In the recent New South Wales Supreme Court decision of Spotlight Pty Ltd v Maintek Roofing Pty Ltd (Spotlight)1, the Court granted leave to Spotlight to have separate legal representation in respect of the principal proceeding and the second cross claim against it on the basis of a conflict of interest.
The authorities suggest the circumstances justifying such an order will be rare and, accordingly, any potential application should be approached on the basis that it is unlikely that leave will be granted. However, the Court was satisfied that, as there was a conflict of interest between the rights of the insured and the rights of the insurer, in this particular instance, separate representation was required.
In this eBulletin, we review the decision and consider its application in the context of insurance matters and more generally.
Spotlight leased a premises at Nowra. On 3 November 2007, there was a storm in Nowra that caused Spotlight substantial loss and damage valued at approximately $5 million. Spotlight was indemnified by its Industrial Special Risk (ISR) insurer for its first party losses.
The subrogated recovery claim issued by the ISR insurer in Spotlight's name proceeded against a number of parties, including the landlord. The landlord issued a cross claim against Spotlight seeking $787,358.18 for asserted breaches of the lease and a significant claim to interest.
Spotlight was partially indemnified by its liability insurer for its third party liability to the landlord.
The lawyers for Spotlight's liability insurer proposed a defence to the cross claim which included a pleading that the cross claim was set off by Spotlight's primary claim for loss and damage (set off pleading).
The lawyers for Spotlight's ISR insurer, who were on the court record, refused to file a defence to cross claim that included the set off pleading.
It was contended that Spotlight's interests as plaintiff differed from its interests as cross defendant, such that the lawyers on record representing Spotlight as plaintiff had a conflict of interest in continuing to properly represent Spotlight on the cross claim.
The ISR insurer maintained that if Spotlight was in breach of the lease, such damage is not a matter of set off but a matter that should be visited upon Spotlight separately and the subrogated recovery (if successful) should not be reduced or extinguished.
The liability insurer argued that, to the extent that Spotlight was liable to the landlord, any judgement in favour of Spotlight on its primary claim should be reduced.
The liability insurer relied on:
- the New South Wales Supreme Courtdecision in Buses and 4WD Hire Pty Limited v Oz Snow Adventures Pty Ltd (Buses) where leave was granted for separate representation; and
- the New South Wales Solicitors Conduct Rules that relevantly require a solicitor to act in the best interest of a client and to avoid conflicts between the duties owed to two or more current clients.
The ISR insurer:
- argued that such an order would have an inevitable impact on the length and complexity of trial including differences of approach in relation to interlocutory matters and the potential to different views on the part of counsel as to what evidence to call;
- relied on established authority in support of the submission that the circumstances justifying such an order will be rare and an application should be approached on the basis that it is unlikely that such leave would be granted; and
- asserted that the question of a set off does not create a difficulty as the court has discretion to provide separate judgements where there is a claim by a plaintiff and a cross claimant.
Justice Adams found that the authorities raised in argument were not of any direct assistance, beyond the fact that they illustrate that allowing separate representation should be rare and done only to avoid injustice. His Honour did acknowledge that the decision in Buses did assist in determining whether there was a conflict of interest for the lawyers representing Spotlight's interest as plaintiff and Spotlight's interests as cross defendant.
His Honour noted that the application proceeded on the basis that the parties did not dispute that the Court had the power to make such an order.
In circumstances where he was satisfied that the potential conflict of interest had already arisen concerning the proper pleading of the defence to the cross claim, Justice Adams found that any potential conflict could not be resolved by the delivery of separate judgements at the conclusion of the hearing.
Justice Adams noted that the order for separate representation was likely to cause prejudice, including the prospect of increased costs caused by a number of matters, particularly the potential for cross examination of witnesses by two counsel and the extra costs of dealing with two firms of lawyers throughout the litigation. To reduce this potential prejudice, His Honour urged the parties to agree on a protocol with an aim of limiting costs.
It is unclear whether the decision in Spotlight and Buses will be restricted to circumstances where there is a conflict of interest between different insurers or insurer and insured on the conduct of the recovery or defence, or whether the decisions indicate that courts may be willing to expand the operation of separate representation. This will need to be evaluated on a case by case basis.
It may also be relevant whether the insurance policy provides the insurer with the right to defend or merely associate in the defence, and whether there is a Queen's Counsel clause to determine disputes as to settlements.