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Legal Insight Issue 5

Legal Insight Issue 5

Contents:

Expert Determination Clause Binding on Parties

Examination Transcripts Cannot be used Against Others

Building Industry - Payment Claims - Setting Aside an Adjudicator's Determination

Clarification by High Court as to what Constitutes an Appealable Error of Law

Director Absolved of Liability for Insolvent Trading

Bouncing Cheques - Has your Bank Defamed You?

Lost Insurance Policy...Who Needs to Prove?

 

Expert Determination Clause Binding on Parties

The Supreme Court of New South Wales has held (in Lipman Pty Ltd –v- Emergency Services Superannuation Board [2010] NSWSC 710) that an expert determination clause in a construction contract which provided that the determination would be binding and final unless it was "reversed, overturned or otherwise changed", pursuant to a specific procedure stipulated in the contract, prevented later Court intervention.

Facts

A dispute arose between the parties and negotiations were held to try to settle the dispute. The negotiations failed. The parties appointed an expert pursuant to the contract and the expert issued a determination. Further negotiations were held after the determination was issued. Again the matter was not settled by negotiation. Over three and a half years later, one of the parties commenced proceedings in the Supreme Court of NSW making a claim identical to that which was the subject of the determination.

Law

The Court rejected an argument that if the determination was final and binding it would preclude the parties from exercising their rights at common law to seek Court redress. The Court held that the clear wording used in the contract meant that the expert determination was final and binding and could not be challenged in a Court unless the specific procedure set out in the contract was instigated after the determination was issued. In this case, it was not.

Comment

Parties should be aware that if a dispute arises in any commercial contract and there is a specific dispute resolution clause, particularly dealing with the rights of the parties in respect of an expert determination, such clauses should be strictly followed. Any appeal/review rights should also be strictly followed if a party is unhappy with the result. These steps should be taken at the relevant time, not down the track when the review/appeal rights may have been lost.

 

Examination Transcripts Cannot be used Against Others

The Supreme Court of New South Wales has held (in Fodare Pty Limited -v- Shearn [2010] NSWSC 737) that a signed transcript of an examinee's evidence in a public examination can be used against that person in later civil proceedings, however it cannot be used against any other person.

The Court appears to have come to this conclusion on the basis that section 597(14) of the Corporations Act expressly provides that "…[this evidence] may be used in evidence in any legal proceedings against the person." In doing so, the Court rejected an argument that any evidence contained in such a transcript was inadmissible by reason of it offending the "hearsay rule".

The hearsay rule (found in the Evidence Act of NSW and the Commonwealth) states that evidence of a previous representation (prior statements/answers) made by a person to prove a fact which it can be reasonably supposed that person intended to assert by the representation (the prior statements/answers) is inadmissible. The hearsay rule is subject to exceptions, none of which are relevant for present purposes. Although the question was not specifically addressed, it will be interesting to see whether any future decision on this issue addresses the apparent inconsistency between the Corporations Act and Evidence Acts and whether it explicitly finds that the Corporations Act is to operate despite the provisions of the Evidence Act, to the extent of any inconsistency.

The effect of this decision has far reaching consequences, particularly in light of the fact that a public examination requires examinees to answer all question put to them. An examinee is entitled to claim privilege in respect of any answers given. It should be noted that the signed transcript was only admissible as evidence against the person who actually gave that evidence, not any other person. One issue which may still warrant attention by the Court is whether a transcript would be admissible if, contrary to a direction of the Registrar conducting the examination, the examinee does not sign the transcript (which in our experience frequently occurs).

 

Building Industry - Payment Claims - Setting Aside an Adjudicator's Determination

The Building and Construction Industry Security of Payment Act ("the Act") has a very strict and non-extendable period for the service of payment claims, payment schedules and notices to enliven the Act's streamlined regime. Failure to comply with these provisions is fatal.

