McDonald v Chicago: US and Australian Constitutional Federalism

It is a common misconception in Australia that the United States Bill of Rights is universal in its application to both state and federal governments. In fact, prima facie, the protections do not apply to state legislatures and for at least the first 120 years of the United States, the Bill of Rights was explicitly held not to apply to the States.

It is only through a process that the Courts call ‘incorporation’ that Clauses in the Bill of Rights are applied to the States. Such incorporation is done on an ad hoc basis, dealing with one Clause at a time as the case requires.

On Monday the Supreme Court of the US handed down the long awaited decision in McDonald v Chicago, in which it declared that the Second Amendment (“the right to keep and bear arms”) is incorporated to the States.

That is an interesting Constitutional landmark in its self (see discussion at VC), however what is also interesting is the manner in which one member of the Court proposed to incorporate the Second Amendment. In the US, the Supreme Court has traditionally found that this process of incorporation occurs through the ‘Due Process Clause’ of the Fourteenth Amendment. That is to say that some rights are so fundamental that they must be protected at the state level in order to ensure that Due Process, in the Constitutional sense, is protected.

However for a long time US Constitutional Scholars have argued that it would be more appropriate for incorporation to occur through the ‘Privileges and Immunities Clause’ of the Fourteenth Amendment. This argument however is contrary to the previous Supreme Court authority in the Slaughter House Cases.

In McDonald, the Supreme Court was asked to overturn the Slaughter House Cases, but this argument was spectacularly dismissed as purely academic in the first few sentences of the appeal hearing transcript. Surprisingly however, Justice Thomas, who was the fifth of a 5 to 4 majority, relied entirely on the Privileges and Immunities Clause in finding that the second amendment was incorporated. (See a brief discussion at SCOTUS Blog). Some proponents of this view are championing this as the beginning of a migration of incorporation jurisprudence to the Privileges and Immunities Clause.

So...?

I find this topic intriguing because it mirrors contemporary struggles that the Australian High Court has with balancing the degree to which protections in the Constitution should bind the States.

For example the recent ruling in ICM Agriculture Pty Ltd v The Commonwealth [2009] HCA 51 that the Federal Government cannot provide funding to a state legislature in return for the state passing legislation that the Federal Legislature could not Constitutionally do itself.

Also, the ‘incorporation’ (for lack of a better word), of protections of Judicial integrity to the States by virtue of the Constitutional status of the Supreme Court, in cases such as Kirk v Industrial Relations Commission [2010] HCA 1 (protection of judicial review for jurisdictional error in states) and the Kable doctrine (integrity of Supreme Court as proper receptacle for Federal Jurisdiction, which was recently reenlivened in International Finance Trust Company Limited v New South Wales Crime Commission [2009] HCA 49 and, I predict, will again be enlivened when the Court delivers its judgment in Totani v South Australia).

Dupas v The Queen

Dupas v The Queen [2010] HCA 20

Summary

Majority: French CJ, Gummow, Hayne, Heydon, Crennan, Kiefel and Bell JJ

Appeal Dismissed

The appellant sought a permanent stay of his trial due to an abuse of process, claiming that pre-trial media attention prevented him from having an impartial jury and therefore a fair trial. The Court found that it is not sufficient, for the grant of a permanent stay, that a trial is conducted against a background of extensive pre-trial publicity. A stay will only be ordered where any prejudice that is occasioned can not be remedied by directions to the jury by the judge at trial. There is nothing exceptional about the appellant’s case that prevented jury directions remedying any danger of unfairness. Therefore, the Court found that no stay should be ordered.

Facts

The appellant, Peter Dupas was charged with the murder of Mersina Halvagis. The appellant had previously been convicted of two other brutal murders, and was notorious in the media, where he was often referred to as a serial killer.

In addition, the evidence in the trial in conjunction with the Prosecution’s case was such that it was inevitable that the jurors would be made aware of the previous convictions and at least some of the prejudicial media material.

Prior to trial, the appellant had sought a permanent stay of the trial on the ground that there was so much adverse pre-trial publicity that it would not be possible to get a fair-minded jury. The Judge at first instance, Cummins J, denied the application for a stay, and the appellant was subsequently convicted by a jury.

On appeal to the Victorian Court of Appeal, the appellant was successful in having his conviction set aside on grounds not relevant to the High Court appeal. However, the Court of Appeal rejected an appeal against the order of Cummins J denying a stay, and ordered that the appellant be retried.

In the High Court, the appellant again argued that there should be a permanent stay of the retrial because the pre-trial publicity was such that he could not receive a fair trial.

Finding

The Court refused to order a stay.

The Court reiterated the principle underlying our jury system that the Court must assume that a jury will only act on admissible evidence and will properly take into account all directions given by the trial judge (at [29]).

It will therefore be a very rare situation, the Court said, in which prejudice to the accused cannot be remedied by adequate directions to the jury. The Court said that, where previous authorities have called for cases to be ‘extreme’ or ‘singular’ before a stay would be ordered, what is really required is the rare situation in which jury directions cannot remedy the unfairness (at [35]).

The Court concluded (at [36]):

There is nothing remarkable or singular about extensive pre-trial publicity, especially in notorious cases, such as those involving heinous acts. That a trial is conducted against such a background does not of itself render a case extreme, in the sense that the unfair consequences of any prejudice thereby created can never be relieved against by the judge during the course of the trial.

