 1936 (Cth), but nevertheless their reasoning is helpful in the present context (I should also observe that the High Court granted special leave to appeal in this matter on 28 July 2016). 22. The relevant trust (the Lismore Business Park Trust) came into existence on 8 February 2008. "Member" is defined (clause 1.9 of the Trust deed) as the person or corporation registered for the time being under the provisions of the deed as the holder of units and to include a person jointly so registered. Net income is defined (cl 1.12) to mean the Trust Income of the Trust Fund for each Accounting Period. Taxable Income is defined (cl 1.20) to mean Taxable Income for the purposes of the Tax Act excluding any amount which is included in taxable income only by reason of subdivision 207-B of the Tax Act or section 6AC of the Tax Act. 23. Trust Income is defined (cl 1.24) to mean, in respect of any Accounting Period, an amount equal to the Taxable Income of the Trust Fund for the Accounting Period. 24. The Trustee holds the Trust Fund on the terms of the Deed from the Commencement Date (cl 3.2). 25. The Trustee holds the Trust Fund on trust for the Members in proportion to each Members Proportion (cl 4.1.1). All units are of equal value (clause 4.1.2) further each unit will entitle the Member equally with the Members owning all other Units to the Trust Fund as an entirety and not entitle the Members to any particular security or investment comprised in the Trust Fund or any part of the Trust Fund (cl 4.1.3(a) and (b) 26. The Trustee has a first and paramount lien on each Member's units for all money due and unpaid presently payable by that Member or a Member's Estate to the Trustee (cl 5.3.1). 27. The Trustee is to collect, receive and obtain all dividends, interests, rents and other income from the investments of the Trust Fund (clause 6.1.1). The Trustee is to pay out of the gross income of the Trust Fund all costs and disbursements and commissions, fees, taxes, management charges and other proper outgoings in respect of the investments and administration of the Trust fund (cl 6.1.2). 28. Until the Vesting Date (as defined in clause 1.26), the Trustee may at any time before the expiration of each Accounting Period determine to pay or accumulate any part of the Net Income for each Accounting Period. The Net Income can be paid by an interim or final distribution (cl 6.1.3). 29. Clause 6.2 deals with the timing and circumstances under which determinations may be made, but it is clear that the Trustee exercises a discretion in terms of whether, and if so to what extent, a Determination is made. In that regard, the Trustee's discretion is said to be "absolute" (cl 6.2.7). Further, the Trustee will not be bound to give any reasons for its determination (cl 6.2.7). 30. Again, the amount of any accumulation of income is also a matter within the provence of the Trustee (cls 6.3.1 and 6.3.2). If a Trustee does not make a determination for the distribution of income, the Trustee holds the undistributed balance on trust for Members in accordance with each Member's proportions (cl 6.3.2). 31. The Defendant relies in particular upon clause 6.3.5 (to which I will shortly return) which states that notwithstanding anything to the contrary in clause 6, the Members: "(a) Are presently entitled to the income of the Trust subject only to payment of proper expenses by and of the Trustee relating to the administration of the Trust and (b) Are presently entitled to the capital of the Trust and may require the trustee to wind up the Trust and distribute the Trust Fund or the net proceeds of the Trust Fund." (emphasis not in original) 1. The Trustee has wide and general powers (cl 15.1). In addition, pursuant to clause 15.2, with respect to the Trust Fund, the Trustee may generally perform all acts of alienation and hypothecation and other acts of ownership to the same extent and with the same effect as might have been done if the Trustee were the beneficial owner of the Trust Fund (cl 15.2). 2. The decisions and actions of the Trustee "whether actually made or taken in writing or implied from the actions of the Trustee" are conclusive and binding on all the Members and others who in the future acquire any interest under the Deed (cl 15.3). 3. Pursuant to clause 16, the Trustee is given very wide powers relating to investment, banking, borrowing, granting of guarantees and the like (cls 16, 17 and 18). 4. In particular, pursuant to clause 18.7, the Trustee may institute and defend proceedings at law and pursue them to such final determination or compromise as the Trustee thinks advisable. 5. The Defendant points, as I have already said, to clause 6.3.5 and submits that the entitlement of unitholders pursuant to this clause supports the argument that Mr Mitchell would benefit (along with others) if Treetops' claim was successful. This clause, of course, speaks of unitholders being "presently entitled". 6. The High Court has considered the phase "present entitlement" in a number of cases. True it is they are in the field of taxation law. The phrase was not expressly defined in any of the enactments considered, however in my view these cases are still helpful, by analogy, in construing the terms of the trust deed. 7. In FCT v Whiting (1942) 68 CLR 199, the High Court held that amounts of income which were credited in favour of the beneficiaries of a trust were not to be viewed as the beneficiaries having a present entitlement to such income, as the beneficiaries were not entitled to call upon the Trustees to pay the residue of the estate to them. This was because payment of the liabilities of the estate had not been completely finalised. The Court held that in order for a beneficiary to be presently entitled to the income of a trust estate, the beneficiary must be able to demand immediate payment of such income from the Trustee. 