HIGH COURT OF AUSTRALIA
BRENNAN CJ,
McHUGH, GUMMOW, KIRBY AND HAYNE JJ
UNITY INSURANCE BROKERS PTY LIMITED APPELLANT
AND
ROCCO PEZZANO PTY LTD RESPONDENT
Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (P64-1996)
[1998] HCA 38
20 May 1998
ORDER
Appeal dismissed with costs.
On appeal from the Supreme Court of Western Australia
Representation:
C J L Pullin QC with D M Bradley for the appellant (instructed by
Barker Gosling)
R H B Pringle QC with D A Dawes for the respondent (instructed by
Michael Rennie)
Notice: This copy of the Court’s Reasons for Judgment is subject to formal revision prior to publication in the Commonwealth Law Reports.
CATCHWORDS
Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd
Insurance - Insurance Brokers - Breach of duty or contractual obligation by broker to disclose insured's full claims history to insurer - Compromise settlement by insured of claim against insurer and remainder of claimed damages sought from broker - Whether settlement reasonable - Whether sufficient evidence brought by insured to demonstrate the strength of the insurer's defence of non-disclosure - Whether broker's breach of duty or contractual obligation relevantly caused insured's loss - Whether settlement rendered the remainder of insured's damages too remote.
Words and phrases - "A reasonable insurer".
Insurance Contracts Act 1984 (Cth), s 28.
BRENNAN CJ. Hayne J has set out the relevant facts, which I need not repeat, and has reached a conclusion with which I respectfully agree. Although I am in substantial agreement with what his Honour has written, my reasons differ in some respects. I point out those differences.
The appellant broker's failure to disclose to the insurer the full claims history of the respondent insured had an immediate consequence: the insured obtained a policy that was arguably defeasible at the option of the insurer and there was no certainty that the insurer would not attempt to exercise the option. The policy did not provide the sure cover which the broker was retained to procure. If the insurer was not liable under the policy to provide a full indemnity to the insured, the insured was entitled to full indemnity from the broker by reason of the broker's breach of its retainer or its negligence. When the insurer denied liability "by reason of material non-disclosure of prior claims", the insured brought proceedings in which it joined the insurer and the broker as defendants. If the action against the insurer had gone to trial and the insurer had succeeded in denying liability, the insured would have been entitled to obtain full indemnity against the broker.
When a claim is met by an arguable defence, a compromise is a natural and foreseeable result. Therefore it is a natural and foreseeable result of whatever creates an arguable defence to a claim that the claim will be compromised. In the present case, whatever weakness there was in the insured's case against the insurer was attributable to the broker's negligent breach of its retainer or its negligence. The acceptance in settlement of the insured's claim against the insurer of a sum less than a full indemnity was something which occurred in the natural course of events or which was in contemplation of the parties at the time of the engagement of the broker or was reasonably foreseeable at the time of the broker's negligence. A shortfall below a full indemnity was not so remote from the insurer's breach of retainer or negligence as necessarily to fall outside the area of compensable loss[1]. The critical question is whether the insured's acceptance of a sum less than a full indemnity should be regarded as a result of breach of contract or of negligence. If the sum accepted in settlement were a reasonable sum to accept in settlement of the insured's claim for an indemnity against the insurer, a shortfall in the amount of the indemnity is, as a matter of common sense and experience[2], the result of the broker's negligence. But if the sum accepted were unreasonably low, the insured could not establish that the entire shortfall was the result of the broker's negligence[3]. As the insured was obliged to act reasonably to mitigate any loss suffered by reason of the broker's breach of retainer or negligence, the loss incurred by the acceptance of an unreasonably low sum in settlement could not be attributed to the broker's wrongful conduct, either because the acceptance of such a sum was not a reasonable step to take in mitigation of the insured's loss or because it was not foreseeable that the insured would act unreasonably[4].
[1]Wenham v Ella (1972) 127 CLR 454 at 471-472; Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653 at 657-658, 672-673.
[2]Medlin v State Government Insurance Commission (1995) 182 CLR 1 at 6.
[3]See Medlin v State Government Insurance Commission (1995) 182 CLR 1 at 10.
[4]Burns vMAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653 at 673.
When an agent is under a duty to exercise reasonable skill and care in negotiating a contract between the principal and a third party but fails to perform that duty whereby the third party asserts an entitlement to deny the principal's rights under the contract, the damages which the principal who compromises a claim to enforce those rights against the third party may recover against the agent are the difference between what the principal would have obtained from the third party had the agent exercised reasonable skill and care and what the principal could reasonably obtain by compromise with the third party. It follows that, in proving damages, the principal must show (i) what would have been obtained from the third party absent the defendant's negligence, and (ii) that, having regard to any weakness in the plaintiff's claim against the third party caused by the agent's negligence, the amount accepted in settlement was reasonable in the circumstances. Although a rule expressed in these terms may encourage the principal reasonably to settle a claim with the third party, in my respectful opinion the adoption of the rule is not in furtherance of any legal policy of encouraging settlements. It simply applies to a particular fact situation the ordinary principles governing the assessment of damages in contract and in tort.
The onus is on a plaintiff seeking damages in tort or more than nominal damages in contract to establish the nature and extent of the damages suffered as the result of the defendant's negligence. Where the damages claimed are the difference between what could have been obtained from a third party but for the defendant's negligence and the sum accepted in settlement of the plaintiff's rights against the third party, the plaintiff must prove that that sum equals or exceeds what was reasonably obtainable in the circumstances from the third party having regard to the effect of the defendant's negligence on the plaintiff's rights against the third party.
The plaintiff must show that the sum accepted in settlement was reasonable[5]. The test of reasonableness is, as Hayne J says, an objective one. Evidence of the advice which the insured received to induce it to accept the settlement is not proof in itself of the reasonableness of the settlement advised. The factors which lead to the giving of the advice are factors relevant to the reasonableness of the settlement but the only relevance of advice given by the insured's legal advisers to settle is that it tends to negative the hypothesis that the insured acted unreasonably in accepting the settlement.
[5]Biggin & Co Ltd v Permanite Ltd [1951] 2 KB 314 at 321 per Somervell LJ and at 326 per Singleton LJ.
If an amount be accepted by a plaintiff in settlement with a third party and subsequently discovered events demonstrate that the settlement was more favourable than it would have been had those events been known at the time, the defendant is not disadvantaged by the settlement. On the other hand, if events subsequently discovered by a plaintiff show that a more favourable settlement could have been obtained, the damages assessed against the wrongdoer are not necessarily diminished. The reasonableness of a settlement depends on the circumstances existing at the time, provided the plaintiff has acted reasonably in discovering the circumstances material to the settlement at that time.
I respectfully agree with Hayne J that there was sufficient evidence to support the concurrent findings of fact made by the learned trial judge and the Full Court that the settlement reached between the insured and the insurer was reasonable. It would have been against the weight of such evidence as there was to hold to the contrary. The insured was entitled as against one or other of the defendants it had sued to a full indemnity. Its acceptance of a sum less than the full indemnity from the insurer left the insured exposed to the risk of litigation against the broker alone, a risk of losing the full indemnity which would have been obtained from one or other defendant had there been no settlement.
I would dismiss the appeal.
McHUGH J. The question in this appeal is whether a plaintiff claiming damages for breach of contract is entitled to damages for loss arising from the plaintiff compromising legal proceedings with a third party where the proceedings arose out of the breach of contract.
The appeal is brought by Unity Insurance Brokers Pty Ltd ("the broker") against an order of the Full Court of the Supreme Court of Western Australia. That order dismissed the broker's appeal against a judgment holding it liable in damages for breach of a contract made with the respondent. The broker contends that, although it breached its contract with the insured by failing to exercise reasonable care and skill in obtaining an insurance policy, the insured failed to prove that it had suffered a loss from that breach. That contention is based on the ground that the insured sought to prove its loss simply by proving the difference between the sum that it would have received from the insurer, if due care had been exercised, and the sum that it did receive in settlement of the claim with the insurer. The broker contends that to calculate its loss the insured was required to prove the sum that it would have received if it had litigated the matter against the insurer and that the insured cannot rely on the settlement sum in calculating the difference.
Factual background
The broker agreed to obtain insurance for the respondent, Rocco Pezzano Pty Ltd, ("the insured") in respect of the insured's business premises in East Cannington, near Perth. Pursuant to the agreement, the broker obtained a special risks insurance policy from NZI Insurance Australia Limited ("the insurer"). Among the risks covered by the policy was damage by fire to the insured's plant, machinery, stock, contents and premises. During the currency of the policy, a fire at the premises extensively damaged many of those items. The insurer refused to indemnify the insured for the damage because "of material non-disclosure of prior claims". The non-disclosure was caused by the broker who disclosed to the insurer only one of 12 claims that the insured had made against insurers during the previous 13 years.
As a result of the insurer's refusal to indemnify it, the insured sued the insurer for breach of its promise of indemnity and the broker for breach of its duty to exercise reasonable care and skill in obtaining the policy. The insurer, relying on s 28 of the Insurance Contracts Act 1984 (Cth) ("the Act"), asserted that it was entitled to reduce its liability under the policy to nil by reason of the non-disclosure. In these circumstances, the legal advisers of the insured, including senior counsel advised it to settle the action against the insurer for $900,000. The shortfall between the amount of the settlement and a full indemnity was more than $800,000. The insured contends that, because the broker placed it in the position where it had to settle for this sum, the broker is liable to it for the difference between the amount of the full indemnity and the sum of $900,000 received in the compromise settlement.
In the action between the insured and the broker[6], Mr Pezzano, a director of the insured, gave evidence that he had been advised that the insured should accept the sum of $900,000 rather than "losing everything because there was no disclosure" of the full claims history. He also testified that the insured's lawyers had told him that the insurer "wouldn't pay any more than that". Senior counsel and the insured's solicitors who gave this advice were not called as witnesses. Nor was there any other evidence concerning the reasons for the settlement. There was, however, evidence that the initial offer from the insurer was $740,000 and that this had been eventually increased to the sum of $900,000 which was then accepted.
[6]Rocco Pezzano Pty Ltd v Unity Insurance Brokers Pty Ltd (1995) 8 ANZ Ins Cas 61-288.
The learned trial judge found that the broker had breached its duty to the insured. He held that it was reasonable to compromise the claim and that the settlement was reasonable. The judge found that the amount to which the insured would have been entitled on an indemnity basis was $1,720,287.04. He awarded the insured the difference between that sum and the $900,000 which the insured had accepted in settlement.
