The High Court of Australia in CGU Insurance Ltd v Blakeley & Ors [2016] HCA 2 unanimously confirmed that a third party can join a defendant’s insurer to a proceeding and seek a declaration of rights under the insurance agreement, provided that third party has a ‘real interest’ in the performance of the agreement and that there is practical utility in the court providing that declaration.

The decision resolves the uncertainty about whether a party needs to be a party to an insurance agreement to seek a declaration of its terms, particularly in circumstances of insolvency of the insured. It also helps to clarify the outer limits of the Supreme Court’s jurisdiction to join parties to a dispute for the purpose of granting declaratory relief.

Significance

This decision has resolved a conflict of authority at intermediate appellate court level and has confirmed the following matters:

  • The jurisdiction of the court to grant joinder for the purpose of seeking a declaration is wide, and is only informed, but not curtailed, by discretionary factors.
  • In some circumstances (which should still be regarded as exceptional), insurers can be joined directly by a party suffering a relevant loss – this supplements the statutory charge arising under section 6 of the Law Reform (Miscellaneous Provisions) Act in New South Wales (and similar provisions in the Northern Territory and Australian Capital Territory).
  • In the case of a claim brought against a director of an insolvent company, the liquidator may apply to join the director’s insurer, where indemnity is denied, and seek a declaration as to the insurer’s indemnity obligations.
  • This judgment should encourage insurers to make a quick decision if they intend to admit liability in order to avoid being joined – that is, sitting on the fence will be less attractive for insurers.
  • In the event of impecuniosity of a party insured under a third party liability policy of insurance, the relationship between the insured and their insurer becomes different to that of ordinary contracting parties. This is because third parties with claims against the insolvent defendant insured have an interest, and probably the primary interest, in the question of whether or not the policy responds.
  • Even prior to the formal insolvency of a defendant (winding up, bankruptcy), it may be possible for the defendant’s insurer to be joined, if it is shown that the defendant has insufficient means to meet the claim.
  • The decision means that it is more likely that insurers will be joined to class actions.
  • The decision increases the risk faced by professional indemnity insurers in the context of insolvency, at least in terms of being included as defendants at earlier stages of litigation.

Background and original decisions

Akron Roads Pty Ltd was placed into voluntary administration in February 2010, and liquidators were appointed in March 2010. The liquidators commenced a claim for “insolvent trading” – being contravention of section 588G of the Corporations Act 2001 (Cth) (Corporations Act) – against Akron’s directors (including Mr Trevor Crewe) and an alleged shadow director (Mr Crewe’s business consultancy company, Crewe Sharp Pty Ltd (Crewe Sharp).

Crewe Sharp and Mr Crewe, who was also a director of Crewe Sharp, were the beneficiaries of a professional indemnity policy issued by CGU Insurance Ltd (‘CGU’). Both Mr Crewe and Crewe Sharp made claims under the insurance policy, in relation to the insolvent trading claims, but CGU denied indemnity. Crewe Sharp subsequently went into liquidation.

Akron’s liquidators applied to the Supreme Court of Victoria to join CGU to the insolvent trading proceeding as a defendant and to amend their statement of claim to include a claim for a declaration to the effect that CGU was liable to indemnify Mr Crewe and Crewe Sharp in respect of the claims made against them in the proceeding. Akron’s liquidators claimed that their ultimate right to proceeds of insurance, under section 562 of the Corporations Act (and section 117 of the Bankruptcy Act 1966 (Cth)), provided a sufficient basis for joinder.

The joinder application was made under rule 9.06(b) of the Supreme Court (General Civil Procedure) Rules 2005 (Vic). Rule 9.06 provides that the Court may order a person to be joined to the proceeding if a ‘question arises out of’ or ‘in relation to’ that person’s relationship with a party to the proceeding, and if it is ‘just and convenient’ to determine that additional question in the same proceeding. Similarly broad joinder rules exist in other Australian jurisdictions.