8. The High Court again looked at the phrase in Taylor & Anor v FCT (1970) 11 CLR 444. Sitting alone, at 452, Kitto J took the view that the phrase "presently entitled" in that context referred to an interest in possession in an amount of income that was legally ready for distribution, so that the beneficiary would have a right to obtain payment of it. 9. Both of these decisions were considered by the High Court in Harmer v FCT (1991) 173 CLR 264. That case involved a dispute between three parties relating to the entitlement of a sum of money. The disputed sum was paid into Court by one of the parties and it was ordered that the sum be invested in a building society in the names of the parties' solicitors, who were to hold money on trust pending the outcome of the dispute. The Commissioner had assessed the parties' solicitors on the interest derived from the building society deposit on the basis that no beneficiary was presently entitled to such income, since pending the outcome of the trial no beneficiary had a "vested and indefeasible interest" in any part of it. In joint judgment, Mason CJ, Deane, Dawson, Toohey and McHugh JJ stated at 272-273: "After payment in the claimants acquired an interest in the moneys in the sense that they were entitled to insist that they be properly administered and applied for the purposes for which they were paid in. However no claimant was beneficially entitled to either the whole or any part of the moneys paid into court or of the interest earned thereof. The moneys were received and held…to be applied in accordance with the orders ultimately made by the Supreme Court. The respective interests of the individual claimants were at best contingent. None had an entitlement to the capital or income of the fund which was vested either in interest or possession. A fortiori, none had a present legal right to demand or receive payment of either capital or income. It follows that none of the claimants was "presently entitled" to the income of the fund..." 1. In the end, the Defendant's position in these proceedings is that the distinction between a unit trust on the one hand and a discretionary trust on the other (if any) does not assist in identifying whether the receipt of insurance monies into the trust is "for the benefit of the ultimate unitholders as the trust deed expressly provides that the unit holders are "presently entitled to income and capital of the trust" (cl 6.3.5) (D Supplementary [2]). 2. In the alternative, the Defendant submits that applying the reasoning of the majority in ElecNet, the trust operates as a unit trust and unitholders in the Trust have a beneficial interest in the income or property of the trust estate "which is capable of being functionally described as involving units" (D Supplementary [3]). 3. The Defendant accepts that the High Court decisions in Whiting, Taylor and Harmer stand for the proposition that "presently entitled" means that the beneficiary has an interest in the income which is both vested in interest and vested in possession and further, that the beneficiary has a present legal right to demand and receive payment in the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has funds available for immediate payment. 4. The Defendant submits that a similar meaning should be given to the words "presently entitled" appearing in the relevant trust deed. In the context of clause 6.3.5, this means that unitholders in the trust have a right to demand and receive income and capital of the trust, subject to the qualifications in that clause. Further, it submits that the fact that the trustee has a discretion in clause 6.1.3 to "determine" whether to pay the net income does not detract from that construction. 5. The Defendant also points out that pursuant to the deed (cl 6.1.3), the net income is either paid or accumulated, and if there is a determination pursuant to the Deed then there would clearly, it submits, be a "present entitlement" pursuant to clause 6.2.4. All accumulated income is to be held on trust for the Members in accordance with each Member's proportions (cls 6.3.1, 6.3.2, 6.3.3 and 6.3.4). In that sense, the Trustee is obligated to distribute in accordance with each Member's proportion and the income received, which the Defendant submits would include insurance monies, is to be held on trust in the relevant proportions and hence for the benefit of unitholders (and ultimately for those persons having a beneficial interest in the unitholders). 6. However, the Plaintiff makes the valid point that until the satisfaction of a trustee's rights of indemnity, it is impossible to say what trust funds are indeed available for distribution. It does seem to me that on any view, it can be said, borrowing the words of Lord Davey in Wharton v Masterman [1895] AC 186 at 201, that the entitlement is at best to a fund which is of an 'undetermined and uncertain' surplus. 7. In addition, the Plaintiff points out that the trustee is after all entitled to be reimbursed for proper expenditure relating to the administration of the trust and further submits that it is by no means clear that "insurance monies" would be part of any trust assets. Leaving the latter point to one side, it is clear that if the claim is paid, it would be paid to Treetops as compensation for losses said to have been incurred as a result of the landslip. 8. The Plaintiff submits that the purpose of bringing the claim is relevant to determining whether it could be said that it was a claim for the benefit, for example, of an insured. The Plaintiff reiterates that Treetops brings the claim for itself (that is for its own benefit). In bringing the proceedings, the Plaintiff says clauses 15.2 and 18.7 reinforce that proposition. 9. The Plaintiff also submits that whether the supposed "ultimate unitholders" have entitlements from which they derive a benefit requires analysis of each of the relevant trust deeds or other instruments under which the "ultimate unitholders are said to benefit". Correctly, the Plaintiff points out that there is simply no evidence before the court that would permit such an analysis. 