Construction of indemnities and leave to set aside default judgment

Jiona Investments Pty Ltd & Ors v Medihelp General Practice Pty Limited [2010] QCA 99

Judgment was at first instance entered against the appellant for $1.2 million and costs of $407,378.47; having failed to enter a defence to third party proceedings based on an indemnity.

The failure to enter a defence was pivotal in the primary judge refusing leave for the counsel of the appellant to appear and consequently argue the defence.

The appeal was premised on:

  • construction of clauses 5 and 6 of a Deed which addressed obtaining consent of the appellant before compromising the principal litigation with other parties for which the appellant had provided an indemnity, together with the reasonableness of the compromise and that the appellant could not unreasonably refuse consent to compromise the litigation; and
  • the failure to of his Honour to give leave for the appellant’s counsel to appear (and put an arguable defence with respect to clause 6).

In respect of construction of indemnities Muir JA held, with whom Atkinson and Ann Lyons JJ concurred:

[16] If the proper construction of clause 6(b) of the Deed is as discussed above, it remains necessary to consider the consequences of a failure on the part of Medihelp to obtain the appellant’s consent to the settlement. Counsel for Medihelp argued that a construction of clause 6(b) which denied indemnity to Medihelp where it concluded a reasonable settlement but had failed to seek the appellant’s prior consent (despite the fact that the appellant could not have refused to give his consent because the settlement was reasonable and he could not unreasonably refuse consent), would be unreasonable and uncommercial. That broad assertion, with respect, fails to have regard to the language of clauses 5 and 6 and to the nature of the relevant obligations. The High Court, in Andar Transport Pty Ltd v Brambles Ltd[3] affirmed the principles applicable to the construction of guarantees adopted in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd[4] and applied in Chan v Cresdon Pty Ltd[5] and held that such principles were relevant to the construction of indemnity clauses.
[17] Central to the proper construction of clause 6(b) is the following statement of principle in the joint reasons in Ankar:[6]

“At law, as in equity, the traditional view is that the liability of the surety is strictissimi juris and that ambiguous contractual provisions should be construed in favour of the surety. The doctrine of strictissimi juris provides a counterpoise to the law’s preference for a construction that reads a provision otherwise than as a condition. A doubt as to the status of a provision in a guarantee should therefore be resolved in favour of the surety and so the provision should be interpreted as a condition, or perhaps as an innominate term, instead of a mere warranty.”

[18] Their Honours then proceeded to explain the basis on which a creditor’s failure to comply with a term of the suretyship contract operated to relieve the surety of liability:[7]

“If the surety is to be discharged for breach of a promissory term in the suretyship contract, the justification for the discharge must be that the creditor has failed to comply with a provision that, as a matter of interpretation, requires strict performance as a condition precedent to the surety’s obligation or at least requires substantial performance of the promise such that the surety would not have entered into the contract if it had not been assured that there would not be a breach such as the breach which in fact occurred. If on its true interpretation the term is not intended so to operate, it is not easy to understand why the surety should be discharged by its breach. Of course, in construing the contract the court is entitled to look to the general setting in which the contract has come into existence: see, eg, the discussion in Reardon Smith Line Ltd v Hansen-Tangen.” (footnote omitted)

AND

[24] Counsel for the appellant argued as follows. The claim and statement of claim were based on a misunderstanding of the nature of the indemnity provided by the Deed and made no claims known to law. It is possible to sue for specific performance of an indemnity or to claim damages if there is a failure to indemnify. In appropriate circumstances a declaration of rights in respect of the indemnity may be sought, but where the indemnity is in respect of a contingent liability, the grantor has no obligation to indemnify until the liability ceases to be contingent.
[25] Reference was made to McIntosh v Dalwood (No 3)[9] in which Harvey CJ in Eq said at 86:

“The cases show that a plaintiff can call upon the debtor to pay the debt under his contract of indemnity from the principal debtor before he has actually paid the liability. In my opinion the same principle exactly applies to a contract of indemnity against the payment of a liability. The cases to which I have been referred show that that liability must have crystallized into an actual present and enforcible demand before the indemnifier can come into court to get relief. As long as it remains a contingent liability, which may or may not arise, the court will not entertain any proceedings, but where it has become an actual present demand which the contracting indemnifier has contracted to pay, the court of Equity will order specific performance of the contract by ordering the indemnifier to pay it, instead of leaving the indemnified merely to a remedy for damages after he may have been ruined.”

AND

[27] I do not regard the appellant’s arguments as fanciful. The correctness of the principles stated in the above passage from McIntosh v Dalwood is beyond doubt.[11]

Apropos the failure to give leave to appear (to put an arguable defence), his Honour Muir JA allowed the appeal, having found the appellant raised meritorious arguments in respect of clause 6 of the Deed, and concluded:

 [33] In my respectful opinion, the primary judge erred in refusing the appellant leave without considering whether the appellant had an arguable case arising out of the construction of clause 6 of the Deed. His Honour, by implication, found that no such case existed in relation to clause 5 but that was just one of the two arguments advanced on behalf of the appellant. Admittedly, as is so often the case, the advancement of the lengthy and tenuous argument in respect of clause 5 served to distract attention from the more substantial, but fleetingly addressed point on the construction of clause 6(b).
[34] The following statement of principle by Gaudron, McHugh, Gummow and Hayne JJ in Agar v Hyde[12] is apposite:

“It is, of course, well accepted that a court whose jurisdiction is regularly invoked in respect of a local defendant (most often by service of process on that defendant within the geographic limitations of the court’s jurisdiction) should not decide the issues raised in those proceedings in a summary way except in the clearest of cases. Ordinarily, a party is not to be denied the opportunity to place his or her case before the court in the ordinary way, and after taking advantage of the usual interlocutory processes. The test to be applied has been expressed in various ways, but all of the verbal formulae which have been used are intended to describe a high degree of certainty about the ultimate outcome of the proceeding if it were allowed to go to trial in the ordinary way.”

[35] A broadly similar approach has been traditionally taken in relation to applications to set aside regularly obtained judgments.[13]
[36] In Troiani & Anor v Alfrost Properties Pty Ltd,[14] McPherson JA observed that the refusal of leave to defend on the grounds of unjustified delay where “a plausible defence on the merits” had been shown, was “an unusually heavy sanction for delay”.
[37] I am also of the view that the primary judge erred in finding, implicitly, that the appellant had been guilty of relevant delay in not filing a defence and that this failure was relevant to whether the appellant’s counsel should be heard on Medihelp’s application. This was not a case in which a party had been responsible for relevant delay or any failure to comply with obligations under the Rules. The failure to file and serve a notice of intention to appear and a defence before the hearing was, in my view, a forensic error which weakened the appellant’s position, as it exposed him to the necessity of obtaining leave to appear. The failure to file a defence was also something on which the respondent’s counsel could, and did, rely in their submissions. However, once the fury, sound and dust of the engagement at first instance are penetrated, it may be seen that the appellant had a fairly arguable point on the merits which could have emerged only after the appellant became aware of the settlement, and that there were no disentitling factors such as delay or prejudice standing in the way of a trial on that point.
[38] The claims sought to be enforced by Medihelp’s application were, arguably, at the very least, not within the relief expressly claimed in the claim and statement of claim. The compromise which provided the factual basis for the most substantial claim had just been made. For these reasons also, the appellant should not have been deprived of the opportunity of resisting the new claims without compelling grounds.

Brisbane Barrister – David Cormack

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