Loading...
Queensland Judgments

beta

Authorised Reports & Unreported Judgments
Exit Distraction Free Reading Mode
  • Unreported Judgment

Oakland Investments (Aus) Limited v 'Certain Underwriters at Lloyds'

 

[2012] QSC 6

 

SUPREME COURT OF QUEENSLAND

PARTIES:

FILE NO/S:

13564 of 2010

Trial Division

PROCEEDING:

Claim

ORIGINATING COURT:

DELIVERED ON:

31 January 2012

DELIVERED AT:

Brisbane 

HEARING DATE:

5 and 6 December 2011

JUDGE:

Applegarth J

ORDER:

Judgment for the plaintiff in each proceeding.  The plaintiff to submit minutes of orders.

CATCHWORDS:

INSURANCE – CLAIMS GENERALLY – REFUSAL – GENERALLY – where plaintiff conducted business as a lender of short to medium term loans – where plaintiff was insured by defendants under successive mortgage indemnity and impairment policies – where a number of the plaintiff’s borrowers defaulted under their loans – where plaintiff sold property securing those loans and a loss resulted – where defendants refused to indemnify plaintiff for amounts representing interest and fees paid by borrowers to plaintiff – where policy excluded cover for fees or charges payable to the plaintiff and any amounts advanced “for” the payment of interest – where plaintiff required interest and fees to be pre-paid by borrowers – where borrowers at settlement directed the plaintiff to distribute amounts for pre-paid interest and fees from the sums lent by the plaintiff – whether plaintiff had advanced sums “for” the payment of interest and fees – whether defendants entitled to refuse indemnity for amounts representing interest and fees

INSURANCE – CLAIMS GENERALLY – where insurer delays in paying undisputed amounts that were payable under mortgage indemnity and impairment policies – whether breach of contract proven – whether damages should be assessed at rate of 10 per cent simple interest per annum

HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640; [2004] HCA 54 cited

Oakland Investments (Aust) Ltd v “Certain Underwriters at Lloyds” [2011] QSC 55 cited

Ted Brown Quarries Pty Ltd v General Quarries (Gilston) Pty Ltd (1977) 16 ALR 23 followed

Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522; [2005] HCA 17 cited

COUNSEL:

R G Bain QC and P A Travis for the plaintiff

S R Donaldson SC and J J Baartz for the defendants

SOLICITORS:

Elliott May Lawyers for the plaintiff

Lee & Lyons for the defendants

[1] The plaintiff (“Oakland”) was insured under a “Mortgage Indemnity and Impairment Policy” by the first defendants (“the 2006 Underwriter”) for the period 1 July 2006 to 30 June 2007 and by the second defendants (“the 2007 Underwriter”) for the period 1 July 2007 to 30 June 2008.  The terms of the 2006 policy and the 2007 policy are materially the same.  Oakland made claims under each of those policies and, after the insurers failed or refused to pay those claims, these proceedings were commenced.  Certain issues have been resolved either by payment of part of the claim, by summary judgment for part of the claim[1] or by a negotiated resolution of a claim for repayment of overpaid premiums.

[2] The issues that remain for resolution are:

(a)Whether indemnity under the relevant policy extends to certain amounts which the Underwriters contend fall outside the terms of cover because, in each case, they are:

 

(i)amounts advanced for the payment of interest or as a provision for possible future payment of interest; or

 

(ii)fees or charges payable to Oakland.

 

(b)Whether, in respect of payments that are referred to by the parties as the “undisputed amounts”, and which now have been paid to Oakland by the Underwriters, Oakland is entitled to damages for breach of contract arising from their late payment and, if so, the amount of damages that should be assessed.

 

(c)If Oakland is entitled to judgment in respect of the remaining claim for indemnity referred to in (a) above, whether it is entitled to interest pursuant to s 47 of the Supreme Court Act 1995 (Qld), and the appropriate rate of such interest.

Background

[3] At all material times, Oakland carried on the business of lending money to individuals and companies engaged in property development, or in the acquisition of rural and agricultural businesses and land.  One of its directors, Mr Handley, who is familiar with its business and the loans that are the subject of these proceedings, said that Oakland’s business was “predominantly a special case lender for short to medium term business loans.”  In general terms, loan transactions would arise after an application was made to an associated brokerage company, Oakland Finance Pty Ltd (“Oakland Finance”).  Oakland had criteria which determined to whom it would lend and, after conducting investigations and assessing the value of security, it would indicate the amount that it was prepared to lend to a borrower.  Oakland’s decision about how much it would lend would be based on the ratio of the amount of the loan to the value of the security that was to be provided.

[4] Oakland generally required, and specifically required in the loans that are relevant in these proceedings, that interest be paid by the borrower, and that it be pre-paid at the drawdown of the loan.

[5] Although some general evidence was given by Mr Handley, by way of background, to the effect that Oakland did not engage in “grossing up or capitalised interest lending”, such general evidence does not assist the resolution of the issues.  Instead, reference is required to the six specific loan transactions that are in issue, and the terms upon which amounts were advanced under each insured loan.  It is necessary to consider the loan documentation in each case, and to determine whether the amount advanced by Oakland to the borrower in each such case included an “amount advanced for the payment of interest or as provision for possible future payment of interest” or any fees or charges payable to Oakland.  However, the facts in relation to the first claim (the O’Neill claim) provide an example of the general way in which each loan was transacted. 

[6] Ms O’Neill applied through Oakland Finance for a short term loan.  The application sought to borrow $2 million over a three to six month term.  The stated purpose of the loan was “Settle Penthouse”.