10. Indeed, the Plaintiff asks rhetorically, and again in my view correctly, what is an "ultimate unitholder" and how it might be precisely said that insurance monies find their way into that person's (or entity's) hands. Of course, much might depend on whether those monies simply compensate Treetops for losses incurred. Some of those alleged losses may have been paid by Treetops, in which case the insurance monies would replenish the relevant account to that extent. But, others may simply exist as debts owed by Treetops. Again, the evidence does not permit any analysis of the precise status of the various losses said to have been incurred as a result of the landslip (CB 233). 11. From the above authorities, to be "presently entitled" to the income of a trust estate, the beneficiary must have at least a vested beneficial interest (as opposed to merely a contingent interest in the trust income) and must be able to demand payment of the trust income from the trustee. 12. As I have already commented, there is simply no evidence as to financial position of the trust. Notwithstanding cl 15.2, in my view there is no basis upon which to find there is a benefit, of any kind, which is yet vested and depending upon the success of the project, there may never be. 13. After a somewhat tortuous analysis, I do not consider, on the basis of the above reasons, that Treetops' claim can be said to be "on behalf of" or "for the benefit of" an insured. This particular exclusion would not enable the Defendant to refuse indemnity. Family Member? 1. The Defendant submits that notwithstanding that Mr Mitchell holds no units in the Trust, certain of Mr Mitchell's family members hold shares in one or more companies, that in turn hold units in the Lismore Business Park Trust. Those entities are Markmitt Pty Ltd, Mitchell Moran Family Holdings Pty Ltd, PJ & CL Mitchell Family Holdings Pty Ltd, Yamba Caravan Parks Pty Ltd and Northern Rivers Pty Ltd. 2. The Plaintiff submits that in relation to the first four entities, none of those companies holds its units for itself, but rather does so as a trustee. 3. However, the Plaintiff accepts that Northern Rivers is different. It accepts that its units are held for itself, but none of the relevant family members holds any of its shares. The Plaintiff accepts that Blue Dolphin Racing Pty Ltd holds one third of the shares in Northern Rivers and that Ms Linda Mitchell is a shareholder in Blue Dolphin. The Plaintiff submits that that connection is both too remote and quantitatively insignificant to justify a conclusion that the Treetops claim is brought for Ms Linda Mitchell's benefit. 4. In any event, the Plaintiff points out that the Treetops claim would not be deprived of indemnification under the Policy by operation of the family member exclusion as it does not operate where the relevant family member is acting without any prior direct or indirect solicitation or co-operation from the insured. It submits that the Treetops claim was a consequence of the Treetops engineers giving notice to Treetops that the claim against them was an "apportionable claim" under the Civil Liability Act 2002 (NSW) and that Malamit was for that purpose a concurrent wrongdoer. The Plaintiff further points out that there is simply no evidence that Mr Mitchell, directly or indirectly, solicited or co-operated with any family members to instigate the bringing of the Treetops claim. 5. The Plaintiff submits that the Defendant's submission, at its highest, is that a family member might ultimately benefit. However, each of the relevant unitholders in the trust is a corporate entity that cannot be "an insured", a "subsidiary" or a "family member of the insured" for the purposes of the exclusion (cl 7.15) and four out of the five relevant corporate unitholders do not hold those units on their own behalf. One entity that does hold units for itself is Northern Rivers Pty Ltd, an entity in which none of Mr Mitchell's family members holds any shares. 6. The Plaintiff submits that in order to make good its submission that the Treetops proceeding against Malamit is one that may result in some benefit for a family member, such that the exclusion clause may be engaged, the Defendant is required to demonstrate how each unitholder would deal with "insurance monies". 7. However, the Defendant reiterates that Mr Mark Mitchell is an insured and that there is no issue that each of David Mitchell, Linda Mitchell, Joanne Mitchell and Paul Mitchell is a family member, as defined, of Mr Mark Mitchell, who is a shareholder or ultimate shareholder in one or more unitholders in the Trust. Further, the Defendant submits that if the Treetops claim against Malamit is successful, those who have an interest in the Trust will benefit. The Defendant also submits that from an onus point of view there is no evidence that any family member is acting without any prior direct or indirect solicitation or co-operation from Mr Mitchell. 8. According to the Defendant, the claim by Treetops against Malamit should then be properly characterised as being one for the benefit of the nominated family members. Leaving the question of solicitation or co-operation to one side for the moment, it is not clear to me that if Treetops was successful in its claim the family members as opposed to entities in which they hold shares might benefit. Given the state of the evidence, this assertion by the Defendant seems to me to be theoretical and speculative. There is simply no way of identifying what, if any, benefit anyone is presently entitled to or likely to obtain. 9. For these reasons, I do not regard this exclusion as having any application. Conclusion 1. However, for the reasons earlier expressed in [53] of this judgment, I am of the view that the Defendant was entitled to refuse indemnity. I would invite the parties to prepare short minutes of order giving effect to my reasons. I will also hear the parties on costs if that is necessary. ******* Amendments 16 September 2016 - Typos in para [72] "assumption" to "assumptions" para [93] "were presently entitled" to "was presently entitled". 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: 16 September 2016