CGU opposed the liquidators’ application on the ground that courts do not have jurisdiction, at the suit of a stranger to a contract, to grant declaratory relief as to the meaning and effect of the contract.

At first instance, Judd J held that the Court did have jurisdiction to order the joinder and that discretionary factors favoured allowing the liquidators to seek the declaratory relief requested.

CGU appealed to the Court of Appeal, which agreed with Judd J’s reasoning and dismissed CGU’s appeal. The Court of Appeal largely approached the matter, as did the primary judge, on the basis that joinder was a discretionary matter. The Court emphasised that an application for a joinder requires a balancing of the significance of the dispute between the joined party and another party (whether it is material), the degree of the applicant’s interest in the joined party’s contractual rights, and whether a joinder would advance the efficient resolution of all related disputes. To this effect, the Court held: ‘[consistent] with the way courts are expected to exercise their jurisdiction in a modern world, one could not countenance the possibility of separate proceedings between the current parties [Akron and the Crewe Sharpe parties] and later proceedings between [those parties] … and CGU.’

CGU sought special leave to appeal to the High Court of Australia. Special leave was granted on the basis that some conflict existed within the intermediate jurisprudence concerning applications for joinder for the purpose of declaring rights relevant to the joined party.

High Court decision

The focus of the matter before the High Court concerned jurisdiction, rather than discretion.

CGU’s primary argument was to the effect that section 562 of the Corporations Act (and the Bankruptcy Act equivalent) does not create any substantive rights in favour of third parties to a contract of insurance, as against the insurer, and, accordingly, the courts have no jurisdiction to make declarations regarding operation of the policy on the application of such third parties. Absent that jurisdiction, no basis exists for a joinder of the insurer as no real controversy exists between the third party and the insurer.

It was accepted by the Court that in order for the joinder provision to be enlivened, the Court must first have jurisdiction with respect to the proceeding in so far as it is to concern the party sought to be joined. The joint judgment (French CJ, Kiefel, Bell and Keane JJ) concluded that, in this proceeding, the Victorian Supreme Court was exercising federal jurisdiction, the primary claim being a matter arising under the Corporations Act. The real controversy was whether there existed a justiciable controversy between the liquidators and CGU. That, in turn, squarely gave rise to the question of whether a declaration could be granted, in favour of the liquidators, regarding the operation of an insurance policy to which the company in liquidation was a contractual stranger.

The Court accepted that section 562 of the Corporations Act does not confer on a claimant any right of action against an insurer of the defendant. Even more so, in the case of the claim against Mr Crewe who was not yet a bankrupt, any right under section 117 of the Bankruptcy Act was currently “hypothetical and contingent”.

Nevertheless, the joint judgment recorded that section 562 (Corporations Act) and section 117 (Bankruptcy Act), coupled with CGU’s denial of cover under the policy and the two relevant insureds’ non-acceptance of that denial, gave to the liquidators a “sufficient” interest to constitute a justiciable controversy between the liquidators and CGU directly.

In a separate judgment, Nettle J noted that, whilst a party seeking declaratory relief must demonstrate a “real interest” in the subject matter of the declaration and that the question must not be “purely hypothetical”, it is not necessarily the case that the declaration must relate to an actual right, duty or liability existing directly between the opposing parties. His Honour concluded that, in this case, the liquidators have a “real interest” in establishing that the insurer is liable to indemnify the directors – “…it is not an essential feature of a matter [being the foundation of a justiciable controversy] that the parties to a claim share correlative rights”.

On the related topic of whether it is possible for a Court to make a declaration about the meaning and effect of a contract on the application of a non-party to the contract, Nettle J confirmed that this is not normally appropriate, but there are exceptions of which the present case was one. It cannot be rationally said that a claimant who qualifies as a beneficiary of the priority afforded by section 562 of the Corporations Act or section 117 of the Bankruptcy Act is an “outsider” to the relevant policy of insurance.

The Court also rejected CGU’s suggestion that the declaration sought by the liquidators would not bind them, on the basis that it would be impractical, and probably an abuse of process, for the question to be subsequently re-litigated