His Honour found that the insured would have obtained insurance of the kind obtained from the insurer even if it had disclosed the history of prior claims. This finding was based on the evidence of an expert in the industry who said that, while he was not sure at what cost or on what terms cover would be given, he thought that cover would have been obtained even after full disclosure of the previous claims. The witness said that the premium payable for the policy in those circumstances "would be a bit higher" than normal[7]. He conceded in cross‑examination that not all insurers would have provided cover. However, he thought that a reasonable insurer would have done so[8]. His Honour entered judgment for the insured in the sum of $1,041,166.
[7]Rocco Pezzano Pty Ltd (1995) 8 ANZ Ins Cas 61-288 at 76,204.
[8]Rocco Pezzano Pty Ltd (1995) 8 ANZ Ins Cas 61-288 at 76,204.
The broker's appeal to the Full Court of the Supreme Court of Western Australia was dismissed[9].
[9]Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1997) 9 ANZ Ins Cas 61-343.
The issue
Upon these facts, the principal issue in this appeal is whether the difference between the amount that the insured would have received under the policy and the amount which it received in the settlement was a loss caused by the broker's breach of contract.
The broker contends that the insured could recover the difference between the two sums only if it showed that it could not have recovered any more than the sum for which it settled. It asserts that, notwithstanding its breach, s 28(3) of the Act enabled the insured to claim the full indemnity under the policy less some small amount for the increase in premium.
Section 28 of the Act provides:
"(1) This section applies where the person who became the insured under a contract of general insurance upon the contract being entered into:
(a) failed to comply with the duty of disclosure; or
(b) made a misrepresentation to the insurer before the contract was entered into;
but does not apply where the insurer would have entered into the contract, for the same premium and on the same terms and conditions, even if the insured had not failed to comply with the duty of disclosure or had not made the misrepresentation before the contract was entered into.
(2) If the failure was fraudulent or the misrepresentation was made fraudulently, the insurer may avoid the contract.
(3) If the insurer is not entitled to avoid the contract or, being entitled to avoid the contract (whether under sub-section (2) or otherwise) has not done so, the liability of the insurer in respect of a claim is reduced to the amount that would place him in a position in which he would have been if the failure had not occurred or the misrepresentation had not been made."
The plain meaning of this section is that the insurer was not entitled to avoid the policy even though the insured failed to comply with the duty of disclosure. However, the insurer was entitled to reduce its liability to the amount that would place it in the position in which it would have been if the failure to disclose had not occurred[10]. That being so, the broker argues that the insured was entitled to full indemnity less the amount of the additional premium which a reasonable insurer would require by reason of the insured's claims history. Consequently, the broker contends that it was liable only for the amount of that additional premium and that that sum was the only loss that the insured had suffered by reason of the broker's breach. On this basis, the "loss" which the insured suffered by accepting $900,000 in settlement of its claim against the insurer was the result of its own voluntary act and was not causally connected with the breach of duty on the part of the broker.
[10]s 28(3).
Causation and remoteness
To succeed in its claim for the difference between the full indemnity and the settlement sum, the insured must show that the difference "resulted from the breach" of the insurance brokerage contract[11]. The question then is whether the breach by the broker caused or contributed to the loss of the difference[12]. Whether one event caused or resulted from another is determined in legal proceedings by applying common sense criteria and not philosophical or scientific theories of causation[13].
[11]Reg Glass Pty Ltd v Rivers Locking Systems Pty Ltd (1968) 120 CLR 516 at 523; Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310 at 349.
[12]Norton Australia Pty Ltd v Streets Ice Cream Pty Ltd (1968) 120 CLR 635 at 643.
[13]March v E & M H Stramare Pty Ltd (1991) 171 CLR 506.
Once the trial judge found that the settlement was reasonable, the difference between the indemnity and the settlement sum plainly resulted from the broker's breach. Both as a matter of logic and common sense, the difference resulted from the failure of the broker to disclose the prior claims to the insurer. If the broker had not breached its duty, the insured would not have been placed in a position where it had to decide whether or not to accept the insurer's offer. As long as the decision of the insured to accept the settlement was reasonable, the act of the insured in accepting the settlement was directly connected with the broker's breach of duty[14].
[14]Dee Conservancy Board v McConnell [1928] 2 KB 159; Edwards v Insurance Office of Australia Ltd (1933) 34 SR(NSW) 88 at 98; Lord v Pacific Steam Navigation Co Ltd (The Oropesa) [1943] 1 All ER 211; Haber v Walker [1963] VR 339 at 358-359; Thorpe Nominees Pty Ltd v Henderson & Lahey [1988] 2 Qd R 216; Chase v De Groot [1994] 1 NZLR 613 at 626-627; Medlin v State Government Insurance Commission (1995) 182 CLR 1 at 6, 10, 21.
However, to succeed in its action against the broker, the insured must show more than that its loss was causally connected with the broker's breach of duty. Damages in contract are recoverable only for a loss which is the kind of loss which was within the contemplation of the contract breaker or would have been within the contemplation of a reasonable person in his or her position[15].
[15]Koufos v C Czarnikow Ltd [1969] 1 AC 350 at 395; Wenham v Ella (1972) 127 CLR 454 at 471-472; Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653 at 657-658, 672-673.
Was it or ought it to have been within the reasonable contemplation of the broker that, if it failed to carry out its obligation to exercise reasonable care and skill in obtaining the policy, the insured might be placed in a position where it was forced to compromise a claim for indemnity under the policy? In my opinion it was.
A reasonable insurance broker would know that if he or she caused the insured to breach its duty of disclosure, there was a high probability that the insurer would repudiate a liability to fully indemnify the insured. Moreover, a reasonable person in the position of the broker must also be taken to know of the provisions of s 28 of the Act giving an insurer the right to reduce its liability to nil in some circumstances. In that setting, it is within the reasonable contemplation of a person in the position of the broker in the present case that, if he or she causes the insured to breach its duty of disclosure, litigation may ensue and that the insured and the insurer may differ as to whether the insurer is entitled to reduce its liability to nil. Furthermore, a reasonable person in the position of the broker in this case would contemplate not only the possibility of litigation between the insured and the insurer but also that the contentions of the insurer might make it reasonable for the insured to settle the litigation.
Accordingly, upon the finding in this case that the settlement was reasonable, the insured proved a causal connection between the settlement and the breach of the broker's duty of care and that the settlement was within the reasonable contemplation of the broker or a reasonable person in its position. If the case is governed by ordinary principles of contract law concerning causation and remoteness, the insured is entitled to recover the loss claimed.
Surprisingly, there is no reported case which authoritatively and persuasively lays down the principle which governs the facts of a case such as the present. There are a number of cases[16] in which a plaintiff to a contract has recovered damages against the defendant for monies paid to third parties as a result of compromising actions which were arguably the result of the defendant's breach. In these cases it was either held or assumed that monies paid by a plaintiff in reasonable settlement of an action resulting from the defendant's breach of contract was recoverable in an action against the defendant for breach of contract. However, none of these cases contain reasoning which can be regarded as persuasive. Biggin & Co Ltd v Permanite Ltd; Berry Wiggins & Co Ltd (Third Parties)[17] is the case most frequently cited in this context, subsequent decisions merely applying the propositions laid down in that case.
[16]Smith v Compton (1832) 3 B & Ad 407 [110 ER 146]; Fisher v The Valdtravers Asphalt Co (1876) LR 1 CP 511; Edwards (1933) 34 SR(NSW) 88; Biggin & Co Ltd v Permanite Ltd; Berry Wiggins & Co Ltd (Third Parties) [1951] 1 KB 422; Tadoran Pty Ltd v N G Delaney Insurances Pty Ltd (1989) 5 ANZ Ins Cas 60-900; Suncorp Insurance and Finance Pty Ltd v Ploner [1991] 1 Qd R 69; Western Australia v Bond Corporation Holdings Ltd (1991) 28 FCR 68.
[17][1951] 1 KB 422; [1951] 2 KB 314 (CA).
In Biggin, Devlin J and the English Court of Appeal considered a claim for damages where the defendant had sold defective material to the plaintiff who had resold it and had later been forced to settle claims made against it by third parties for supplying the defective material. The plaintiff claimed that the amounts paid in settlement of the claims against the defendant were losses recoverable from the defendant for its breach of contract at first instance. Devlin J rejected the claim. He said[18]:
"Was the compromise a foreseeable consequence of the making of the claim? In my judgment, it was not a consequence in the legal sense at all. It flowed from the voluntary acts of the plaintiffs."
His Lordship said that a plaintiff who settles does so at his own risk and that if "he compromises erroneously where there is no liability, he cannot make the defendant pay for his error"[19]. It is difficult to know whether his Lordship decided the case on causation or remoteness or both. The reference to foreseeability in the first sentence of the above extract suggests remoteness. The reference to consequence in the second sentence suggests causation.
[18][1951] 1 KB 422 at 428.
[19][1951] 1 KB 422 at 427.
On appeal, the Court of Appeal came to a different conclusion. Somervell LJ said[20]:
"I think that the judge here was wrong in regarding the settlement as wholly irrelevant. I think, though it is not conclusive, that the fact that it is admittedly an upper limit would lead to the conclusion that, if reasonable, it should be taken as the measure. The result of the judge's conclusion is that the plaintiff must prove their damages strictly to an extent to show that they equal or exceed £43,000; and that if that involves, as it would here, a very complicated and expensive enquiry, still that has to be done. The law in my opinion, encourages reasonable settlements, particularly where, as here, strict proof would be a very expensive matter. The question, in my opinion, is: what evidence is necessary to establish reasonableness?"
Singleton LJ said[21]:
"The plaintiffs must establish a prima facie case that the settlement was a reasonable one. If the defendants failed to shake that case, the amount of the settlement can properly be awarded as damages. The position is much the same, though perhaps not quite so strong, as in the case in which damages have been assessed in a suit between other parties involving the same facts. The judgment is not binding, but the court will not lightly disregard it in the absence of fresh evidence or new factors."
Birkett LJ agreed with both judgments[22].
[20]Biggin & Company Ltd v Permanite Ltd [1951] 2 KB 314 at 321.
[21]Biggin [1951] 2 KB 314 at 325.
[22]Biggin [1951] 2 KB 314 at 327.