[7] On or about 4 August 2006, Oakland Finance sent an indicative funding proposal to Ms O’Neill.  The proposal stated that Oakland Finance believed that it could source funding on specified terms, which included:

 

(a)Funds Required: $1.7 million or 70% of registered valuations, whichever is the lesser.

 

(b)Term: four months.

 

(c)Lower interest rate: 3.2 per cent per month

 

(d)Interest Payments: four months interest to be paid upfront at settlement.

[8] By a letter dated 8 August 2006, Oakland advised Ms O’Neill that her loan application was conditionally approved for the loan amount of $1,631,250.  The letter noted that “the purpose of the loan facility is [t]o purchase the property known as Unit 83 ‘AQUA’ Nelson Bay.”  

[9] Under the heading “Loan amount and distribution of funds”, the letter identified amounts to be paid at settlement, including pre-paid interest of $108,315 and a loan compliance fee of $5,872.50.  The pre-paid interest was to be retained in Oakland’s account.  The letter was in the nature of an offer, which Ms O’Neill was required to accept by signing a duplicate of it and completing other forms.  The letter of offer included a term by which Ms O’Neill authorised Oakland “to deduct brokerage, valuation, legal fees and outlays and interest if any from the advance at settlement.”  Ms O’Neill accepted the offer.  She thereby authorised the distribution at settlement from the loan monies to be advanced to her of an amount of $108,315 for the pre-payment of interest and $5,872.50 for a loan compliance fee.

[10] On or about 14 August 2006, Oakland entered into a Loan Agreement with Ms O’Neill for a loan amount of $1,631,250, which was secured by a mortgage over real property in New South Wales.  At cl 3.1, the Loan Agreement provided: “The Borrower warrants, undertakes and confirms to the Lender that the advance will be used strictly for the purpose of purchasing and/or developing the lands more particularly described in Item 9 of the Schedule to this agreement.”  The amount outstanding was to be repaid no later than 14 October 2006

[11] The sum of $1,631,250 was advanced to Ms O’Neill in accordance with the arrangements documented in the letter from Oakland to her dated 8 August 2006.  In accordance with that agreement, the amount of $108,315 was paid and retained in Oakland’s general account, being an interest bearing account where it was to be drawn upon each month for interest.  The amount of $5,872.50 was likewise disbursed from the funds that were advanced to Ms O’Neill to pay Oakland’s loan compliance fee. 

[12] Ms O’Neill defaulted under the Loan Agreement.  A notice of default was issued by Oakland.  The property that secured the loan was sold, and a loss resulted. In April 2007, Oakland notified the 2006 Underwriters of the claim arising from Ms O’Neill’s default.

[13] The 2006 Underwriters have refused to indemnify Oakland for $114,187, which amount corresponds to the interest ($108,315) and the loan compliance fee ($5,872) paid at settlement by Ms O’Neill.

Relevant terms of the Policy

[14] In each policy, the coverage clause provides as follows:

 

“1.1Subject always to the terms of this policy, if, during the Period of Insurance and in respect of an Insured Loan, any of the following events occur:

 

(a)You become entitled to issue a Statutory Default Notice as a result of any Default by the Borrower under an Insured Loan; or

 

(b)...

 

and You notify Us of that Event within the Period of Insurance, then We will pay the deficit if the proceeds of any sale or the compensation monies in each case without any deduction are less than the Outstanding Debt due to You under the Insured Loan.

 

1.2Provided that Our obligation to pay the deficit will arise only:

 

(a)under clause 1.1(a), if the Default remains unremedied to the date of the sale;

 

(b)under clause 1.1(b), if the notice or agreement is not cancelled and does not lapse or expire; and

 

(c)after all Mortgaged Property securing that Insured Loan has been sold or compulsorily acquired.

 

1.3To avoid doubt, the date of the loss is the date of the Event described in either clause 1.1(a) or 1.1(b) as the case may be.”

[15] The defined terms in the coverage clause that are particularly relevant to this proceeding are “Insured Loan” and “Outstanding Debt”.

[16] The term “Insured Loan” is relevantly defined at cl 4.2 of the Policies to mean a loan:

“ ...

 

(b)which is recorded by a written loan agreement signed both by You and by the Borrower;

 

...

 

(e)in respect of which the LVR is not more than the Maximum LVR Percentage;

 

...

 

(h)in respect of which the Principal Amount is no more than the Maximum Principal Amount;…”

[17] The “Maximum LVR Percentage”, as stated in cl 4.2 of the Policy, is defined by reference to the Policy schedule, being 66.67 per cent under “Option A” and 75 per cent under “Option B”. “LVR” is defined by cl 4.2 of the Policy to mean “the loan to value ratio expressed as a percentage” where the loan is the “Principal Amount” of the “Insured Loan” (plus any amounts owing to any prior mortgagee) and the value is the “As Is Valuation” of the “Mortgaged Property”.

[18] The term “Outstanding Debt” means the total of the “Outstanding Principal Amount” and other expenses listed at cl 4.2 of the Policy.  The “Outstanding Principal Amount” means that part of the “Principal Amount” actually advanced by Oakland to the borrower under the “Insured Loan” and not yet repaid.

[19] The term “Principal Amount” is defined at cl 4.2 of the Policies as follows:

 

“‘Principal Amount’ in relation to any Insured Loan means the amount of principal advanced by You, and to be advanced by You, under that Insured Loan, excluding

 

(a)any amount advanced for the payment of interest or as provision for possible future payment of interest whether or not retained by You for that purpose.

 

(b)Any fees or charges payable to You.