The NSW Court of Appeal (in the case of Chase Oyster Bar -v- Hamo Industries [2010] NSWCA 190) has set aside a purported Adjudication Determination under the Act on the basis that the Act's provisions were not strictly followed. The Court held that:

  1. nothing in the Act prevents the Supreme Court from setting aside a (purported) Determination; and
  2. because a notice of intention to apply for Adjudication was served outside the prescribed 20 business days, the purported Adjudicator's Determination was invalid and of no legal effect.

This is yet another reminder for developers, builders and sub contractors that (as Spigelman CJ said) "…punctilious compliance with each specific time limit is required if a builder [or contractor] is to have the benefit of the scheme established by the Act".

 

Clarification by High Court as to what Constitutes an Appealable Error of Law

In late September 2010, the High Court in Kostas –v- HIA Insurance Services Pty Limited (2010) HCA 32, clarified what constitutes an error with respect to a matter of law in the context of an appeal from a decision of the Consumer, Trader & Tenancy Tribunal ("CTTT").

Section 67 of the CTTT Act, 2001 (NSW) ("CTTT Act") creates a right of appeal against a decision by the CTTT of "a question with respect to a matter of law".

In the Kostas case, the CTTT made a finding in its reasons for judgment to the effect that a purported termination of a building contract by Kostas was not effective because the builder had validly served various notices of claims for extensions of time under the building contract.

However, there was no evidence before the CTTT to support the finding that the builder had served such notices. It was a critical element to the CTTT's findings that such notices had been served to enable the CTTT to conclude that the termination notice served by Kostas was not valid.

The majority judgment of the High Court accepted the contention by Kostas that there was no material before the CTTT which supported the above findings. Accordingly, Kostas was therefore able to appeal the CTTT decision to the Supreme Court under Section 67 of the CTTT Act. The High Court held that the conclusion that there was material to support the findings of the CTTT, which was necessarily implicit in making the finding that extension of time notices by the builder had been validly served, was a decision with respect to a question of law.

It is important to note that the written reasons for decision issued by the CTTT did not identify the evidence relied upon to support its conclusion that the extension of time claims had been served, nor did the reasons specify how or when those notices had been served.

Therefore, if there is no evidence to support a factual finding made by the CTTT, that will be a question of law, not a question of fact, and may be the subject of an appeal under Section 67. Put another way, if the CTTT decides a question of fact when there is "no evidence" in support of the finding, the CTTT makes an error of law.

Having decided that the decision of the CTTT was wrong, the High Court restored the decision of the primary Judge to the effect that the termination of the building contract by Kostas was lawful and ordered HIA to pay the costs of the hearings of the High Court appeal and the Court of Appeal.

 

Director Absolved of Liability for Insolvent Trading

The Stake Man's Decision

When a company trades while insolvent the directors may be personally liable to the creditors of the company for debts incurred when trading while insolvent.. Courts have ordered a director to pay creditors as much as $96.7 million.

In Stake Man Pty Ltd v Carrol, the Court applied the defence in section 1317S of the Corporations Act ("Act") and held that although a director may have allowed the company to trade while insolvent, the director's conduct was sufficient to absolve him from all personal liability.

Under section 1317S of the Act if it is found that a director has acted honestly and, having regard to the circumstances of the case, the person ought to be fairly excused for the contravention, a court may relieve the director (partly or wholly) of the liability.

Carrol, a director of Stake Man, was worried about Stake Man's cash flow due to losses caused by faulty plant and equipment. On the advice of an accountant that Stake Man was "near insolvency", Carrol sought and found an investor to inject more capital (which was quickly exhausted).

After receiving a notification from the ATO that Stake Man owed it $110,000.00, Carrol's accountant advised him that Stake Man should seek advice from an insolvency specialist. Three days later, on the specialist's advice, Stake Man went into voluntary administration and then into liquidation. The liquidator pursued Carrol for insolvent trading, seeking over $400,000.00.