With great respect to the Court of Appeal, the reasoning is far from clear. First, it is not clear whether their Lordships even considered issues of causation and remoteness. Perhaps their Lordships assumed that the settlement was causally connected with the breach and that it was not too remote a consequence of that breach if the settlement was reasonable. But they did not say so. Moreover, the reference to public policy in the judgment of Somervell LJ suggests that they did not consider the case in terms of causation or remoteness.
It is impossible, however, to think that their Lordships intended that money paid in reasonably settling a third party action following a breach of contract could be recovered from the defendant even though there was no causal connection between the settlement and the breach. But, even on this restricted reading of the judgments of the Court of Appeal, their Lordships' reasons are at least open to the interpretation that every reasonable settlement of litigation resulting from a breach by the defendant must be regarded as within the contemplation of the defendant. That proposition cannot be accepted.
Whether a settlement was within the contemplation of a defendant or a reasonable person in its position must depend upon the nature of the contract between the plaintiff and the defendant, their actual or imputed knowledge of the consequences of a breach, and the nature of the third party's claim against the plaintiff. As a general rule, a contract breaker must be taken to have reasonably contemplated that its breach may force the innocent party into litigation with third parties and that the innocent party may conclude that it is in its best interest to compromise the third party's claim. But it does not follow that the fact that it was reasonable for the plaintiff to compromise the claim against the third party necessarily means that the settlement was within the reasonable contemplation of the defendant. That is so even in those cases where the defendant's breach was proved to be causally connected with the settlement. Each case must depend upon its own facts.
In my opinion, Biggin should not be used as an authority in this country. Whether the claim is in tort or contract, the question whether the plaintiff can recover from the defendant monies paid in settlement of a third party action depends on ordinary principles of causation and remoteness. That proposition also applies in a case such as the present where the settlement is an element in the calculation of damages.
One further point should be made about the Court of Appeal's judgment in Biggin. Somervell LJ expressed the opinion that, while the client can prove that the settlement was made as the result of legal advice, the evidence of the advisers is not ordinarily relevant or admissible. With great respect, I am unable to accept that the evidence of the legal advisers is not normally relevant or admissible in such a case. On the contrary, in most cases where the settlement is made on legal advice, the evidence of the relevant legal advisers is vital. This is because the risk involved in the litigation and the reasoning which led to the settlement are the factors that will determine whether or not the settlement was reasonable. If an unreasonable settlement is made on bad legal advice, the innocent party's remedy is against the legal adviser, not the contract breaker.
The final question in the appeal is whether the trial judge's finding that the settlement was reasonable can stand. The insured called no evidence from its legal advisers. The learned judge said[23]:
"It seems to me, in all of the circumstances, that, viewed from the plaintiff's perspective in January 1994 (when the settlement with NZI was achieved), there was a reasonable prospect that NZI would succeed in its defence on the non-disclosure issue (that, as I have said, having been the only issue which, on the evidence, caused the plaintiff to consider it necessary to settle for less than the amount of its claim after taking into account the proper application on the average provisions of the policy).
Once that is accepted, and having regard for the fact that the plaintiff had been advised by senior counsel to settle with NZI for payment of the sum of $900,000 (and Mr Pezzano said in evidence not only that he was told that it was better to accept this amount than to lose everything 'because there was no disclosure' of the full claims history but also that his lawyer told him that NZI 'wouldn't pay any more than that'), it seems to me that the settlement was reasonable.
Of course the plaintiff was required, in circumstances in which it proposed to recover the balance of its claim from the defendant, to act with the defendant's interests in mind as well as its own. I am, in this respect, troubled by the fact that no evidence was placed before me to suggest that the defendant was invited to comment on the reasonableness of the proposed settlement ...[24]. However I am, in the end, satisfied that this did not render the settlement unreasonable in circumstances in which the defendant was maintaining a complete denial of liability to the plaintiff, in which it had denied knowledge of the plaintiff's prior claims history and in which it was ascribing to the plaintiff the very act, which had given rise to the non‑disclosure, of which it had itself been guilty. Moreover, it may, in this respect, be apposite to quote what was said by Lord Macmillan (albeit in a somewhat different context) in Banco de Portugal v Waterlow[25] cited in McGregor on Damages[26] as follows:
'Where the sufferer from a breach of contract finds himself in consequence of that breach placed in a position of embarrassment the measures which he may be driven to adopt in order to extricate himself ought not to be weighed in nice scales at the instance of the party whose breach of contract has occasioned the difficulty. It is often easy after an emergency has passed to criticise the steps which have been taken to meet it, but such criticism does not come well from those who have themselves created the emergency. The law is satisfied if the party placed in a difficult situation by reason of the breach of a duty owed to him has acted reasonably in the adoption of remedial measures and he will not be held disentitled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken.'
I am satisfied, in the light of the evidence before me, that the defendant's breach of duty (whether contractual or tortious) was such as to leave the plaintiff exposed to a real risk of complete failure in relation to its claim against NZI, that the circumstances were such that it was reasonable for it to have sought to compromise that claim and that the compromise which it did in fact achieve was reasonable in all of the circumstances."
[23]Rocco Pezzano Pty Ltd (1995) 8 ANZ Ins Cas 61-288 at 76,213-76,214.
[24]cf Ng Chee Chong & Ors t/as Maran Road Saw Mill v Austin Taylor & Co Ltd [1975] 1 Lloyd's Rep 156 at 161 per Ackner J.
[25][1932] AC 452 at 506.
[26]15th ed, par 311.
The Full Court was "unable to conclude that his Honour erred in this finding"[27].
[27]Unity Insurance Brokers Pty Ltd (1997) 9 ANZ Ins Cas 61-343 at 76,764.
Apart from the fact that the insured's solicitors and senior counsel advised the settlement, there was simply no evidence upon which the learned trial judge could determine whether objectively the settlement was reasonable. In addition, his Honour accepted that, for the payment of an additional premium, the insured would have obtained insurance of the kind obtained from the insurer even if it had disclosed the history of the prior claims. It may be that this insurer would not have accepted the insured's proposal in any circumstances once it learned of the prior claims history. In that event, the insurer would have been entitled to reduce its liability to nil and the settlement would have been a reasonable one. But the insured led no evidence from the insurer or its officers as to what it would have done if it had known the true claims history of the insured. Moreover, there was evidence, which his Honour seemed to accept, that the insurer in this case was "a reasonable insurer"[28]. This suggests that the insurer would not have been able to reduce its liability by more than the cost of the additional premium.
[28]Rocco Pezzano Pty Ltd (1995) 8 ANZ Ins Cas 61-288 at 76,204.
In these circumstances, the question arises as to whether the evidence of the advice of the solicitors and senior counsel was sufficient to make out a case that the settlement was reasonable. In the light of the evidence that the insured would have obtained cover from a reasonable insurer, although at a higher premium, and that the insurer involved in this case was a reasonable insurer, the insured was fortunate indeed to obtain a finding that the settlement was reasonable. However, the insured has concurrent findings in its favour to that effect. Although this Court is not bound by law or practice to uphold concurrent findings of fact, an appellant "faces a difficult task in seeking to overturn concurrent findings of fact"[29].
[29]The Commonwealth v Introvigne (1982) 150 CLR 258 at 274; see also Baffsky v Brewis (1976) 51 ALJR 170 at 172; 12 ALR 435 at 438.
Given the uncontradicted evidence that the solicitors and senior counsel thought that the settlement was reasonable - indeed necessary - the further evidence that the insurer in this case was "a reasonable insurer" is not sufficiently compelling to convince me that the conclusions of the trial judge and the judges of the Full Court on the reasonableness issue should be set aside. The insurer, by its pleadings, denied any liability. For all we know, it may have had a particular policy not to enter into policies with persons with poor claims histories. Moreover, the broker made no attempt to explore the reasons for the legal advice given to the insured. By relying on what it had been told by its lawyers, the insured waived its legal professional privilege. Yet no attempt seems to have been made to cross-examine the insured's director as to the reasons why the legal advisers thought that the insured might lose everything if it did not settle.
In these circumstances, I do not think this Court would be justified in setting aside the trial judge's finding that the settlement was reasonable. Once the trial judge found that the settlement was reasonable, the basic principles of the law of contract concerning causation and remoteness required the conclusion that the insured was entitled to recover from the broker the sum of $1,041,166.
Order
The appeal should be dismissed with costs.
GUMMOW J.
Background
The facts are detailed in the judgments of Kirby J and Hayne J and I do not repeat them in detail.
The respondent, Rocco Pezzano Pty Ltd, engaged the appellant, Unity Insurance Brokers Pty Ltd, as its insurance broker. The appellant negotiated a contract of insurance between the respondent and NZI Insurance Australia Limited ("the insurer") for a policy period of 12 months ending 29 June 1993. The contract was "a contract of general insurance" within the meaning of s 11(6) of the Insurance Contracts Act 1984 (Cth) ("the Act"). Section 28 of the Act states:
"(1) This section applies where the person who became the insured under a contract of general insurance upon the contract being entered into:
(a) failed to comply with the duty of disclosure; or
(b)made a misrepresentation to the insurer before the contract was entered into;
but does not apply where the insurer would have entered into the contract, for the same premium and on the same terms and conditions, even if the insured had not failed to comply with the duty of disclosure or had not made the misrepresentation before the contract was entered into.
(2) If the failure was fraudulent or the misrepresentation was made fraudulently, the insurer may avoid the contract.
(3) If the insurer is not entitled to avoid the contract or, being entitled to avoid the contract (whether under subsection (2) or otherwise) has not done so, the liability of the insurer in respect of a claim is reduced to the amount that would place him in a position in which he would have been if the failure had not occurred or the misrepresentation had not been made."
The respondent had a substantial history of prior claims which it disclosed to the appellant as its broker. The appellant failed to comply with the duty of disclosure in respect of the respondent's claims history. The consequence was that, whilst the insurer was not entitled to avoid the policy, its liability in respect of a claim was reduced by s 28(3) of the Act to the amount which would place it in a position in which it would have been if the failure had not occurred. Rather than acquiring a policy which was fully enforceable according to its terms and not subject to the operation of s 28(3) of the Act, the respondent acquired something of lesser value. This was a cover which was open to controversy between it and the insurer and from which there was a reduction in what otherwise would have been the liability of the insurer.
The consequence of the operation of s 28(3) was that this was not a situation where the respondent was necessarily to be provided with a full indemnity either by the insurer (under the policy) or by the broker (by reason of the broker's breach of contractual retainer or its negligence).