 

In the event that You advance a sum in excess of the Principal Amount in respect of interest or for any other reason, Your loan documentation will specify this.”

[20] Clause 4.13(d) of the policies requires, in respect of each Insured Loan, that Oakland, “clearly state the Principal Amount, and any amount to be advanced in addition to the Principal Amount in respect of interest or for any other reason, in Your loan agreement with the Borrower”.

The construction issue – submissions

[21] Oakland contends that it did not advance any amount to the borrowers for payment of interest, fees or charges and, therefore, the Underwriters are not entitled to withhold indemnity for the amount paid by the borrowers to Oakland in satisfaction of interest, fees and charges.  For example, in the case of Ms O’Neill, Oakland contends that it did not advance the amount of $108,315 for the payment of interest, and that the loan compliance fees that were paid by Ms O’Neill are included within the “Principal Amount” as defined in cl 4.2 of the policies.

[22] In essence, Oakland submits that the definition of “Principal Amount” in cl 4.2 involves a purposive inquiry as to whether the amount of principal included an amount advanced “for” (in the sense of “for the purpose of”) the payment of interest.  It is not concerned with the actual uses to which the amount was applied.  Oakland submits that in relation to each of the loans that are relevant to the proceeding, it did not advance money for payment of interest.  It submits that, while borrowers invariably chose to fund the obligation to pre-pay interest at settlement out of the most convenient pool of funds, namely funds advanced by Oakland pursuant to a loan agreement, Oakland did not loan money for that purpose.  It observes that if borrowers wanted to fund their obligations to pre-pay interest and to pay fees and charges to Oakland from another source of funds, it would have been of no concern to Oakland

[23] The borrower’s decision to use part of the advance to meet these obligations, and the recording of this in documents brought into existence by Oakland prior to making the advance, are said not to alter the purpose for which Oakland made the advance.  The purpose for which amounts were to be advanced by Oakland are said to be determined by reference to Oakland’s purpose, not the purpose of the borrower, and that the relevant purpose must exist prior to the execution of the loan agreement, if Oakland is to be in a position to “clearly state” in accordance with cl 4.13(d), the Principal Amount (taking account of the need to exclude amounts advanced for interest) in the “loan agreement”. 

[24] Oakland rejects the view that the purposive inquiry looks to the mutual purpose of the lender and borrower.  Alternatively, it submits that if this is the case, then the purpose must be limited to an inquiry into the loan agreement, or such other document that represents “the final meeting of the minds of the parties”, not documents exchanged in the course of pre-contractual negotiations.

[25] The Underwriters submit that in relation to each loan that is the subject of Oakland’s claim, there was included an “amount advanced for the payment of interest or as provision for possible future payment of interest” or fees or charges payable to Oakland.  This advance was made either in satisfaction of the borrowers’ obligation to pre-pay interest or on account of an obligation to pay interest during the term of the loan.  The fact that Oakland chose to describe the total amount advanced by it as the “Principal Amount” does not alter the fact that, according to the policies, the amounts advanced for the payment of interest and so on were not included in the “Principal Amount” as defined in the policies, and therefore were not within the cover provided by those policies.

[26] The fact upon which Oakland places much reliance, namely that the borrowers, if they had wished, might have met their obligations to pre-pay interest from a source other than the sum advanced, is submitted by the Underwriters to be irrelevant.  None of the borrowers in fact made this choice, and the loan documentation, including letters incorporating agreements made prior to the making of the advance and agreed directions concerning its disbursement, made provision for amounts to be advanced at settlement for the payment of interest, fees and charges.

[27] The Underwriters submit that it is plain that in each case the interest and fees were borrowed from, and advanced by, Oakland, and did not form part of the “Principal Amount” as defined in the policies.

[28] The description given by Oakland in its loan documentation to “Principal Amount” is said not to alter the fact that the “Principal Amount” for the purpose of Oakland’s insurance cover does not include amounts advanced for the payment of interest or any fees or charges payable to Oakland.  In that regard, if Oakland failed clearly to state the “Principal Amount” in its loan agreement with the borrower, then this simply involved a failure by Oakland to comply with cl 4.13(d).  The Underwriters submit that it does not mean that amounts advanced for the payment of interest, fees or charges are included in the “Principal Amount” as defined in the policies for the purpose of determining the extent of cover.

The construction issue – discussion

[29] The principles to be applied in construing an insurance policy are not in issue.  A policy of insurance should be given a businesslike interpretation.  This requires attention to the language used by the parties, the commercial circumstances which the document addresses and the objects which it is intended to secure.  A construction should be given which gives a congruent operation to the various components of the whole policy.[2] 

[30] In this matter, the definition of “Principal Amount” should be interpreted in the context in which it applies, both in terms of defining the extent of cover and in the application of other provisions such as cl 4.13(d).  The defined term “Principal Amount” focuses upon the amount advanced, and calls for an inquiry to ascertain the amount of principal advanced by Oakland excluding “any amount advanced for the payment of interest or as provision for possible future payment of interest” and any fees or charges payable to Oakland.  This is the “Principal Amount” for the purpose of the policy, even if Oakland and a borrower might describe the “principal” being loaned differently.  The amounts that are excluded by virtue of the definition of “Principal Amount” in the policy call for a purposive inquiry by reason of the word “for” in the phrase “any amount advanced for the payment of interest or as provision for the possible future payment of interest...”.  I favour the view that in ascertaining whether an amount was advanced “for” the payment of interest, regard must be had to the mutual purpose of the parties to the transaction, namely the party making the advance (Oakland) and the party who authorised the advance to be made for, among other things, the alleged purpose.  However, if Oakland is correct in its contention that the relevant inquiry relates only to its purpose, then I do not consider that this makes any practical difference to the outcome since its purpose and the relevant borrower’s purpose were the same. 

