Good Faith and Splitting Causes of Action: Recent considerations from the decision in Hansen v Sedrak

This is a case in relation to section 24 of the Civil Procedure Act 2005 (CPA) and issues of good faith. On 14 March 2016, the second plaintiff’s insurer, AAMI, commenced proceedings against the defendants for damage to the plaintiff’s vehicle pursuant to rights of subrogation. On 9 June 2016, Consent Judgment was entered in those proceedings.

On 15 July 2016, the plaintiffs, represented by Right2Drive Pty Ltd (Right2Drive) and its solicitors, claimed damages of the loss of use of the motor vehicle arising from the collision on 9 November 2015. On 12 August 2016, a defence was filed admitting liability for the collision but disputing quantum and relying on section 24 of the CPA. Right2Drive, on behalf of the plaintiffs, filed a Notice of Motion to set aside the consent judgment in respect of the earlier proceedings.

The relevant facts of the case were as follows:

  • A collision occurred on 9 November 2015, between the plaintiffs’ motor vehicle and a taxi owned by the first defendant, driven by the second defendant.
  • AAMI commenced proceedings on 14 March 2016, in the second plaintiff’s name against the second defendant, to recover the cost of repair, towing and license searches.
  • On 9 June 2016, proceedings were settled after a consent judgment was entered against the first and second defendants in favour of the second plaintiff.
  • The second plaintiff hired a replacement vehicle through Right2Drive while his vehicle was repaired and purportedly engaged Right2Drive to assist recovery of the cost of car hire from the defendant.
  • On 15 July 2016, Right2Drive commenced proceedings for loss of use during the period 13 November 2015 to 21 January 2016.
  • On 12 August 2016, a defence was filed admitting liability but disputing quantum, relying on section 24 of the CPA. The plaintiffs were unaware of earlier proceedings with AAMI, until the Defence was filed.
  • The defendants were aware, at the time of consenting to the entry of judgment of the plaintiffs’ unresolved claim for loss of use of the motor vehicle from the same collision, but at no point prior to obtaining consent judgment in the earlier proceedings did the defendants alert Right2Drive of the proceedings initiated by AAMI.

During the course of the motion, the plaintiffs argued:

  1. the earlier consent judgment was obtained by the defendants “against good faith and sought to set aside the consent judgment to avoid section 24 of the CPA, relying on regulation 36.15 of the UCPR whereby a “judgment or order of the court in any proceedings may, on sufficient cause being shown, be set aside by order of the court if the judgment was given or entered, or the order was made irregularly, illegally or against good faith.”
  2. in the alternative, the plaintiffs attempted to strike out parts of the defendants’ pleading that relied on section 24 of the CPA pursuant to regulation 14.28 of the UCPR.

These issues are set out further below.

Limb 1: Setting Aside Judgment Entered Against Good Faith

The plaintiffs relied on the Morganite principle. In Morganite Ceramic Fibres Pty Ltd v Sola Basic Australia Ltd1 Smart J held that a release would be ineffective against an insurer where the obligator knew it would infringe the insurer’s rights.

The defendants argued that the present case was distinguishable from Chand v Zurich as there was no basis to find that their conduct was “crafty” which was the language adopted by Smart J in Morganite or guilty of “sharp or questionable conduct”, which was the language adopted by Adams J in Chand v Zurich.

The Local Court of NSW found:

  1. The Morganite principle could not be relied on in this case for the following reasons:
    • The application of the Morganite principle does not itself mean that the earlier consent judgment should be set aside for being “against good faith”, as it remains necessary for evidence to be presented that either expressly or inferentially allows such a finding.
    • Further, the present case differed significantly from Morganite, as the defendant in that case was dealing with inexperienced laypersons who were unfamiliar with the law and sought to take advantage of that.
  2. There was evidence that Right2Drive had knowledge of AAMI’s subrogated right, such as emails between Right2Drive and the defendants’ legal representative stating that AAMI had paid for repairs of the plaintiffs’ vehicle.
  3. There was no evidence of the defendants acting against good faith. There was no evidence suggesting that the defendants drafted the consent judgment in such a way that would defeat the interests of the plaintiffs’ proof of loss claim, as the consent judgment was prepared by the legal representatives for the insurer rather than the defendants. There were also no attempts by the defendants to inhibit discovery of the insurer’s claim.
  4. The Morganite principle does not impose a positive duty on a defendant to inform a plaintiff of the possible prejudice to a secondary claim. In Kaporis v Riddington2 the Court said that Part 6 of the CPA did not create a duty on a defendant to inform a plaintiff of the possible impediment to recovery of further damages in subsequent proceedings.
  5. The requirement to show “against good faith” within regulation 36.15 of UCPR relates to conduct in procuring the earlier judgment. That defendants now seek to defeat a subsequent claim by virtue of that earlier judgment is not a basis for setting aside the earlier judgment.
  6. As such, the plaintiffs failed to establish that the earlier judgment was “against good faith”, thus the argument based on regulation 36.15 of the UCPR failed.
Limb 2: Striking Out Defence under section 24 of CPA

The plaintiffs relied on Peters v De Armas,3 where Millege LCM found that section 24 of the CPA did not prevent an insurer from commencing and maintaining separate proceedings to recover an insured loss following a judgment favouring the plaintiff against the same defendant for uninsured loss arising from the same collision.

The defendants pleaded in their Defence that they were entitled to a judgment in their favour pursuant to section 24 of the CPA by reason of the consent judgment entered in the earlier proceedings on the same cause of action.

In considering the above issue, the Local Court of NSW made the following comments:

  1. The general rule as to whether there is a distinct right of an insured from an insurer as to whether they are independent causes of action was stated by Mason JA in Sydney Turf Club v Crowley4 (Sydney Turf Club) at [734]: “[734] Where an insurer is subrogated to the rights of the insured against a third party, the insurer does not acquire an independent cause of action in his own right… that right of action remains in all respects unaltered, it is brought in the name of the insured and it is subject to all the defence which would be available if the action had been brought by the insured for his own benefit.”
  2. Peters v De Armas5 (De Armas) was an exception to the general rule in the Sydney Turf Club case; however, it was not apparent how the exception arose. There was suggestion that the basis for the exception was grounded in finding that no privity of interest exists between the insurer and insured. This was unsustainable as most prior authority has held that an insurer acting under subrogation does not have an independent right.
  3. In referring to possible jurisdictional issues in section 24 of the CPA, as noted in Chand v Zurich6, Assessor Olischlager referred to a possible qualification in Across Australia Finance v Bassenger7 that at [25]: ““Nonetheless, the Court has inherent jurisdiction to set aside orders made by consent, even after entry, on grounds on which the contract embodied in the orders could be set aside. Further, where the Court’s assistance to carry the compromise into effect is required, the Court may decline that assistance if to provide it would lead to injustice, although the grounds may not be sufficient to invalidate the contract between the parties.”
  4. This was not a case where the Local Court should set aside the orders.

The Court held that the plaintiffs found themselves in the present predicament due to their own failures to protect their own interests and the communications between them and the insurer broke down. Hence, the second limb of the plaintiffs’ notice of motion also failed.

This case confirms that there is no positive duty on the defendant to notify the plaintiff or their insurer of a secondary claim that would be prejudicial to the plaintiff’s claim.

In light of the above, due consideration should be given to the following:

  1. In a situation where the plaintiff may have separate claims such as in respect of a claim for loss of use and cost of repairs, the plaintiff should inform their insurer as soon as practicable of their other claim.
  2. The plaintiff, the plaintiff’s insurer and any third party acting on behalf of the plaintiff should communicate clearly between themselves as to the plaintiff’s claims.
  3. The operation of section 24 of the CPA applies and that more inhibitive conduct than mere silence is needed to show that an act constitutes “against good faith” particularly where proof of loss documents were provided where it contained information relating to the other claim.

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