For the ascertainment of the mischief to the remedy of which s 28(3) was directed, it is permissible[30] to have regard to the Report of The Law Reform Commission on Insurance Contracts ("the Report")[31], which preceded the enactment of the legislation. The Report stated[32]:
"The nature and extent of the insurer's redress should depend on the nature and extent of the loss which it has suffered as a result of the insured's conduct. It should no longer be entitled to avoid a contract, and a heavy claim under that contract, merely because it has suffered a small, even insubstantial, loss as a result of a non‑disclosure or misrepresentation."
Of a proposed provision in terms identical to s 28(3), the Report stated[33]:
"An insurer is not entitled to avoid a contract for innocent misrepresentation or non‑disclosure, but may reduce a claim by the amount of the loss it has suffered as a result of the misrepresentation or non‑disclosure. The amount by which the claim is reduced is the amount which would place the insurer in the position it would have been in if the failure to comply with the duty of disclosure had not occurred or the misrepresentation had not been made. For example, if the insured would have charged a higher premium had the misrepresentation not been made, it would be entitled to reduce the claim by the amount of the additional premium. If the insurer would not have entered into the contract at all, it would be entitled to pay nothing in respect of the claim except the premium paid by the insured. If the insurer would have inserted a different term in the contract, then the insurer would only be liable for the amount for which it would have been liable if that term had been a term of the contract. The principle is the one generally applied in assessing damages for misrepresentation."
It is accepted that one application of s 28(3) is to cases where, if disclosure had been made, the insurer would have accepted the risk but on different terms. There has been a division of opinion, which it is unnecessary now to resolve, as to the amount, if any, recoverable by an insured where the insurer would have declined the risk altogether had proper disclosure been made[34]. The litigation between the appellant and the respondent has been conducted on the footing that in a case where, were it not for the failure of the insured to comply with its duty of disclosure, the insurer would not have accepted the proposal at all, s 28(3) may operate to reduce the liability of the insurer to nil.
[30]Newcastle City Council v GIO General Ltd (1997) 72 ALJR 97; 149 ALR 623.
[31]Report No 20 (1982).
[32]at 117.
[33]at 284.
[34]See Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1989) 166 CLR 606 at 621‑622; Twenty‑First Maylux Pty Ltd v Mercantile Mutual Insurance (Australia) Ltd [1990] VR 919 at 926‑928.
In a fire on 20 September 1992, during the currency of the policy, the respondent suffered damage to the insured property. It is accepted that, had it admitted liability under the policy, the insurer would have met the respondent's claim in the sum of $1,720,287.04. However, there has been no finding as to the amount to which, pursuant to s 28(3), the liability of the insurer was reduced so as to place it in the position it would have occupied if the failure to comply with the duty of disclosure had not occurred. It is that circumstance which is at the heart of the appeal brought by the broker to this Court.
The insurer denied liability to indemnify the respondent, in respect of the claim made after the fire, by reason of the non‑disclosure. The respondent commenced proceedings in the Supreme Court of Western Australia against the appellant and the insurer. The action against the insurer was settled for $900,000. The action against the appellant proceeded to trial and the respondent recovered judgment in the sum of $1,041,166[35]. The respondent supports that outcome on the footing that the amount for which it recovered judgment was assessed on the basis that the difference between what the insurer would have paid had it admitted the claim and the amount of the settlement represents the difference in value between the insurance cover which the appellant should have obtained for the respondent and the more limited cover which results from the application of s 28(3) of the Act. Implicit in this position taken by the respondent is the proposition that the amount of the settlement reached in the action between the respondent and the insurer is to be taken in the determination of the liability of the appellant to the respondent as the reduced amount in respect of the liability of the insurer under s 28(3).
[35]Rocco Pezzano Pty Ltd v Unity Insurance Brokers Pty Ltd (1995) 8 ANZ Insurance Cases ¶61‑288.
The appellant complains that the respondent should not have recovered from it the difference between the settlement sum and the sum for which the insurer would have been liable under the policy had there been no failure to disclose, without establishing that the settlement sum represented the extent of the reduced liability of the insurer.
The judgments in the Supreme Court of Western Australia
At the trial, the appellant submitted that the evidence established that the insurer would have accepted the proposal, albeit, perhaps, at an increased premium so that, at most, s 28(3) reduced the liability of the insurer by no more than the amount of any difference in the premium. On that footing, the appellant submitted that it had procured for the respondent a fully enforceable contract of insurance, notwithstanding the non‑disclosure, and that any loss suffered by the respondent was a consequence of its own decision to compromise the claim against the insurer in the light of the defences raised against it. These had included not only non‑disclosure, but an allegation that the fire was the result of arson. However, the trial judge had decided the case on a different footing. His Honour had said[36]:
"The question is not whether [the insurer] considered that it was or was not entitled to reduce its liability to nil but, rather, that of whether [the respondent] acted reasonably in compromising its claim against [the insurer] for $900,000."
[36](1995) 8 ANZ Insurance Cases ¶61‑288 at 76,213.
As this passage indicates, attention to the fundamental issue was distracted at the trial (and later in the Full Court[37]) by emphasis upon collateral considerations. These should be mentioned briefly.
[37]Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1997) 9 ANZ Insurance Cases ¶61‑343.
The Full Court classified the respondent's case against the appellant as the "[loss of] the chance to make a claim without having to meet the defence of non‑disclosure"[38]. However, this was not a loss of a chance case as that expression is to be understood after Sellars v Adelaide Petroleum NL[39]. In such cases, damages for breach of contract are assessed by reference to the probabilities or possibilities, even if less than 50 per cent, that the advantage or benefit would have been realised if the plaintiff had been given the chance which the contract promised.
[38](1997) 9 ANZ Insurance Cases ¶61‑343 at 76,757.
[39](1994) 179 CLR 332 at 349. See also Waribay Pty Ltd v Minter Ellison [1991] 2 VR 391 at 398‑399.
The contract of brokerage was not to provide the respondent with a chance or opportunity, uncertain of realisation, to obtain a commercial advantage or benefit. The respondent enlisted the appellant's services to obtain secure insurance cover. The broker failed to exercise reasonable care, skill and diligence, with the result that the cover provided by the policy was limited by the reduction in the liability of the insurer by s 28(3) of the Act. The difference between the value of what should have been provided and what was provided was the respondent's loss. The court should not have been "concerned with valuing a chance or prospect that the respondent might have lost"[40]. The question was one of assessing the measure of the respondent's loss in the events that happened consequent upon the fire of 20 September 1992 and the denial by the insurer of all liability under the policy.
[40]Johnson v Perez (1988) 166 CLR 351 at 364‑365.
Next, it was said for the respondent, with particular reference to an observation by Somervell LJ in Biggin & Co Ltd v Permanite Ltd[41], that "the law ... encourages reasonable settlements". No doubt, with respect to the action between the respondent and the insurer, this was so. But it is not the policy of the law, at least in the absence of their agreement[42], to compel or cajole parties to settle or to foreclose their right of access to the courts for the determination of their respective legal rights and obligations. That right of access to curial determination is deeply rooted in constitutional principle. In Bremer Vulkan Schiffbau und Maschinenfabrik v South India Shipping Corporation Ltd, Lord Diplock said[43]:
"Every civilised system of government requires that the state should make available to all its citizens a means for the just and peaceful settlement of disputes between them as to their respective legal rights. The means provided are courts of justice to which every citizen has a constitutional right of access in the role of plaintiff to obtain the remedy to which he claims to be entitled in consequence of an alleged breach of his legal or equitable rights by some other citizen, the defendant."
Nor does the policy of the law in encouraging settlements necessarily carry with it the consequence that a settlement between A and B of their respective legal rights and obligations upon a particular subject‑matter provides a determinative measure of the obligations between B and C with respect to that subject‑matter, so as to relieve B of the necessity to prove the loss B seeks to recover from C.
[41][1951] 2 KB 314 at 321.
[42]cf Brooks v Burns Philp Trustee Co Ltd (1969) 121 CLR 432 at 451‑453.
[43][1981] AC 909 at 977. See also R v Lord Chancellor; ex parte Witham [1997] 2 All ER 779 at 784; R v Secretary of State for the Home Department; Ex parte Pierson [1997] 3 WLR 492 at 506‑507; [1997] 3 All ER 577 at 592.
Here, the respondent sued the appellant for a breach of a term implied in their contract that the appellant would exercise reasonable care, skill and diligence in providing the respondent with insurance advice and services. The respondent alleged that it had sustained damage which was represented by the difference between what would otherwise have been payable under the policy and the amount of $900,000 recovered from the insurer under the settlement.
The respondent also alleged that the appellant owed it a duty of care to take all reasonable steps in conducting its business so as not to expose or cause the respondent to suffer unnecessary loss and damage. The trial judge held that, whether contractual or tortious, the appellant had breached its duty to the respondent. In The Commonwealth v Amann Aviation Pty Ltd[44], Deane J, as an example of the diminishing significance of the differences between the rules governing recovery of damages in tort and contract, referred to "the gradual assimilation of the tests of 'within the contemplation of the parties' (in contract) and 'reasonably foreseeable' (in tort)".
[44](1991) 174 CLR 64 at 116.
What is significant is that the obligation undertaken by the appellant was not to indemnify the respondent in respect of liability of the respondent to any third party. It is true that obligations of one party to indemnify another with respect to that party's liability to a third party stand in a special position as regards the effect given to settlements of disputes with that third party. The present was not such a case. The obligation of the appellant was to procure the provision to the respondent of a contract of insurance with secure and certain cover against certain risks. Nevertheless, considerable attention in argument was given to that category of cases involving an obligation to indemnify, and it is appropriate to give it further consideration so as to emphasise why the decisions in litigation within it are not indicative of the outcome in the present case.
Indemnity cases
A number of the decisions to which we were referred, particularly the decision of Devlin J[45] and the English Court of Appeal[46] in Biggin, concerned situations where A was obliged (by express stipulation or by implication of law) to indemnify B against the liability of B to C. For example, A may be the insurer of B in respect of claims made by C upon B, or A may be (as in Biggin) the supplier of defective goods to B for resale by B to C. In Biggin, it was not disputed that A ought to have foreseen the claim by C upon B. At the time of the contract between A and B, A had been informed by B of B's negotiations with C and of the purpose for which the goods were required by C[47]. Devlin J posed the issue as one of "the extent of the indemnity which the law grants [to B] by way of damages for breach of contract"[48]. Again, as illustrated by the decision of the Victorian Full Court in Wright v Langlands' Foundry Co[49], A may have contracted with B to supply within a particular period goods or services to B for use in B's performance of the principal contract between B and C, and A's delay has placed B in breach of the contract with C.