[31] The purposive inquiry that the word “for” calls for in the present context relates to the purpose for which the amount in question is advanced, as part of the principal advanced by Oakland under the insured loan.  The purpose relates to the purpose of the advance, not necessarily the general purpose for which a loan was negotiated.  For example, the relevant loan may be made for the purpose of acquiring an identified property and this purpose may be apparent from the terms of a particular document such as a Loan Agreement or a mortgage that secures the loan.  In another case, the relevant Loan Agreement may not specify the purpose.  Even where the purpose of the loan is specified, the amount of principal advanced under it may serve a number of purposes, including payment of the purchase price of the property to be acquired, legal fees, stamp duty, registration fees, loan application fees, other costs and, relevantly for present purposes, pre-payment of interest and the payment of fees or charges.  The purpose or purposes for which an amount is advanced may be stated in a single document, such as a Loan Agreement, or in other loan documentation.

[32] The terms of the policies require reference to documents that govern the making of the advance, and call for an inquiry into the purpose or purposes for which all or part of the amount in question is to be advanced.  The documents that govern the advance are not limited to a Loan Agreement of the kind entered into by Ms O’Neill on 14 August 2006.  The Loan Agreement itself may be silent as to its purpose or may be supplemented by other operative documents that reflect the agreement of the parties in relation to the making of the advance.  I accept Oakland’s contention that the purpose or purposes of the advance may not appear in pre-contractual negotiations or in documents created by Oakland Finance in the course of acting as a broker, if those matters are overtaken by subsequent arrangements negotiated between Oakland and the borrower.  However, documents such as the countersigned conditional loan offer document dated 8 August 2006 that was agreed between Oakland and Ms O’Neill may represent both Oakland’s purpose in making the advance and the mutual purpose of the parties in respect of the advance.  That letter stated that in the event of any conflict or discrepancy between the letter and the loan documentation, the terms and conditions contained in the loan documentation would prevail.  However, absent any such conflict, the accepted letter of offer served to identify that the amount of the loan was to be $1,631,250, and that this amount was to be disbursed in specified amounts for specified purposes including pre-paid interest, a loan compliance fee, an application fee and legal fees and that the remainder was to be disbursed in accordance with the borrower’s solicitor’s disbursement instructions.  The terms of the Loan Agreement did not conflict with the terms of this agreement in relation to the advance and its disbursement.

[33] The purpose for which the relevant amount is advanced must exist at the time of the advance so as to permit a conclusion to be drawn as to whether the amount advanced includes any amount advanced for the payment of interest and so on, and so as to enable Oakland to comply with its obligation pursuant to cl 4.13(d) to “clearly state” the “Principal Amount” (as defined in the policy) in its loan agreement with the borrower.  Such a condition will be met if the sum was stated in a single document that constitutes the loan agreement, or in one of the documents that constitute Oakland’s loan agreement with its borrower.  Whether or not Oakland chooses to constitute its loan agreement with its borrower in a single document or in a number of documents is a matter for it.  Either way, cl 4.13(d) requires it to state clearly the “Principal Amount” (as defined in the policy) and any amount to be advanced in addition to the “Principal Amount” in respect of interest or for any other reason in the loan agreement. 

[34] I have regard to cl 4.13(d) in interpreting the scope of cover and the meaning of “Principal Amount” as defined in cl 4.2.  However, cl 4.13(d) is a clause which falls to be applied in respect of a wide variety of loans.  An insured under such a policy, and Oakland in particular in respect of the 2006 policy and the 2007 policy, may conduct numerous loan transactions in a wide variety of forms, and make different provision for the payment of interest.  One example is the pre-payment of interest.  Another would be a loan transaction in which amounts are advanced for the purpose of enabling the borrower to complete a development, with interest to be paid at the end of the term of the loan when the borrower is expected to have sufficient funds on completion of the development to pay interest and other amounts.  Clause 4.13(d) might apply in a wide variety of circumstances.  Its terms do not compel the conclusion that the purpose of an advance must be found in a single document, such as the Loan Agreement of 14 August 2006 entered into between Oakland and Ms O’Neill.  The documents in relation to the O’Neill loan made clear that Oakland required, and the parties agreed, that as part of the general purpose of purchasing the property in question, the advance was to be disbursed in accordance with the terms of the letter of offer dated 8 August 2006 and other documents authorising the disbursement of the funds that were to be advanced.

[35] Oakland may have been content if Ms O’Neill or another borrower chose to source amounts to meet the obligation to pre-pay interest and to pay agreed fees and charges from a source other than the funds to be advanced by Oakland.  However, this is not what was negotiated.  Instead, preparation for the advance of loan moneys at settlement proceeded on the basis that amounts would be advanced to pre-pay interest and to pay fees and charges.  These amounts would be advanced as part of the amount that Oakland had agreed to loan the borrower.  At the time the loan agreement was made and at the time the advance was made, the loan documentation provided for the pre-payment of interest to be deducted from the principal that was to be advanced under the loan.  By way of example, in the case of the loan to Great South Land Communications Pty Ltd (“GSL”) the parties negotiated, via Oakland Finance Pty Ltd, for a loan having the principal amount of $3,250,000.  The borrower agreed that certain amounts would be deducted from the principal upon settlement of the advance, including interest for the term of the loan.  The relevant mortgage reflected this agreement for interest to be pre-paid.  The only provision for the payment of interest that was agreed between the parties was for it to be paid from the amount that was to be advanced by Oakland on settlement of the loan.  Provision for part of the advance to be used for the payment of interest was made in the loan documentation prior to settlement.  It appears that the advance in that case and others was made in accordance with those arrangements. 

