Abstract

Commercialfactor in Construction - Reasonableness ofSettlement by Insured with Claimant may depend on the language of the cover - Compliance with Requirements of an Indemnity Settlement Deed - Meanings of otherwise.

Article

Construction

The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose. In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That inquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract: DMS Maritime Pty Limited v Royal and Sun Alliance Insurance Plc [2018] QSC 303.

Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption that the parties intended to produce a commercial result. Put another way, a commercial contract should be construed so as to avoid it “making commercial nonsense or working commercial inconvenience: Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd  (2015) 256 CLR 104; Victoria v Tatts Group Limited (2016) 328 ALR 564.

The construction of an insurance policy does not call for any different approach.  It is an agreement which the parties intend to produce a commercial result: Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd (2014) 251 CLR 640 at [35]: as such, it ought to be given a businesslike interpretation being the construction which a reasonable business person would give to it: Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 343 ALR 58 at [17]; Simic v New South Wales Land and Housing Corp (2016) 260 CLR 85 at [78]; Todd v Alterra at Lloyd’s Ltd (2016) 239 FCR 12 at 22–23 [42]; Weir Services Australia Pty Ltd v AXA Corporate Solutions Assurance [2018] NSWCA 100, [52]. In a temporal sense,  it is interpreted, as at the date on which it was entered into: Ecosse Property Holdings at [16]; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd   at 116 [47]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at [40]. The Courts frequently have regard to the contextual framework in which a contract is formed, to the extent to which it is known by both parties, to assist in identifying its purpose and commercial objective: McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 at 589; Mount Bruce Mining at 117; Franklins Pty Ltd v Metcash Ltd [2009] 76 NSWLR 603 at 618. It goes without saying that a construction that avoids capricious, unreasonable, inconvenient or unjust consequences, is to be preferred where the words of the agreement permit: Onley v Catlin Syndicate Ltd as the Underwriting Member of Lloyd’s Syndicate 2003 [2018] FCAFC 119 at [33]. See DMS Maritime Pty Limited v Royal and Sun Alliance Insurance Plc (supra).

 

Settlement by Insured

Whether an insured is entitled to establish the quantum of the insurer’s liability by reference to a settlement of its liability to the claimant and proving that it was reasonable in all the circumstances requires a construction of the insuring clause and any other provisions touching on the subject. If the insuring clause promises indemnity for all sums which the insured shall become liable to pay where it results from negligence of the insured, its right to an indemnity will accrue on the happening of the insured event which results in its becoming subject to a liability of a particular character where that legal liability was caused in a particular way. It can establish that event and its resulting liability by proof on the balance of probabilities.

A liability to pay a sum will usually be easily established, such as by proof or a deed of compromise. More difficult is establishing that the liability to pay arose in the requisite manner. Under the insuring clause, the insured must prove by evidence how its liability arose, and that on the balance of probabilities the liability met the description required by the insuring clause. If this is done, proof of the reasonableness of the settlement would establish that the relationship between the legal liability and the settlement sum was such that the latter arose “by reason of” the former.

A settlement which is reasonable, in that it is entered into in good faith after careful consideration and on proper advice, may later prove to have been unnecessary or generous, but it does not follow that it was not reasonable: Wong v. Hutchison (1950) 68 W.N. (N.S.W.) 55; White Industries Qld Pty Ltd v Hennessey Glass & Aluminium Systems Pty Ltd [1999] 1 Qd R 210 at 218. Nor does the claimant’s subsequent conduct have any bearing on the plaintiff’s original liability: cf Clark v Macourt (2013) 253 CLR 1 at [109] – [110] per Keane J. Nor can the reasonableness of a settlement be judged according to material which is obtained later showing that a different result might have been obtained: Ruckman v Nominal Defendant [2013] QCA 56

The following principles as to reasonableness were enunciated in Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603:

 (a) The test is an objective one.

(b) Evidence of the advice which the insured received to induce it to enter into the settlement is not in itself proof of its reasonableness.  It is relevant but what is usually more important is the reasoning supporting that advice because that will usually disclose why it was thought reasonable to settle.

(c) Reasonableness depends on the material circumstances at the time, provided the insuredted reasonably in discovering them. It is not to be judged according to whether later material shows that a different result might have been obtained: Cf Wong v. Hutchison (1950) 68 W.N. (N.S.W.) 55 at 58; White Industries Qld Pty Ltd v Hennessey Glass & Aluminium Systems Pty Ltd [1999] 1 Qd R 210, Pincus JA at 218;Derrington J at 227. In making that inquiry attention may need to be given to whether the cost of seeking further information would outweigh the benefit that it was reasonable to expect may be obtained from doing so.

 (d Reasonableness will almost always require consideration of the respective parties’ chances of success, but prediction of likely outcomes must always be imperfect and imprecise. See DMS Maritime Pty Limited v Royal and Sun Alliance Insurance Plc [2018] QSC 303

Indemnity Settlement Deed

The insurer and the insured may enter ino an Indemnity Settlement Deed by way of a compromise resolution of any difference as to the rights of a party under the policy. Sometimes,it may be by way of the insured’s acceptance of a reduced indemnity by way of compromise of the dispute, but it may be more complex, such as requiring the insured’s proof of the amount of the loss to be indemnified in accordance with the terms of the insuring promise.

This may involve the construction of the Deed as well as of the policy, and as both are commercial contracts, the usual well-known principles of construction of such contracts apply to each. For example, if both parties to a Deed were legally advised, and if they intended to exclude the operation of the “reasonable compromise” possibility of crystallizing indemnity, it would have been easy to add the adjective “reasonable” in front of “settlement”, and its absence implies that it was not intended: DMS Maritime Pty Limited v Royal and Sun Alliance Insurance Plc [2018] QSC 303

 

“Otherwise”

The Macquarie Dictionary relevantly defines “otherwise” as 2. in another manner; differently. The Oxford English Dictionary relevantly defines it as a. In another way or ways; in a different manner; by other means; in other words; differently. ....: DMS Maritime Pty Limited v Royal and Sun Alliance Insurance Plc [2018] QSC 303