[45]Biggin & Co Ltd v Permanite Ltd; Berry Wiggins & Co Ltd (Third Parties) [1951] 1 KB 422.
[46][1951] 2 KB 314.
[47][1951] 1 KB 422 at 431; [1951] 2 KB 314 at 322.
[48][1951] 1 KB 422 at 427.
[49](1874) 5 Australian Jurist Reports 113.
In such circumstances, B may seek indemnity from A in respect of C's claim upon B, indemnity may be refused and B and C may compromise C's claim against B. Then, in an action by B against A for repudiation of its obligation to indemnify B, two questions may arise. The first involves the application of the rule in Hadley v Baxendale[50]. This is whether the compromise between B and C was, at the time of the contract between A and B, within their reasonable contemplation or "on the cards" as a "serious possibility" or a "not unlikely result" of A's breach of the contract with B. As pointed out by Hayne J in his Honour's reasons for judgment, it is unnecessary for the purposes of this appeal to choose between any shades of legal meaning there may be in such expressions.
[50](1854) 9 Ex 341 at 354 [156 ER 145 at 151].
In Edwards v Insurance Office of Australia Ltd[51], the defendant insurer had wrongly disclaimed liability and the plaintiff had settled the claims against him. Halse Rogers J said[52]:
"[T]he plaintiff, having been put in the position of having to take all steps in connection with the litigation of the claims against him at his own risk, is entitled to recover, as damages, such sums as he paid to settle those actions, provided that he shows that he acted reasonably in making the settlement."
[51](1933) 34 SR (NSW) 88.
[52](1933) 34 SR (NSW) 88 at 98.
In Biggin, the defendant had sold defective roofing material to the plaintiff who had resold it and then settled claims made against it by third parties. Devlin J said that he had[53]:
"to determine whether the defendants should have regarded it as a serious possibility that one of the consequences of their breach would be that the plaintiffs would compromise the claim. Was the compromise a foreseeable consequence of the making of the claim? In my judgment, it was not a consequence in the legal sense at all. It flowed from the voluntary act of the plaintiffs."
The Court of Appeal reached the opposite conclusion.
[53][1951] 1 KB 422 at 428.
The second question is related to the first. In a case such as Edwards, as between the insurer and the insured, the latter was obliged to mitigate its damages and to pursue a reasonable opportunity of compromise of the third party claims in respect of which the insurer had refused indemnity. It was with such situations in mind that, in Biggin, Somervell LJ said that[54] "the law ... encourages reasonable settlements". As between the parties to the settlement in question, no doubt this is so. The significance for the Court of Appeal's decision in Biggin was the introduction of this precept in the tripartite relationship. However, as Devlin J had pointed out, in the circumstances of that case, this was but to express in another form the proposition that "the compromise was a consequence of the breach"[55].
[54][1951] 2 KB 314 at 321.
[55][1951] 1 KB 422 at 428.
It is in this context that there is to be understood the statement in GRE Insurance Ltd v QBE Insurance Ltd[56] that:
"[a] right to recover from another in respect of payment of a liability usually includes the right to recover for an amount not proved to have been due, but reasonably and honestly paid where doubt existed as to the liability or its extent",
and the more specific proposition[57] that the liability of an insurer to the insured may be established by a reasonable settlement between the insured and the third party, as well as by arbitration or judgment.
[56][1985] VR 83 at 102.
[57]Penrith City Council v Government Insurance Office of New South Wales (1991) 24 NSWLR 564 at 571.
Resolution of the present case
The present appeal does not turn upon recovery by the respondent for breach by the appellant of an obligation to indemnify it in respect of any liability of the respondent to a third party. Rather than, as in the cases considered above, A being obliged to indemnify B against the liability of B to C, here B (the respondent) had rights against both A (the appellant) and C (the insurer). However, to an extent which remained undetermined, s 28 of the Act rendered the rights against the insurer less extensive than would have been the case if the appellant had discharged its obligations to the respondent.
The respondent recovered against the appellant in respect of the shortfall between the insurance claim and the amount of a compromise between the respondent and the insurer. However, the appellant had not dealt with the respondent on a footing which made the amount of the shortfall upon the compromise, reached between the respondent and the insurer, of a rejected claim by the respondent against the insurer something within the reasonable contemplation of both the appellant and the respondent as a serious possibility or not unlikely result of the appellant's breach of its obligations to the respondent.
The primary judge held (in my view, correctly) that it might reasonably be supposed to have been contemplated at the time of the engagement between the appellant and the respondent "that a failure to exercise due care and skill in the course of disclosing the [respondent's] prior claims history to the intended insurer might result in a later refusal, on the part of the insurer, to admit liability in respect of a claim made under a policy of insurance obtained in those circumstances"[58]. I also would accept that it was within the reasonable contemplation of the appellant and the respondent that a serious possibility or not unlikely result of the appellant's breach of its obligations with respect to the brokerage of the policy was that, by the operation of s 28 of the Act, there would be a shortfall for the respondent in the amount which otherwise would have been recoverable under a secure policy.
[58](1995) 8 ANZ Insurance Cases ¶61‑288 at 76,212.
As I have indicated, the question then becomes one, in the events that have happened, of finding the amount which represents that shortfall. I would not accept that, in the above sense, it was within the reasonable contemplation of both the appellant (as broker) and the respondent (as insured) that, as between them, this amount would be fixed by reference to a settlement, which was reasonable as between the respondent and the insurer, of a claim made upon and rejected by the insurer. The reasonable contemplation spoken of in the rule in Hadley v Baxendale is that of both parties and the time at which that is assessed is the time when they made the contract[59]. Here, as in other fields of law, hindsight may mislead[60]. It was not within the reasonable contemplation of the broker and the insured that the measure of the liability of the broker to the insured would be determined by the conduct of parties over which the broker had no control, namely the insured and the insurer. The broker had not undertaken to indemnify the insured against any shortfall upon a settlement of litigation between the insured and the insurer.
[59]See (1854) 9 Ex 341 at 354 [156 ER 145 at 151], and the formulation by Gibbs J in Wenham v Ella (1972) 127 CLR 454 at 472.
[60]See Minnesota Mining and Manufacturing Co v Beiersdorf (Australia) Ltd (1980) 144 CLR 253 at 294, and cf Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281 at 293‑294.
The insured had carried the burden of demonstrating, at the end of the day, that its loss was measured in the amount for which it succeeded in recovering judgment. However, it concentrated upon demonstrating to the trial judge and to the Full Court, as in this Court, that the settlement was to be regarded as "reasonable" in character. If that had been the true issue, as in the insurance and other indemnity cases, then the criterion would have been an objective one.
However, the reasoning in the indemnity cases referred to earlier in these reasons reflects a particular application of the rule in Hadley v Baxendale which did not hold true in the circumstances of this case. I agree with Kirby J that it remained for the respondent insured to prove its loss against the appellant broker and with the conclusion that the issue of the damages recoverable by the respondent was never properly tried. The settlement was the product of various factors disclosed in the evidence. These bore largely upon the consideration by the respondent of the likely outcome of pursuit of its claim to judgment. Indeed, the trial judge held that the respondent had been entitled to assume that at a trial the insurer would have led evidence to show that, had full disclosure been made, it would not have entered into the contract of insurance[61]. At all events, in the action by the respondent against the appellant, the settlement sum was not probative evidence sufficient to establish on the balance of probabilities that it was the reduced amount brought about by the application of s 28(3) of the Act.
[61](1995) 8 ANZ Insurance Cases ¶61‑288 at 76,212.
Conclusion
The appeal should be disposed of in terms of the orders proposed by Kirby J.
KIRBY J. As I approach this appeal, it presents a clash between principle and pragmatism. Principle requires that, if damage is contested, a party claiming damages for negligence and breach of contract must prove its loss by calling evidence. Ordinarily, it must establish exactly what that loss is. The burden of doing so is upon it. If it fails to do so, to the extent of the default, it cannot expect to recover. Pragmatism supports the sensible settlement of legal claims, particularly where settlement is achieved following the advice of experienced legal practitioners. Pragmatism recoils from the prospect of ignoring a settlement between A and B, considered reasonable when made, so as to require A, in a related claim against C, to prove objectively that the factors leading to the settlement were correctly judged. Such factors can rarely, if ever, be estimated with absolute certainty. Yet C asks why its liability in damages to A should be defined by settlement negotiations between A and B in which C played no part and over which C had no control.
It is surprising that the issue raised in this appeal, from the Full Court of the Supreme Court of Western Australia[62], has not previously arisen for decision by this Court. Now that the question is presented to this Court, it is necessary to choose. I prefer principle. Inconvenient though it may be, where damages are in contest, a plaintiff must prove its loss. It cannot rely on a settlement which it has reached with someone else, however reasonable that settlement may have seemed to be to the parties to it.
[62]Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1997) 9 ANZ Insurance Cases ¶61-343.
A claim against an insurer is compromised for non-disclosure
Rocco Pezzano Pty Ltd ("the insured") consulted Unity Insurance Brokers Pty Ltd ("the broker") to secure insurance for its business premises in East Cannington, near Perth. The broker arranged for NZI Insurance Australia Ltd ("the insurer") to issue to the insured a special risks insurance policy ("the policy"). During the term of the policy the insured suffered loss by reason of fire, which otherwise fell within the policy. If liability to indemnify the insured had been established, the insurer would have been obliged to pay the insured $1,720,287.04 for the losses suffered. The insured made a claim under the policy. Liability was denied. Initially, the denial was solely on the ground of "material non-disclosure of prior claims". Subsequently, the insurer added two further grounds. First, that the insured had been guilty of arson. Secondly, that the claim should be reduced for under-statement of the value of the property insured and by application of the average provisions of the policy. In relation to non-disclosure, the insurer asserted that it was entitled to reduce its liability under the policy to nil. It relied on s 28 of the Insurance Contracts Act 1984 (Cth) ("the Act").