[36] In oral submissions, Mr Bain QC for Oakland sought to emphasise that the purpose of the advance in each case was the lender’s purpose in advancing the amount at the time the agreement was struck, and that to give effect to cl 4.13(d) in the loan agreement the “Principal Amount” needed to be ascertained at the time of the loan agreement, so that it could be “clearly stated” in it.  He submitted that there was no relevant difference between the “loan documentation” referred to in the definition of “Principal Amount” in cl 4.2 and the “loan agreement” referred to in cl 4.13(d).  Assuming the correctness of this submission, the “loan agreement” referred to in cl 4.13(d) need not be in a single document.  Mr Bain QC also emphasised that in each of the present cases the loan was for a single sum.  He also emphasised the distinction between an obligation to pre-pay interest, and separate arrangements that may be negotiated by the parties as to how the lender was to be paid that amount, including the source from which it was to be paid.  I accept that distinction.  However, Oakland and the borrower in each case under consideration negotiated for the advance to include an amount to be used to meet the obligation to pre-pay interest.  It was not as if the borrower, being able to source the pre-payment from somewhere other than the advance, negotiated for a sum less than the total loan to be advanced, or for the full loan amount to be advanced for purposes that were no longer to include meeting the obligation to pre-pay interest.  In each case, the sum advanced included an amount for the payment of interest, and also for fees and charges payable to Oakland.

[37] Oakland places store on Mr Handley’s evidence that Oakland did not, in the loans that are relevant to these proceedings, and would not, as a matter of business practice, advance money for interest, fees and charges.  Mr Handley’s evidence about Oakland’s business in general is not very probative of the purpose of the particular advances that were made to borrowers in this case.  His evidence about what he understood were the purposes of the loans in those cases was not particularly helpful in resolving the issues that I am required to determine.  I found Mr Handley’s evidence to be unhelpful because he appeared to have in mind the complexion of the transactions that best suited Oakland’s case for the purpose of claiming indemnity.  In a different context, I expect he would have more readily conceded that funds were advanced by Oakland for purposes that included the pre-payment of interest at settlement unless the borrower negotiated for the loan to be settled on a different basis and arranged an alternative source for the payment of interest. 

[38] More informative sources of evidence than Mr Handley’s testimony in relation to the purpose or purposes for which funds were advanced are the contemporaneous documents.  Mr Handley’s evidence about what he understood the purpose of the loan to be was of no real assistance in resolving the issues.  His evidence tended to confuse his understanding of the basis upon which Oakland agreed to loan an amount (and the theoretical possibility that the borrower might choose to meet its obligation to pre-pay interest and charges from sources other than the total amount that was to be advanced) with the facts of the specific transactions in which, prior to the advance being made, Oakland and the borrower agreed that the obligation to pre-pay interest would be met from funds to be advanced at settlement.  Documents were prepared directing the disbursement of the funds to be advanced in accordance with that agreement.  Oakland advanced sums in accordance with that mutual understanding.  Oakland’s purpose in advancing an amount to pay interest was shared by the borrower.

[39] The parties debated in the course of Mr Handley’s cross-examination, and in submissions, whether Oakland “capitalised” interest with respect to the relevant loans.  I found the evidence on that topic to be of no real assistance in resolving the issues of construction and whether the disputed amounts are the subject of indemnity under the policies.

[40] There were some differences in the form in which loans and arrangements for advances were documented as between individual borrowers.  However, neither party submitted that the application of their preferred interpretation of the policy would result in claims for indemnity being met in respect of some borrowers, with some others falling outside the scope of indemnity.  The Underwriters’ rejection of parts of the claims for amounts which were said to correspond to interest and loan compliance fees in respect of each relevant loan depended on the same point of construction.  As the matter was argued, Oakland’s claims for indemnity in respect of the contested amounts, and the Underwriters’ rejection of indemnity in respect of those amounts, would result either in all of the amounts being subject to indemnity or none of them being the subject of indemnity.

[41] I accept the Underwriters’ submissions on the construction issue and find that the disputed amounts are not the subject of indemnity under the relevant policies.  I find that in relation to each loan, Oakland advanced:

 

(a)an amount for the payment of interest or as provision for possible future payment of interest; or

 

(b)fees or charges payable to Oakland, particularly a loan compliance fee in each case.

The amount advanced for the payment of interest is apparent in the loan documentation which governs the making of the advance.  Although in general terms Oakland may have been indifferent as to the source from which borrowers met their obligations to pre-pay interest and to pay fees and charges, in each case under consideration provision was made for these amounts to be paid out of amounts to be advanced at settlement.  As a result, both Oakland and the relevant borrower arranged for the interest amounts in dispute in these proceedings to be advanced “for” the payment of interest, this being the purpose of Oakland and also the borrower’s purpose.  Prior to the advance in each case being made, and in anticipation of settlement, the parties to the relevant loan agreement documented as part of their agreement provision for amounts to be disbursed out of the amount to be advanced for the pre-payment of interest and for the payment of fees and charges.