The court found that Carrol allowed Stake Man to trade while insolvent. The Court found that the advice the accountant gave Carrol was incorrect; the company was not "near insolvency" and was in fact insolvent. However, the court was satisfied that Carrol had acted honestly and, having regard to the circumstances of the case, should be excused from liability. The Court took into account the following:

  1. Carrol took active steps to increase Stake Man's sales;
  2. Carrol relied upon the advice of his accountant and actively sought an investor to inject capital;
  3. Following the advice of the accountant regarding the ATO tax notice, Carrol promptly sought the advice of an insolvency specialist; and
  4. Carrol promptly followed the advice of the insolvency specialist and placed Stake Man into voluntary administration.

The case highlights that a director who conscientiously (and quickly) seeks advice from professionals/experts and takes action to fulfil a director's duty to not let a company trade while insolvent may ultimately be absolved from all liability. Whether other judges will apply section 1317S in the same (apparently lenient) manner remains to be seen.

 

Bouncing Cheques - Has your Bank Defamed You?

The High Court (by a majority of 3-2) recently held that a bank dishonouring its customer's cheques, in circumstances where sufficient funds were in the account to meet them, had defamed its customer.

Facts

A dispute arose between a Century 21 Real Estate franchisee and franchisor. The franchisor entered default judgment against the franchisee and issued a garnishee order to the franchisee's bank (Westpac). Westpac, of its own volition, changed the status of the franchisee's accounts, including trust account, to prevent money being withdrawn from same. Thirty cheques drawn against the franchisee's account were not met when presented and instead marked "refer to drawer" and sent back to the respective payees, even though there were adequate funds to pay them.

The trial judge and the Appeal Court held that Westpac had published defamatory imputations, however, the imputations were covered by the defence of qualified privilege. The finding in defamation was not challenged, however, the franchisee succeeded in convincing the High Court that the defence was not applicable in this case.

High Court's finding

  1. The finding in defamation was not appealed and therefore not disturbed.
  2. To ground the defence of qualified privilege the evidence must show that the giver and receiver of the publication had a reciprocal and special interest in the subject matter and therefore, as a matter of public policy, the publication should be allowed, notwithstanding its defamatory nature.
  3. The majority held that there was no interest in the payee receiving advice from Westpac that the cheques had been dishonoured, in circumstances where sufficient funds were available.
  4. The minority held that the defence of qualified privilege should be available to protect honest mistakes made in good faith and that the payees did have an interest in knowing the cheques had been dishonoured so, inter alia, they could ensure payment by another means.

Defamation has traditionally been a difficult claim to succeed in. The narrow result (3-2) suggests that the defence of qualified privilege may undergo developments in the near future.

 

Lost Insurance Policy...Who Needs to Prove?

The High Court recently held (Wallaby Grip Ltd -v- QBE Insurance; Stewart -v- QBE Insurance Ltd) that an insurer bears the onus of proving any claimed cap/ceiling on the indemnity it provides to an insured.

Facts

Mr Stewart died from exposure to asbestos during the course of his employment. Mr Stewart's Estate successfully sued Wallaby Grip in negligence for Mr Stewart's death. Damages of approximately $360,000 were awarded. Wallaby Grip sought indemnity from its insurer QBE. QBE did not dispute the claim, however, it pleaded that it was only liable for $40,000, due to a cap in the policy. At the relevant time, employers were legally obliged to have insurance for potential liability in (for example) negligence, with a minimum of $40,000 cover. Neither party were able to locate a copy of the policy and the case turned on who bore the onus of proof.

Law

The trial judge held that as the insurer was admitting the claim however asserting a limit to its liability, it bore the onus of proving any limit. The Appeal Court reversed the trial judge's decision, holding that ordinary principles of proof dictate that a party asserting a contract and its terms was required to prove them.

The High Court reversed the Appeal Court's decision and restored the decision at first instance, holding:

  1. 1. an insured only bears the onus of proving facts which evidence the loss and that the loss falls within the policy; and
  2. 2. a limit on the quantum of indemnity is akin to an exception in a policy and therefore the insurer bore the onus.

Comment

This is another example of the Court's tendency, in circumstances of any ambiguity, to favour the insured over the insurer.

 

 

Hugh & Associates is a Sydney based legal firm with extensive experience in commercial, finance and insolvency law and litigation. If you require legal advice in these areas, we would be pleased to assist you.

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