There was no contest about the non-disclosure. In the application for insurance, the insured, by the agency of the broker, notified only a loss resulting from theft in 1991. In fact, between 1979 and 1991, there had been twelve claims against the then insurers. The primary judge found that the failure to disclose all of these claims was directly attributable to the broker and that this amounted to a breach of the broker's duty to complete the proposal form with reasonable care and skill[63]. That finding is not challenged.
[63]Rocco Pezzano Pty Ltd v Unity Insurance Brokers Pty Ltd (1995) 8 ANZ Insurance Cases ¶61-288 at 76,199-76,200 per Steytler J.
When the insured was denied indemnity, it commenced proceedings in the Supreme Court of Western Australia against both the insurer and the broker. In accordance with advice received by the insured from its senior counsel, the claim against the insurer was settled for $900,000. In the remaining proceedings between the insured and the broker, neither counsel advising nor any other legal adviser of the insured was called in the courts below to give evidence relevant to the settlement. Nor was any evidence tendered to suggest that the broker had been invited to comment on the reasonableness of the proposed settlement between the insured and the insurer, before it was effected[64]. The only evidence about the settlement was that given by Mr Pezzano, the principal of the insured. He said "not only that he was told that it was better to accept this amount than to lose everything 'because there was no disclosure' of the full claims history but also that his lawyer told him that [the insurer] 'wouldn't pay any more than that'"[65]. There was some evidence about the course of the negotiation. It indicated that the insurer had initially offered to settle for $740,000 but had increased this offer to the $900,000 which was accepted. No evidence was proffered to justify the reported opinion of senior counsel, on the basis of which the settlement was agreed.
[64]Rocco Pezzano Pty Ltd v Unity Insurance Brokers Pty Ltd (1995) 8 ANZ Insurance Cases ¶61-288 at 76,213-76,214 per Steytler J. His Honour said that this consideration "troubled" him.
[65]Rocco Pezzano Pty Ltd v Unity Insurance Brokers Pty Ltd (1995) 8 ANZ Insurance Cases ¶61-288 at 76,213 per Steytler J.
The insured claimed, against the broker, the difference between the settlement sum and the sum which would have been recovered had the policy issued by the insurer been fully enforceable ("the shortfall"). That claim required a number of hypotheses to be made in order to succeed. First, that there was no substance in the insurer's alternative defences of arson by the insured and of under-insurance. (For the first of these, at least, the broker was not responsible and possibly for neither.) Secondly, that had there been disclosure of the insured's unpromising claims record, the insurer would not have issued a policy at all to the insured. Thirdly, that the settlement achieved in the negotiations between the insured and the insurer was, objectively, an accurate measure of the insurer's exposure to the insured in terms of the policy which it would have issued had there been no failure to disclose.
No evidence was called at the trial, either from the insurer or from anyone knowledgeable about its practice, as to what it would have done if the non-disclosure had not occurred, that is, if the broker had revealed the full claims history of the insured. There was, therefore, no affirmative evidence as to whether the insurer, accurately informed about the insured's claims history, would have issued a policy at all; issued a policy in the same or different terms; or issued a policy at a higher premium.
An expert in insurance broking, Mr Frank Fuller, gave evidence. That evidence was accepted by the primary judge. Mr Fuller was asked whether he could have "placed the [insured] with an ISR [Industrial Special Risks] insurer in 1992". He said "I would think so. I am not sure [at] what cost or on what terms but, yes, I would place the cover". He thought that the premium "would be a bit higher". In cross-examination, he acknowledged that "[m]aybe not all insurers", with disclosure of the insured's past claims history, would have provided cover. He was pressed with the question whether "a reasonable insurer" would issue such a policy. He answered affirmatively. He also affirmed that the insurer which issued the instant policy was "a reasonable insurer". None of this evidence was contradicted.
It was in this state of the evidence that the primary judge upheld the insured's claim to recover from the broker the entire shortfall constituted by the difference between what he found would have been recoverable under the policy and what was agreed had been recovered from the insurer following settlement. The broker complains that this result was founded on an incorrect approach, unexplored assumptions and the absence of relevant evidence.
Decision of the primary judge
The primary judge found that the only issue which ultimately affected the settlement, as between the insured and the insurer, was non-disclosure. Mr Pezzano had given evidence that, at the mediation conference preceding the settlement, non-disclosure was the only question raised. The insurer did not raise the issue of arson[66]. Mr Pezzano specifically denied that he had been advised that there was a risk that the insured might lose its case against the insurer entirely on the strength of the latter's allegation of arson. The trial judge noted that no admissible evidence had been tendered at the trial to suggest that a defence of arson would have succeeded or that the fact of arson could have been proved. In relation to the defence of under-insurance, the primary judge observed that the parties were agreed in relation to the figures to which the average provisions would have been applied by the insurer had there been no other dispute about liability under the policy[67]. He accepted those figures and adjusted the insured's entitlement accordingly. In this way his Honour, in the claim against the broker, confined his assessment of the "reasonableness" of the settlement by reference solely to the issue of non-disclosure.
[66]Rocco Pezzano Pty Ltd v Unity Insurance Brokers Pty Ltd (1995) 8 ANZ Insurance Cases ¶61-288 at 76,206 per Steytler J.
[67]Rocco Pezzano Pty Ltd v Unity Insurance Brokers Pty Ltd (1995) 8 ANZ Insurance Cases ¶61-288 at 76,206 per Steytler J.
The primary judge recorded the arguments of the broker to the effect that there was no evidentiary foundation upon which to estimate the insurer's response to the established non-disclosure. Accordingly, it was submitted that the broker should not be fixed with the settlement (unapproved and unnotified) as achieved between the insurer and the insured. However, by reference to a decision of the English Court of Appeal in Biggin & Co Ltd v Permanite Ltd, Berry Wiggins & Co Ltd (Third Parties)[68] and to Australian cases which had followed its reasoning[69], the judge stated that the issue was "whether the [insured] acted reasonably in compromising the claim"[70]. He repeated this expression of the test on a number of occasions before coming to his conclusion[71].
[68][1951] 1 KB 422; [1951] 2 KB 314 (CA).
[69]The Nominal Defendant (Qld) v Langman [1988] 2 Qd R 569 at 571-572; Suncorp Insurance and Finance v Ploner [1991] 1 Qd R 69 at 76; Western Australia v Bond Corporation Holdings Ltd (1991) 28 FCR 68 at 80-83; Tadoran Pty Ltd (in liq) v N G Delaney Insurances Pty Ltd (1989) 5 ANZ Insurance Cases ¶ 60-900 at 75,736.
[70]Rocco Pezzano Pty Ltd v Unity Insurance Brokers Pty Ltd (1995) 8 ANZ Insurance Cases ¶61-288 at 76,212 per Steytler J.
[71]Thus at 76,213 of his reasons, Steytler J said: "The question is not whether [the insurer] considered that it was or was not entitled to reduce its liability to nil but, rather, that of whether the plaintiff acted reasonably in compromising its claim against [the insurer] for $900,000 … It seems to me, in all of the circumstances, that, viewed from the plaintiff's perspective in January 1994 ... there was a reasonable prospect that [the insurer] would succeed in its defence on the non-disclosure issue".
In Biggin, Singleton LJ pointed out[72]:
"The question is not whether the plaintiffs acted reasonably in settling the claim, but whether the settlement was a reasonable one."
Therefore, even on the Biggin approach, the repeated references to the reasonableness of the insured's conduct in settling the claim involved a misdirection. However, in other parts of his reasons, the primary judge held that the settlement itself was "reasonable" or "not unreasonable"[73]. He concluded[74]:
"I am, in the end, satisfied that this [failure to consult the broker] did not render the settlement unreasonable in circumstances in which the [broker] was maintaining a complete denial of liability to the [insured], in which it had denied knowledge of the [insured's] prior claims history and in which it was ascribing to the [insured] the very act, which had given rise to the non‑disclosure, of which it had itself been guilty. ... [T]he [broker's] breach of duty (whether contractual or tortious) was such as to leave the [insured] exposed to a real risk of complete failure in relation to its claim against [the insurer] ... [T]he circumstances were such that it was reasonable for it to have sought to compromise that claim and that the compromise which it did in fact achieve was reasonable in all of the circumstances."
[72][1951] 2 KB 314 at 326.
[73]Rocco Pezzano Pty Ltd v Unity Insurance Brokers Pty Ltd (1995) 8 ANZ Insurance Cases ¶61-288 at 76,213-76,214 per Steytler J.
[74]Rocco Pezzano Pty Ltd v Unity Insurance Brokers Pty Ltd (1995) 8 ANZ Insurance Cases ¶61-288 at 76,214 per Steytler J.
Decision of the Full Court
In the Full Court, Kennedy and Franklyn JJ concurred in the reasons of Ipp J. Ipp J noted that the findings of the primary judge, concerning the average provisions of the policy, were not attacked. As for the defence of arson, he concluded that the findings at trial were justified on the evidence and that the issue of arson could not be said to have had any effect on the compromise. He then turned to the complaints about the primary judge's endorsement of the reasonableness of the settlement as a factor in measuring the broker's liability. He rejected the complaint concerning the suggested lack of strict attention to the objective reasonableness of the settlement[75]. He accepted the principle as stated in the English Court of Appeal in Biggin.He pointed out that estimating the prospects of success, at any given time, inevitably involved elements of speculation and judgment. He endorsed the primary judge's conclusion that the insured was "entitled to assume ... that [the insurer] would, at the trial, lead evidence in support of its contention that, had full disclosure of the claims history been made, it would not have entered into the contract of insurance". Ipp J did not consider that the insured was obliged, in its action against the broker, to lead evidence from the insurer to establish that this assumption was correct. In his Honour's opinion, the ultimate question was "what value was to be attributed to the chance lost by the [insured]"[76]. But that value was adequately fixed by the settlement, if the settlement was reasonable.
[75]Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1997) 9 ANZ Insurance Cases ¶61-343 at 76,761 per Ipp J.
[76]Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1997) 9 ANZ Insurance Cases ¶61-343 at 76,763 per Ipp J.
It is from the confirmation by the Full Court of the orders of the primary judge, entering judgment in favour of the insured against the broker for the shortfall, that an appeal, by special leave, now comes to this Court.
