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Australian Contract Law: A recent case study - AAI Limited trading as V... https://www.lexology.com/library/detail.aspx?g=3c822565-a8dd-4392-a...
to judgement, as well as the value of the fog cannons). The Applicant commenced these proceedings in the Federal Court
to recoup from the Respondent a portion of the monies recovered from FP Shipping.
The Deed
The Deed relevantly stated:
'Technology Swiss agrees to accept $425,000 (the Settlement Monies) from Vero in full and final settlement of the
Insurance Claim, the Storage Costs Claim, the Proceeding and the Dispute.'
The Deed preserved the Applicant’s right of subrogation, which was expressed in the marine insurance policy as follows:
Subrogation clause When we settle a claim, we may endeavour to pursue recovery rights against the carrier or any other
third party who caused loss or damage to the goods. You authorise us to act in your name in such recovery action, and
undertake to give us reasonable assistance in such actions.
The claims
The Applicant claimed that the Respondent had suffered no loss at all (having fully recovered the value of the fog
cannons from FP Shipping), and sought to recoup all sums paid to the Applicant ($200,000 + $425,000); notwithstanding
the $500,000 limit on the insurance policy. The Applicant relied on authorities that hold that an insurer is entitled to be
subrogated if it paid the insured, even though it may have had no actual liability to do so under the policy, provided that
the insurer had a bona fide belief that it was paying under the insurance policy.[1]
The Respondent accepted that the Applicant was entitled to recover the $200,000 paid by way of indemnity, but argued
that the Deed created an entirely new entitlement to receipt of the $425,000 which was therefore not a payment under the
indemnity.
The primary judge held that neither of these methodologies was correct and allocated $116,770.06 of the $425,000 to the
indemnity payment (in addition to the $200,000), as this was the amount that could not be attributed to any of the other
matters in dispute that were settled by the Deed and, according to the primary judge, represented the mutual intentions of
the parties. Both parties appealed this judgement.
Judgement
The Full Court of the Federal Court of Australia upheld the decision of the primary judge.
As explained by Derrington J in her reasons for judgement, the key issue on appeal was:
whether it is necessary for the triggering of a right of indemnity that an insurer’s payment to an insured have the
characteristic that it be paid by way of actual indemnity. Here, the $425,000 payment was not specifically stated in the
Deed to be by way of indemnity under the policy and the parties were at odds as to how it should be characterised.
While payments made pursuant to a contract of indemnification will give rise to a right of subrogation, payments that are
instead made to put an end to litigation do not necessarily fit that description.
The Full Court rejected the Applicant’s argument that any payment made in good faith by an insurer leads to a right of
subrogation. Derrington J held that the Applicant’s contention ‘elides any requirement of an intention that the payment is
made to reduce the insured’s loss, [which] is at odds with the established authorities’.
The Full Court also rejected the Respondent’s argument that a lump sum payment to settle multiple matters cannot be
divided into any part that is a payment by way of indemnity, stating (our emphasis):
the question of whether any portion of a lump sum payment can be attributed to a particular integer depends on the
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Australian Contract Law: A recent case study - AAI Limited trading as V... https://www.lexology.com/library/detail.aspx?g=3c822565-a8dd-4392-a...
circumstances of the case including the terms of settlement and the availability of means to dissect it for the
purposes of allocation. Rather than suggest a general rule that a lump sum payment cannot be attributed to particular
elements, [the authorities] show that it is only where that is not possible to identify the parties’ mutual intention in
relation to the lump sum payment, that no apportionment may take place.
In this case, the Full Court found that the various matters settled by the Deed did include the indemnification of the
Respondent under the insurance policy, and the primary judge had satisfactorily determined the mutual intentions of the
parties to apportion an amount to the indemnity payment; by eliminating those amounts that could reasonably be
allocated to those other matters, based on the available evidence.
The Applicant criticised the primary judge’s calculations; arguing that a process of elimination resolved ambiguity in the
Deed against the Applicant as the party seeking to rely on it (contra proferentum) and this rule of construction should
only be used as a last resort. However, as the Full Court held, the primary judge had not undertaken an exercise in
interpreting the Deed which would be subject to the rules of construction. Rather, the primary judge was determining the
parties’ mutual intentions for the purposes of the assessing the extent of the Applicant’s right of subrogation.
Key takeaways
This case illustrates the importance of drafting clear and precise contractual clauses, particularly in relation to settlements
and indemnity payments. If a lump sum payment is intended to discharge a promise of indemnification (amongst other
matters in dispute), but the apportionment of an amount to the indemnity payment is not made clear, a court might impose
its own judgement of what the parties intended to achieve – effectively limiting the indemnifying party’s right of
subrogation.
Commonwealth entities may grant indemnities to their suppliers, through the exercise of delegated power under s.60 of
the Public Governance, Performance and Accountability Act 2013 (Cth) – provided that the Commonwealth entity meets
the conditions set out in the Finance Minister’s instrument of delegation. In such cases, Commonwealth entities should
carefully consider their right of subrogation arsing in respect of the indemnity, and clearly set out in the express terms of
the contractual agreement with the indemnified party the extent and nature of the Commonwealth’s entitlement to recover
losses from third parties.
You should always take the opportunity to ensure that your contracts are drafted in clear and express terms that accurately
and comprehensively communicate the intended meaning of each provision. This should be done not only in pre-
contractual negotiations, but whenever the term of a contract is extended or there is another cause to review the contract
(such as frequent or significant disagreements between the parties over the intended meaning).
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