When is a Contract Claim not a Contract Claim? When it’s a Personal Injury Claim

Date: July 14, 2016 Author: Sebastian Brodowski

The Bankruptcy Act 1966 (Cth) specifies the circumstances in which a bankrupt is entitled to continue prosecuting legal proceedings after a sequestration order has been made.  Sections 60 and 116 of the Act allow a bankrupt to continue with their proceedings if the proceedings are “in respect of any personal injury or wrong done to” the bankrupt.  

For a first in Australian jurisprudence, the Supreme Court of Western Australia, in Berryman v Zurich Australia Ltd¹ (Berryman) was required to consider whether a claim for Total and Permanent Disablement (TPD) was a claim for:

• personal injury or wrong done to the bankrupt, which the bankrupt would be able to continue to litigate, or
• a claim for breach of contract and therefore vested in the trustee.

The uncontroverted facts in Berryman were as follows:

• Berryman had a TPD policy of insurance with Zurich and it was a term of the policy that if Berryman became totally and permanently disabled under the policy, Zurich would pay him a TPD benefit of $2 million.
• Berryman had an accident whilst at work and subsequently made a claim with Zurich which was declined. 
• Berryman instituted legal proceedings alleging breach of contract; however, after commencing proceedings, Berryman became bankrupt.

Due to the bankruptcy of Berryman, Zurich sought to have the claim dismissed on the basis that the right to continue with the proceedings vested in the trustee and the proceedings were deemed to have been abandoned by the trustee by virtue of s 60 of the Bankruptcy Act.²  The Court sought to determine the issue by way of separate question.

Zurich’s Position

In brief,³ Zurich argued that the claim was actually a claim for breach of contract meaning that it was a chose in action which vested in the trustee.  Because any damages (if Berryman was successful) would be assessed by reference to the alleged breach of contract – a chose in action and therefore property right, it did not satisfy the test espoused in Cox v Journeaux (No 2)⁴ which requires the damages to be “estimated by immediate reference to pain felt by the bankrupt in respect of his mind, body or character and without reference to his rights of property.” Further, the express wording of s 60(4) required any personal injury to be “done” to Berryman, that is, by a third party, and did not include a personal injury which was “suffered” by Berryman.

Berryman’s Position

In brief,⁵ Berryman argued that in interpreting the relevant sections of the Bankruptcy Act, the substantive nature of the claim, that is the total and permanent disablement was a personal injury for the purposes of the Act and that the cause of action (breach of contract) was not determinative.  Further, the construction of the Act which required the injury to be caused by a third party was incorrect.

In considering the matter, the Court noted that the issue has not been determined in Australia with only one similar case in the UK dealing with a similar type of policy.  In delivering judgment,⁶ the Court addressed the various authorities dealing with similar cases and ultimately held that a substantive interpretation to the Act is required and that a TPD policy, although a breach of contract is, for the purposes of the Act, a personal injury claim.  Such an interpretation was in line with existing judicial authority and in line with the purposes of the Act.  The policy underlining the authorities and the purpose of the Act being that it would be considered unjust and harsh to a bankrupt to allow his estate and creditors to be enriched and advantaged by a wrong to the person.  Further, on the basis of uncontroversial statutory interpretation principles, his Honour rejected Zurich’s interpretation of the Act that the injury had to be committed by a third party.

The Bankruptcy Act contains express provisions which exclude proceeds from certain life insurance policies from becoming part of the divisible property of the estate.  This judgment clarified that TPD policies are also excluded from the divisible property – something that had not previously been determined in Australia.  Had the decision been in Zurich’s favour, noting that some TPD policies can be for large sums of money, it possibly could have provided an available pool of funds for trustees to seek to access for the benefit of creditors.  It remains to be seen whether an appeal is filed by Zurich.

1 [2016] WASC 196.

2 The statutory framework is summarised at [8] through [16] of the judgment.

3 Zurich’s submissions are summarised at [17]

4 (1935) CLR 713, 721 per Dixon J

5 Berryman’s submissions are summarised at [18]