The controversy in Biggin's case
Biggin was a case in which the plaintiff had purchased from the defendant a quantity of bituminous adhesive for resale, as the defendants knew, to the Government of the Netherlands. The adhesive proved unsatisfactory. The Netherlands Government claimed damages against the plaintiff. It withheld payment for other goods sold by the plaintiff. Whilst refusing to submit to the jurisdiction of the English courts, it consented to the submission of the claim to arbitration in England. Acting on legal advice, the plaintiff settled the case, agreeing to pay £43,000 plus costs to the Netherlands Government. It then sued to recover that sum from the manufacturer of the adhesive. At first instance, Devlin J ruled that the settlement was wholly irrelevant to the issue of damages between the plaintiff and the manufacturer and that evidence of it was inadmissible. The Court of Appeal held that the amount of the settlement was relevant to establish the upper limit of recovery. Whether it was determinative of that recovery depended upon whether the settlement was "reasonable". In the circumstances it was held that it was. A pertinent consideration was that it had been made "under advice legally taken"[77].
[77][1951] 2 KB 314 at 321 per Somervell LJ.
The issue in the present case is somewhat different from that raised in Biggin. Here, no one contested that the settlement was relevant to fix the maximum recovery for the indemnity claimed by the insured. Here also, no solicitor or counsel were "submitted to cross-examination" to justify the settlement. Some of the considerations that seemed to have affected the primary judge in this case were the reasonableness of the conduct of the insured rather than the objective reasonableness of the settlement. In Biggin, only the latter was said to be relevant. Significantly, Biggin concerned a situation where A was obliged to indemnify B against the liability of B to C. In the present case, B (the insured) has rights against both A (the broker) and C (the insurer). Nevertheless, the discussion in Biggin of the question for decision is sufficiently pertinent to repay attention to the reasons of Devlin J and of the English Court of Appeal written nearly fifty years ago.
Devlin J, at first instance, stated his approach thus[78]:
"[T]he general rule is that a defendant who is required to indemnify a plaintiff against his liability to a third party is entitled to have the existence and precise extent of that liability proved against him in proceedings to which he is a party. That does not mean that a plaintiff may not compromise with his adversary save at the risk of losing his indemnity or at the cost of offering the defendant a choice between the compromise or the proof. A plaintiff acts in such a matter at his own risk and for his own benefit. If he compromises erroneously where there is no liability, he cannot make the defendant pay for his error. If he compromises successfully, he will be that much in pocket. It is true that if the defendant pays him more than the compromise, the plaintiff will be paid more than he has lost. But that is a thing which is bound to happen whenever the nature of the indemnity if precisely defined, and the area of its operation consequently circumscribed, and an event takes place outside that area."
Devlin J rejected the argument that the duty on the plaintiff to mitigate its loss extended to acceptance of the settlement[79]. He then dealt directly with the suggestion that the liability of a third party could be fixed by the opinions and estimates of counsel in settlement negotiations in which the third party was not involved[80]:
"It is conceded that counsel's views on the facts and law on which the existence of liability is based are irrelevant, and that that is a matter for the court. Why as a matter of logic are his views on the facts and the law relating to the quantum of liability any different? What happens if the court thinks that nominal damages only have been proved? Is it permissible to investigate the chain of counsel's reasoning to see if it contains any error? Would an incorrect appreciation of the facts be a fatal error, or must it be an error of law? If in the case of a large number of items counsel has erroneously included one, does that invalidate altogether a settlement for a global sum? And so on. The point is not, I think, improved by the alternative submission that the settlement made must be reasonable. If this means that the sum paid must be the reasonable value of the claim when all the material facts are taken into consideration, it can only be that which the court would itself have awarded, and the inquiry is neither shortened nor affected by the advice of counsel. Therefore, it is contended that reasonableness must be judged as at the time of the settlement and on the information then available. This means that instead of weighing the true facts the court would have to weigh only those, however incomplete and erroneous, which were known to counsel. What standard of reasonableness can be applied to that?"
[78][1951] 1 KB 422 at 426-427.
[79][1951] 1 KB 422 at 428.
[80][1951] 1 KB 422 at 429.
It is clear, of course, that to avoid double recovery, the amount recovered by the insured under a settlement must be taken to account in assessing the damage suffered by the insured as a result of the broker's breach. The broker contended that this was the only significance to be attached to the fact that the claim against the insurer had been compromised or to the amount at which it had been settled. To attach any further significance to the fact of settlement of the claim and the amount of the settlement would, it was submitted, permit the extent of the broker's liability for its breach of obligation to be determined by the conduct of parties over which it had no control. There are several reasons why that argument is flawed and should be rejected.
First, the broker's breach of obligation caused the insured to obtain a policy that was open to doubt or challenge. The very fact that the policy is open to doubt or challenge may cause loss to the insured. If the doubts are capable of ready resolution without resort to litigation, as for example, by the insured taking the opinion of counsel and providing it to the insurer, comparatively little cost may be incurred but the broker's breach would nevertheless have caused that loss. At the other extreme, however, if the doubts are obvious and irremediable, and the insured could not recover under the policy, the broker's breach would have caused the insured to lose the whole benefit of that policy. The insured suffers loss in both kinds of case - not just the second. And the loss in both cases is caused by the broker's breach of obligation.
The fact that the dispute between insured and insurer may be resolved by agreement does not lead to any different result. The loss suffered by the insured, if the compromise is reasonable, is caused by the broker's breach of obligation. To the extent that policy is to be considered in answering the question whether the breach caused the loss[115], policy considerations reinforce the conclusion that the breach caused the loss.
[115]March v Stramare (E & M H) Pty Ltd (1991) 171 CLR 506; Bennett v Minister of Community Welfare (1992) 176 CLR 408.
No doubt the broker may be wholly excluded from any negotiations to resolve the differences between insured and insurer and it seems that that was the case here. But that does not mean that the broker is left to the mercies of parties over which it has no control or that those parties may impose on the broker any liability that they choose. The settlement between insurer and insured must be reasonable. (It will be necessary to return to explore what is meant by saying that the settlement must be "reasonable".)
Next, and most importantly, to require the insured to prove, as part of its case against the broker, the case which the insurer would have mounted against it is to encourage the prolonging of litigation and to discourage settlement. If the insured must prove the insurer's case, that is a significant reason not to settle its claim against the insurer but to conduct alternative claims against the insurer and the broker. If, without working injustice to the broker, the settlement of disputes can be encouraged, the desirability (some may say the necessity) of doing so is obvious.
In addition, such decided cases as there are on the matter tend in favour of a rule which would require a person in the position of the insured (who has settled a dispute with a third party under a contract procured by the broker) to prove in support of its claim against the broker for breach of retainer no more than that the settlement which it had reached with the insurer was reasonable.
The authority most often cited in this connection is Biggin & Co Ltd v Permanite Ltd[116]. That case concerned a claim by Biggin & Co Ltd (and an associated company) which had bought defective goods from Permanite Ltd to recover from Permanite the amount which the plaintiffs had agreed to pay the Dutch Government as settlement of a claim by the government against the plaintiffs. (The plaintiffs had sold the goods bought from Permanite to the Dutch Government and that government alleged that it had suffered damage as a result of its resale of the goods for use.) At first instance[117], Devlin J held that the plaintiffs could recover from Permanite the amount which the Dutch Government could have recovered from them. Devlin J held that the fact that the plaintiffs had reached a compromise with the Dutch Government was not a foreseeable consequence of Permanite's breach of contract because the making of the compromise was a voluntary act by the plaintiffs[118]. Accordingly, he held that the plaintiffs had to prove the case which the Dutch Government would have mounted against them.
[116][1951] 2 KB 314. See also Fisher v Val de Travers Asphalte Co (1876) 45 LJ CP 479; The Nominal Defendant (Qld) v Langman [1988] 2 Qd R 569; Tadoran Pty Ltd (in liq) v N G Delaney Insurances Pty Ltd (1989) 5 ANZ Ins Cas ¶60-900; Western Australia v Bond Corporation Holdings Ltd (1991) 28 FCR 68.
[117][1951] 1 KB 422.
[118][1951] 1 KB 422 at 428.
The Court of Appeal reversed the decision and, as the headnote in the Law Report records[119], the case is taken to have held that the amount paid under the settlement, if reasonable, should be taken as the measure of the plaintiffs' damages. It may be doubted whether the reasons for judgment are as unequivocal as the headnote suggests. Further, there is little discussion of the underlying principles. Other than a reference by Somervell LJ to the law encouraging reasonable settlements[120], the reasons of the members of the Court do not identify why the settlement should be taken as the measure of the plaintiffs' damages, and do not discuss in any detail what is meant by "reasonable" in this context.
[119][1951] 2 KB 314 at 315.
[120][1951] 2 KB 314 at 321.
In my view, however, the several considerations which I have mentioned, especially the need to encourage settlement of disputes, suggest that a settlement of the dispute between insured and insurer should be given more significance as between insured and broker than simply identifying an amount which may limit the amount of damages recoverable by the insured from the broker for the broker's breach of duty[121]. They are considerations that suggest that the damages recoverable by the insured should be fixed as the difference between what the insured recovered under the settlement (if it was reasonable) and what would have been recovered under the policy which the broker ought to have arranged (together, no doubt, in an appropriate case, with any other costs or expenses incurred by the insured as a result of the broker's breach and taking account of any extra premium that would have been payable). Whether such a rule would, or may, work injustice to the broker is much affected by what is meant by a "reasonable" settlement of the dispute between insured and insurer and it is to that subject that I now turn.
[121]I speak of "broker", "insured" and "insurer" to identify the parties in this case but the principles to be applied do not depend upon any point of insurance law.
Whether the compromise of a claim was reasonable must be judged objectively, not subjectively. Thus whether a party to litigation has received advice to settle may be important in deciding whether that person's conduct in settling the case was reasonable but, standing alone, the fact that a litigant was advised to settle at a particular figure reveals little or nothing about whether the settlement reached was reasonable. This is not to say that evidence may not be led that such advice was given and adopted; it may. But evidence of that kind does not conclude the issue. What will usually be much more important is the reasoning that supported the advice that was given for that will ordinarily reveal why it was thought reasonable to compromise the claim as it was.
Next, the question whether the settlement was reasonable must be judged by reference to the material the parties had available to them at the time the compromise was reached. It is not to be judged according to whether material which was obtained later shows that the opposite party could or could not have prosecuted or defended the claim successfully but according to the assessment which could properly be made at the time of settlement of the chances of success or failure.