[42] The amount advanced for the payment of interest in each case is excluded from the “Principal Amount” for the purpose of the policies, even if Oakland described it as part of the “Principal Amount” in other documents.   It is unnecessary to decide whether Oakland failed to comply with cl 4.13(d).  Whether or not it did does not alter the fact that in relation to each loan it advanced an amount for the payment of interest or as provision for possible future payment of interest.  The amount advanced by Oakland also included fees and charges, and these amounts also fall outside the policies’ definition of “Principal Amount”.  The consequence is that the amounts for which the Underwriters have refused to indemnify Oakland, and which correspond to the interest advanced in relation to each loan and amounts of fees that were payable to Oakland in respect of loan compliance fees and other fees and charges payable to it, are not indemnified under the policies.

[43] Oakland’s claim for indemnity in respect of these amounts fails.

Damages for breach of contract arising from the late payment of undisputed amounts

[44] Notices of claim were made on various dates in respect of the default of the relevant borrowers.  These notices were treated as constituting claims for the purposes of each policy.  I have earlier quoted cl 1.1 of the policy which defined the cover.  In essence, if Oakland became entitled to issue a statutory default notice as a result of any default by the borrower under an insured loan, and if Oakland notified the Underwriters of that event within the period of insurance, then the Underwriters promised to pay the deficit if the proceeds of any sale without any deduction were less than the “Outstanding Debt” due to Oakland under the insured loan.  Clause 1.2 relevantly provided that the obligation to pay the deficit would arise only if the default remained unremedied to the date of sale and after all mortgaged property securing the insured loan had been sold.  Clause 1.3 stated that to avoid doubt, the date of the loss was the date of the event described in cl 1.1, which in this case was the issuing of a statutory default notice. 

[45] The Underwriters admit that they were notified of each of the claims on the dates that are pleaded by Oakland.  The relevant dates of notification of the claim are:

 

(a)April 2007 for the O’Neill claim;

 

(b)October 2007 for the Great South Land claim;

 

(c)December 2007 for the Bates claim;

 

(d)27 October 2007 for the Wilkinson claim;

 

(e)30 August 2007 for the Diamond Pine claim;

 

(f)22 January 2008 for the Hancox Developments claim.

After those dates Oakland co-operated with the Underwriters in their investigations of the claims.  So much was admitted in the Underwriters’ defences.  Oakland provided the information sought by the Underwriters.  The Underwriters’ loss adjuster, Mr Cowan, attended Oakland’s offices on a number of occasions to review documents and files pertaining to the claims made by Oakland against the insurance policies issued by the Underwriters.  These visits included visits in March and April 2008, and there were further visits in late 2008, in 2009 and in early 2010.  Mr Handley gave affidavit evidence about Mr Cowan’s visits and offered detailed evidence in relation to the provision of information in respect of the Diamond Pine matter.  He also gave oral evidence concerning the provision of information to Oakland and the access that Mr Cowan enjoyed.  None of this evidence was contested.  Mr Handley was not aware of any occasion when information, documents or other materials were not promptly provided by Oakland.  Mr Cowan had open access to documents.  Mr Cowan would send a list of the documents that he was looking for, and these would be provided to him.  If there was ever an occasion of delay in providing any information to him—for example in relation to the sale of a property—then this would be given to him within a week or two of his visit.  In general, Mr Cowan was provided with the documents and information he sought at the time he requested them upon such a visit.  On any other occasion they were provided to him as soon as possible.

[46] The Underwriters accepted that claims had been made on the relevant policies and that the policies responded to indemnify Oakland in respect of some aspects of each claim. 

[47] The amount for which the Underwriters were obliged to indemnify Oakland in respect of each claim depended on whether the proceeds of sale of the secured property were sufficient to meet the outstanding debt.  Accordingly, the determination of the amount that Oakland was obliged to pay under its obligation to indemnify depended on the sale of securities.

[48] In respect of its breach of contract claim, Oakland submits that the Underwriters breached their obligations to pay under the policy by not paying the undisputed amounts within three months, at the very latest, following the sale of the final security in each claim.  It submits that damages should be assessed on the basis that it was kept out of monies that were due and owing to it, and further submits that damages should be assessed on the basis of interest awarded at the simple rate of 10 per cent per annum, being the rate adopted in Practice Direction 06/2007 by way of interest.  Interest at such a rate is submitted to reflect a conservative approach to the assessment of Oakland’s loss arising from late payment, and is submitted to be an appropriate rate at which to assess damages for breach of contract.

[49] The Underwriters submit in response that the date of breach has not been proven, and that there is a lack of evidence on which to assess the value of the loss occasioned to Oakland as a consequence of the breach of contract.

[50] Mr Handley’s evidence about the provision of information is uncontradicted, and he was not cross-examined about it.  The evidence is that the Underwriters had all the information required by them to assess the claim, and that if they needed any information it would be promptly provided upon a request by the Underwriters’ agent, Mr Cowan.  The Underwriters cannot seek to justify the failure to pay the undisputed amounts on the grounds that Oakland did not co-operate with them, or failed to provide required information and documents.  The evidence concerning the provision of information is more specific in relation to the Diamond Pine matter than in respect of other claims, but the evidence in general is all one way.  The early and open access that Oakland provided to the Underwriters to investigate each claim should not be confused with the obligation to pay undisputed amounts.  The policy and the access provided by Oakland facilitated the Underwriters’ undertaking an investigation from an early date after notice of a claim was received.  However, the Underwriters could await developments, including the sale of the secured property, before a final assessment of the extent of the obligation to indemnify was made.  The Underwriters were, however, in a position to investigate, if they so chose, other aspects of the obligation to indemnify before the date upon which the last secured property had been sold and its obligation to pay under the policy commenced.