Often that will require consideration of whether the party that later seeks to say that the settlement was reasonable had made sufficient enquiries and had sufficient information available to it to warrant reaching a compromise. In turn that may invite attention to whether the cost of seeking further information would outweigh the benefit that it was reasonable to expect may be obtained from doing so, but it does not assume knowledge of the opposite party's brief to counsel.
All of these, and no doubt other, considerations may bear upon the question whether the settlement arrived at was reasonable. And it is inevitable that there will be no single answer to the question "for what amount was it reasonable to compromise this claim" - there will be a range of answers. What is a reasonable compromise of the claim will almost always require consideration of the chances of the parties succeeding in their respective claims or defences and that prediction of likely outcomes must always be imperfect and imprecise. To state the obvious, that is why the compromise of a claim, which is a monetary claim that will succeed entirely or fail entirely, will usually fasten upon a figure that is less than would be recovered if the claim were to succeed and why it is that there will be a range of figures within which the reasonable observer may conclude that settlement of the claim would be reasonable.
No doubt this may be contrasted with the case which is fought to judgment. Then the liability of the party in the position of the insurer in this case would be fixed by the judgment. The broker's argument in this case (and the argument which found favour with Devlin J at first instance in Biggin & Co Ltd) is that its liability should be fixed by reference to that sum and no other and that if the liability of the insurer has not been fixed by judgment in an action brought against it, it should be fixed in the action between insured and broker.
I do not agree. First, as I have indicated, acceptance of this argument would discourage settlement of the claim between insured and insurer. Secondly, to subject the broker to liability based upon a settlement that is found to be reasonable is not unjust. And it is not unjust even though there may well have been a range of figures within which settlement could reasonably occur and even though the decisions whether to settle and at what figure to settle are decisions over which the broker has no control. It is always necessary to recall that the broker was in breach of duty. There is no injustice in leaving the wrongdoer to bear the consequences of the decisions made in response to that wrongdoing by the party harmed - so long as those decisions are reasonable. Reasonableness informs much of the law of contract and, in particular, the assessment of damages for breach[122]. This means, for example, that if the party wronged has acted reasonably, the wrongdoer may be liable for all the loss that the plaintiff has suffered, even if the plaintiff's conduct has increased the loss[123]. Conversely, the party wronged is not bound to take all possible steps to mitigate its loss, only those steps which are reasonable[124].
[122]Bellgrove v Eldridge (1954) 90 CLR 613 at 618-619; see also British Westinghouse Electric and Manufacturing Company Ltd v Underground Electric Railways Company of London Ltd [1912] AC 673; Ruxley Electronics and Construction Ltd v Forsyth [1996] 1 AC 344; Jacob & Youngs v Kent 129 NE 889 (1921) at 891-892 per Cardozo J.
[123]See, eg, Banco de Portugal v Waterlow & Sons Ltd [1932] AC 452 at 506 per Lord Macmillan; Sacher Investments Pty Ltd v Forma Stereo Consultants Pty Ltd [1976] 1 NSWLR 5 at 9 per Yeldham J; Segenhoe Ltd v Akins (1990) 29 NSWLR 569 at 582 per Giles J.
[124]For example, a party is not bound to embark upon a "complicated and difficult piece of litigation against a third party": see Pilkington v Wood [1953] Ch 770 at 777 per Harman J.
How, then, is the reasonableness of the settlement to be established? The Court of Appeal in Biggin & Co Ltd held that it was relevant for the client that had compromised to give evidence that this step had been "made under advice legally taken"[125], but Somervell LJ went on to suggest[126] that the advisers would not "normally" be relevant as admissible witnesses. It may be that calling legal advisers to give evidence about the settlement may present some question about legal professional privilege but I do not accept that the evidence of the advisers would be irrelevant or inadmissible. Often it is the advisers who will be best placed to give evidence about the matters that were taken into account in deciding to settle the case and it is they who may well be able to deal with such matters as what investigations had been made or why particular investigations had not been pursued. Sometimes there may be questions about the course of negotiations: why was this offer accepted; why was no counter offer made? Sometimes that course of negotiations may reveal why a settlement was reached when it was reached and that, in turn, may bear upon whether it was reasonable. Again, it will be those who conducted the negotiations, often the legal advisers, who will be able to speak of these matters.
[125][1951] 2 KB 314 at 321 per Somervell LJ, 325 per Singleton LJ.
[126][1951] 2 KB 314 at 321; see also at 325 per Singleton LJ.
Considerations of legal professional privilege are not the only considerations that may affect the evidence that may be led. If the settlement has been reached at a mediation, the rules under which the mediation was conducted, whether rules of court or privately agreed rules, may restrict what may be revealed about what occurred at the mediation. But that may mean only that the reasonableness of the settlement reached may have to be demonstrated without resort to that material. If that is a problem, it affects the party contending that the settlement is reasonable; it is not a problem that causes any injustice to the party against whom the evidence of the settlement is to be led.
I have already referred to the finding of the trial judge in this matter that the settlement which the insured reached with the insurer was reasonable. There were several strands in the reasoning in support of that conclusion (reasoning which was substantially approved by the Full Court) to which reference should be made.
As I have already noted, the insurer relied, in its amended defence, not only on defences of non‑disclosure and misrepresentation but also on a defence of arson and a defence based on the average provisions of the policy. Only the first of these defences - of non‑disclosure and misrepresentation - concerned conduct of the broker. The trial judge found that the insured was motivated, in arriving at the settlement which it did, solely by its concern that the insurer might succeed in the defence of non‑disclosure. In particular, he found that the defence of arson played no part in persuading the insured to settle with the insurer and that it did not influence the amount for which the insured was prepared to settle. As for the question of average, he found that, although the insurer and insured disputed the values to which the relevant provisions should be applied, the insured settled the claim having regard to the figures which it propounded and not those put forward by the insurer. Accordingly, the trial judge found that the dispute between insured and insurer about these figures was not material to whether the settlement was reasonable.
It follows that the case which the insured sought to make at trial was that, having regard only to the defence of non‑disclosure, the settlement which it reached with the insurer was reasonable. That is, even though the insurer's pleading of other grounds of defence (arson and average) might have been said to have injected further doubt into the fate of the litigation, and thus, have warranted a further discounting of the insured's claim against the insurer, the insured contended, in its claim against the broker, that those defences of arson and average should be entirely disregarded in considering whether the settlement was reasonable.
The trial judge's finding may be read as focusing on the subjective reasoning of the insured - the insured did not take certain matters into account in deciding whether to settle for the amount ultimately agreed. As I have said, the test to be applied is an objective test; the subjective reasoning of the insured does not determine whether the settlement was reasonable. What is important for present purposes is the question whether, having regard only to the defence of non‑disclosure, the settlement was reasonable.
The trial judge concluded that the insured was entitled to assume that, at any trial between insured and insurer, the insurer would "lead evidence in support of its contention that, had full disclosure of the claims history have been made, it would not have entered into the contract of insurance" and that the insured was not bound, in its action against the broker, to lead evidence from the insurer to the effect that its assumption was correct.
The first of these conclusions may be read as emphasising what the insured thought. As I have said, the question is whether the settlement was reasonable, and that is not concluded by identifying whether the parties settling thought it was or why they thought it was. As to the second of these propositions, I accept that the insured was not bound to call the insurer to show that the insurer would have declined the risk but, in order to demonstrate that settling its claim against the insurer for $900,000 was reasonable, the insured did have to show that there was a real risk that the insurer could have satisfied a court that it would not have entered the contract of insurance if the true claims position had been disclosed. It was this, and only this risk, which was said to warrant the insured accepting such a large discount on its claim against the insurer. (Showing that this, or another, insurer might have charged a higher premium would not have been enough in the particular circumstances of this case. The only evidence about this aspect of the matter was evidence from an experienced insurance broker that, if full disclosure had been made, some insurers would have accepted the risk but at a premium which he described as "a bit higher".)
The insurer had pleaded that if full disclosure had been made it would not have taken the risk. The fact that the defence had been taken was the first step in demonstrating that there was a risk that the insured may have failed in its claim on the policy, but the fact that the defence was taken says nothing about what chance it had of succeeding. At most it showed that the legal practitioner who prepared the pleading had instructions sufficient to warrant drawing the pleading in the form it took. No larger assumption could be based on the form of the pleading.
As the Full Court pointed out, there was evidence led at the trial which was said to indicate the attitude of the insurer to the risk. In February 1991, the broker attempted to procure industrial special risks insurance on behalf of the insured over its premises, plant, equipment and the like for the 1991‑1992 year. The broker disclosed the insured's then full claims history. It asked NZI and other insurers for a quotation but there was no record of NZI providing any such quotation to the broker and an employee of the broker gave evidence that he did not recall receiving a response to the request for quotation. In addition, the broker gave an answer to an interrogatory to the effect that the broker believed that "NZI orally informed the [broker] that no such quote was to be provided". This answer was tendered in evidence. Finally, the request for quotation sent by facsimile to NZI was produced by NZI in answer to a subpoena and was also tendered. That request bore markings that appeared to read "no quote". This evidence, taken together, warranted the finding that NZI had refused to offer a quotation for the insured's business in February 1991.
There being evidence that the insurer had refused the risk in 1991, I consider that it was open to the trial judge to find that there was a real risk that the insurer would have proved that it would have refused the risk in 1992 if full disclosure had been made of the claims history. (During 1991 there had been two further claims and thus the insured's history was no better than it had been in 1991 when the insurer refused the risk.)
Was there, then, enough material to show that the settlement was reasonable? The trial judge and the Full Court held that the evidence that was led, exiguous as it was, was sufficient to show that it was reasonable and I am not persuaded that that conclusion was wrong. The settlement discounted the insured's claim by between 40 and 50 per cent. Presumably, then, the insured is to be taken to have estimated the chances of the insurer succeeding in its defence as being about that level. It is as well to remember, however, that there are uncertainties inherent in litigation and that predictions of the chances of success in litigation can never be precise. It follows that the comparison between the amount of the settlement and the amount of the claim can never be anything more than a general indication of what the parties see as the risks of continuing the litigation. There was evidence available to the insured, at the time it compromised with the insurer, that the insurer had refused to deal with it in the previous year and the insurer alleged that if it had known all the facts it would not have dealt with the insured in the year in question. No doubt it was on this basis that senior counsel retained to advise the insured about the possible compromise told the insured that it should settle "because the way things were [the insured] would lose" and that it was better to accept the sum of $900,000 rather than "losing everything because there was no disclosure" of the claims history.
I would dismiss the appeal.