[51] The relevant date in respect of the contractual obligation to pay is the date upon which the secured property was sold.  The dates upon which the last security in each claim was realised are as follows:

 

(a)for the GSL claim, 17 November 2008;

 

(b)for the Bates claim, 18 February 2009;

 

(c)for the O’Neill claim, 5 May 2009;

 

(d)for the Wilkinson claim, 21 April 2009;

 

(e)for the Hancox claim, 12 November 2009; and

 

(f)for the Diamond Pine claim, 23 February 2010.

 

[52] As to the undisputed amounts, it is agreed that the Underwriters paid the following amounts to Oakland on the dates listed:

 

(a)O’Neill claim: $135,465 (28 April 2010);

 

(b)GSL claim: $422,610 (28 April 2010);

 

(c)Bates claim: $729,507 (28 April 2010);

 

(d)Wilkinson claim: $162,539 (10 June 2011);

 

(e)Hancox claim: $1,088,834 (10 June 2011); and

 

(f)Diamond Pine: $922, 216 (5 December 2011, being the first day of the trial).

[53] These undisputed amounts were capable of assessment and payment in accordance with the policy much earlier than the dates upon which they were in fact paid. 

[54] Mr Handley gave evidence about the provision of information after the claims were made.  He was not necessarily in a position to give evidence about the reasons why the Underwriters failed to pay the undisputed amounts shortly after the extent of the obligation to pay was “crystallised” upon the sale of the secured property.  It was not suggested that he knew any such reasons.  Senior Counsel for Oakland submitted that the Underwriters decided not to pay the undisputed amounts, being monies that it should have paid in accordance with the terms of the policy, including the implied term to act in good faith in their dealings with Oakland, because that gave the Underwriters “commercial leverage” in negotiations.  He submitted that this was the only available inference in circumstances in which there were disputes about other matters.  Although the inference is certainly open, I am not persuaded that it is the only available inference.  There was no evidence from the Underwriters to resist the inference advanced by Oakland in this regard.  It called no evidence to explain why undisputed amounts were not paid within a relatively short time after the sale of the final security on each claim. 

[55] The onus is on Oakland to prove a breach of contract arising from a failure to pay undisputed amounts in respect of which it was entitled to payment pursuant to the policies.  The Underwriters did not carry an onus to prove that they did not breach the policies and to call evidence explaining the time that it took to pay the undisputed amounts.

[56] Although Oakland had the onus of proving a breach of contract, it was not incumbent on it to prove a particular date, being the date upon which the Underwriters first breached the obligation to pay under the policy.  It was sufficient for it to nominate, as it did, a date by which the Underwriters were in breach, and to seek damages from that date.  It submits that, at the very latest, a breach occurred within three months following the sale of the final security on each claim.  The Underwriters having not paid the undisputed sums, Oakland commenced proceedings to recover those and other amounts.  The first proceedings were commenced on 21 December 2009.  The second proceedings were commenced on 17 December 2010.

[57] I am satisfied that the plaintiff has proven a breach of contract by each of the Underwriters, that breach being the failure to pay the undisputed amounts within three months after the sale of the security on each claim.  Oakland had complied with all requests for information.  It provided open access to its books and records, including steps taken to recover the debt from the sale of the secured property, and the amount for which it sold.  I consider that Oakland has discharged the onus of proving that the Underwriters’ failure and refusal to pay the undisputed amounts more than three months after the sale of the final security on each claim constituted a breach of contract.  The contract may have been breached prior to this date.  In failing and refusing to pay the undisputed amounts after that date the Underwriters breached their contracts.  The evidence indicates that the information provided to the Underwriters was sufficient for them to assess the amount that was payable pursuant to the policy.  By three months after the sale of the secured property in each case the Underwriters had had sufficient time to satisfy themselves of the obligation to pay under the policy in respect of the undisputed amounts, and to pay those amounts. 

[58] Senior Counsel for the Underwriters accepted the proposition that there must come a point in time at which, once the insurer is in possession of all of the information in relation to a claim of the present kind, it becomes unreasonable not to pay.  He submitted, however, that the evidence did not permit a conclusion to be drawn as to when that point was reached.  He accepted that in a case in which the insurer had all of the information that was needed in order to satisfy itself of all of the obligations or preconditions as to entitlement to indemnity, and all of the information that was needed in order to quantify the amount of the indemnity, then a period of four to six weeks would be reasonable, provided there was no dispute about any aspect of the indemnity.  He submitted that the fact that there were disputed aspects of the claim was relevant, and provided an explanation for any delay in reaching a partial settlement.  Counsel for the Underwriters submitted that in the normal course of events it would be anticipated that an agreement would be struck on all elements of the claim, and a resolution reached in relation to the entire claim.  As noted, no explanation for the delay in paying the undisputed amounts for this reason was given by the Underwriters in evidence.  I decline to accept that this provides an explanation for the delay in payment of the undisputed amounts.  It is equally open to conclude that the Underwriters failed to pay the undisputed amounts because they were interested in attempting to resolve the entire claim, even if this meant placing commercial pressure on Oakland and its shareholders.  I find it unnecessary to conclude whether the Underwriters acted with a lack of good faith in not paying undisputed amounts because they hoped to reach a resolution in relation to the entire claim.  It is sufficient to conclude that their failure and refusal to pay the undisputed amounts after three months had elapsed after the sale of the final security on each claim was at a time when the Underwriters had all of the information that they needed in order to quantify the undisputed amount of the claim, and to pay it.  I conclude that they breached their contract with Oakland.

[59] As to the assessment of damages, the Underwriters submit that no evidence has been adduced as to the commercial consequences to Oakland of the late receipt of the undisputed amounts.  It submits that the amount of loss suffered by reason of a breach of contract can only be identified through proper consideration of the use to which the funds would have been put, and the return that the plaintiff would have achieved had the funds been so invested.

[60] There was no dispute on the pleadings that Oakland at all material times carried on the business of lending money to individuals and companies engaged in property development or the acquisition of rural and agricultural businesses and land.  Mr Handley did not give evidence about the average rate of return on loans that had been made by Oakland as part of its business after the dates upon which, on its case, it should have been paid the “undisputed amounts”.  I conclude that if the undisputed amounts had been paid in a timely fashion, then the sums would have been distributed to shareholders, or alternatively used for the purposes of the business.

[61] Counsel for Oakland submitted that it was not incumbent upon it to call detailed evidence about the rate of interest that it would have charged borrowers had it advanced funds to borrowers over the relevant period, or the rate of return that Oakland was likely to obtain as a result of making those loans.  Had it sought to obtain damages for a higher amount than an award based upon a simple interest calculation of 10 per cent, then it might have called such evidence.  However, the evidence concerning the interest charged on the six loans in question permitted the conclusion to be reached that it would have achieved a return of far more than 10 per cent simple interest per annum, even taking into account discount factors such as defaults and the possibility of not recovering interest components on loans that were insured.  The fact that Oakland had continued in business in difficult market conditions in which to raise funds was said to be in its favour, having reduced competition in the market in which it lends funds to borrowers for short terms. 

[62] Oakland charged a high rate of interest on short term loans.  Reducing the annualised figures that were achieved on the loans in question to take account of falling interest rates, possible defaults and other matters, it was submitted that a 10 per cent simple rate of interest was a reasonable and conservative figure.  Oakland submitted that even if the Court could not undertake a precise calculation of damages, the evidence showed that it had suffered a real detriment by being kept out of the money owed to it and that the Court, acting conservatively, should adopt a 10 per cent simple rate of interest as an appropriate basis upon which to assess damages. 

[63] It is not the law that a plaintiff must produce evidence from which the extent of its loss can be precisely calculated.  The tribunal of fact must do the best it can in assessing damages.[3]  It will not be able to do so where there is no evidence upon which it can act.  In Ted Brown Quarries Pty Ltd v General Quarries (Gilston) Pty Ltd[4] the trial judge rejected an expert’s evidence about what a resource was worth, and accordingly was left with no evidence of what its value was.  As a result, the majority of the High Court concluded that the plaintiff failed to discharge the burden of proving its loss.  This case is factually different and, unlike Ted Brown Quarries, does not involve the application of a measure of damages that depends upon proof of the value of the property purchased.  Instead, it involves an assessment of the extent of the loss that Oakland has suffered by reason of being kept out of monies that the Underwriters should have paid to it.  Oakland was not obliged to produce evidence from which the extent of such loss could be precisely calculated.  It was, however, required to call some evidence.  It did so by calling evidence about its business activities.  The loss in question was its loss, not that of its shareholders.  I conclude that, had the undisputed amounts been paid, Oakland might have put them to a variety of uses including payments to shareholders, payment of legal costs or the funding of its ordinary business activities, including the making of loans.  As general as the evidence was concerning the consequences to Oakland of being kept out of its money, that it suffered a loss is beyond question.  It was deprived of funds which otherwise would have been used in the course of its business and for the benefit of its shareholders.  I consider that an assessment of its loss based upon a figure of 10 per cent simple interest per annum is a reasonable assessment of the extent of its loss. 

[64] Its damages for breach of contract will be calculated by reference to a date which is three months after the sale of the final security in each claim, and will take account of the date upon which the undisputed amounts were paid in the case of each claim.  The rate will be the rate of 10 per cent simple interest per annum.

[65] I consider that interest should be awarded on those damages at the same rate.

Conclusion

[66] Oakland has failed to establish an entitlement to be indemnified in relation to the remaining disputed items, namely amounts which the Underwriters have successfully contended fall outside the terms of cover because they are:

 

(a)amounts advanced for the payment of interest or as a provision for possible future payment of interest; or

 

(b)fees or charges payable to Oakland.

[67] Oakland has established an entitlement to damages for breach of contract from the late payment of other amounts, and which were referred to by the parties as the “undisputed amounts”.  Its damages should be assessed at the rate of 10 per cent per annum commencing on the day which is three months after the sale of the final security in each claim. 

[68] I direct the plaintiff to confer with the defendants in relation to the calculation of damages in accordance with my reasons and submit minutes for judgment and other orders.  I will hear the parties in relation to orders for costs if they are unable to agree an appropriate order as to costs.

 

Footnotes

[1] Oakland Investments (Aust) Ltd v “Certain Underwriters at Lloyds” [2011] QSC 55.

[2] Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522 at 528-9, [2005] HCA 17 at [15]-[16].

[3] Ted Brown Quarries Pty Ltd v General Quarries (Gilston) Pty Ltd (1977) 16 ALR 23 at 26, cited with approval in HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640 at 661, [2004] HCA 54 at [47].

[4] (1977) 16 ALR 23.

Close

Editorial Notes

  • Published Case Name:

    Oakland Investments (Aus) Limited v 'Certain Underwriters at Lloyds' & Anor

  • Shortened Case Name:

    Oakland Investments (Aus) Limited v 'Certain Underwriters at Lloyds'

  • MNC:

    [2012] QSC 6

  • Court:

    QSC

  • Judge(s):

    Applegarth J

  • Date:

    31 Jan 2012

Litigation History

No Litigation History

Appeal Status

No Status