The Court set out the directions given by Cummins J in this case (at [21]), and found that they were adequate to allay any risk of unfairness. Accordingly the appeal was dismissed.

Comment

One notable aspect to the Court’s decision is the brief obiter discussion of the constitutional status of a Court’s power to order a stay of proceedings. The Court said (at [15]) that the power of a court to order a stay in order to prevent an abuse of process is a necessary requirement of a Chapter III Court. That is to say that any attempt by the Parliament to pass legislation that would remove such a power from a Chapter III Court would be contrary to the Constitution and therefore invalid. The Court said (at [15]):

Having regard both to the antiquity of the power and its institutional importance, there is much to be said for the view that in Australia the inherent power to control abuse of process should be seen, along with the contempt power, as an attribute of the judicial power provided for in Ch III of the Constitution. However, on the trial of the appellant the Supreme Court did not exercise federal jurisdiction and no question arises respecting the validity of any State legislation denying or limiting the inherent power of State courts to control abuse of their processes in matters not arising in federal jurisdiction. The power of the Supreme Court was that identified by Lord Blackburn as inherent.

The Court went on to say that this applies with respect to ‘both civil and criminal proceedings’ (at [16]).

Most academics in this field would say that support for this principle is found in Nicholas v The Queen [1998] HCA 9 (though the High Court does not refer to that case). For example, Gaudron J said in Nicholas that (at [74]): ‘a court cannot be required or authorised to proceed in any manner which involves an abuse of process, which would render its proceedings inefficacious, or which brings or tends to bring the administration of justice into disrepute.’ (emphasis added)

But there is considerable academic dispute as to what this means (see eg here and here), and in particular whether this extends to a power to stay its proceedings. Accordingly, this is an interesting piece of obiter from the High Court, worthy of some note to Constitutional scholars, and it is a bit disingenuous for the Court to make this statement as though it were axiomatic.

June Special Leave Rundown

Only three cases were given special leave to appeal yesterday, they were:

R v Lacey; ex parte Attorney-General (Qld) [2009] QCA 274

Leave was granted in Dionne Lacey’s appeal against sentence for the manslaughter of a man with his brother in the Gold Coast in 2007. The Court of Appeal disapproved of a previous line of authority that an appeal by the Attorney-General against sentence pursuant to s 669A of the Criminal Code 1899 (Qld) requires an appeal court to find an error in the decision of the sentencing judge before exercising the discretion afresh (in accordance with House v the King (2008) 236 CLR 510).

R v Roach [2009] QCA 360

This case considers whether Qld legislation which allows for admission of evidence of history of a domestic relationship is subject to the test set out in Pfennig v The Queen (1995) 182 CLR 461, if it discloses previous criminal acts (i.e. if it is used for a propensity purpose).

State of Queensland v Springfield Land Corporation (No 2) P/L [2009] QCA 381

This case relates to the acquisition of land by the State of Queensland. The amount of compensation for the acquisition was referred to arbitration. The primary issue was whether the arbitrator erred in his approach to determining the purpose of the acquisition, and whether such a finding was an error of law which is susceptible to appeal in the Supreme Court under the Commercial Arbitration Act 1990 (Qld).


[[UPDATE: I forgot to include this earlier:

Notable cases for which leave was refused

R v Ogawa [2009] QCA 307: this is not really a notable case, but for practitioners in Queensland, I’m sure most of you are aware of the continuing attempts by PhD student and Associate Law Lecturer, Megumi Ogawa to have her PhD accepted by Melbourne University. She is known for her ferocious advocacy style as a self represented litigant as well as for her contempt for court staff. This has led her to charges for threatening Federal Court staff as well as a contempt charge. Some papers have reported that, in the heat of one altercation with Court officials, she displayed her dissatisfaction with the proceedings by mooning the Judge. An Austlii search of ‘Megumi AND Ogawa’ provides no less than 48 hits, only two of which relate to her academic work. The High Court yesterday refused special leave in relation to the most recent of these decisions. ]]

New HCA Judgments

Two new judgments were published today. We'll have the summaries up soon but for now:

Saeed v Minister for Immigration and Citizenship [2010] HCA 23

This case concerns the construction of the Migration Act 1958 (Cth). Specifically it considers whether a provision of the Act which purports to restrict the requirements of natural justice apply to other provisions of the Act which provide for the granting of visas while the applicant is not in Australia. The Court gives consideration to the scope and content of the common law natural justice hearing rule, as well as the presumption of statutory interpretation which avoids its abrogation. The Court concludes that the Act does not restrict the rules of natural justice for visa applicants who are not in Australia when making the application and allows the appeal.

Osland v Secretary to the Department of Justice [2010] HCA 24

This case concerns Marjorie Osland, who was convicted of murdering her abusive husband back in 1996. She made a petition for Mercy to the Government of Victoria in 1999 but it was denied for reasons that included reliance on legal advice. Ever since, she has been seeking to get access to the documentation on which the AG relied through Freedom of Information legislation. She was successful in a previous appeal to the High Court relating to the documentation, and the case was remitted to the Supreme Court. Today she was again successful in her appeal. The case does not concentrate on the construction of the FOI Act, but rather on the nature of the Supreme Court’s role when hearing a remitted case, and the effect of a successful appeal to the High Court on discrete issues.

SA Solicitor General on Evasion

I didn't mean to post this earlier. But seeing as I accidentally did, and then ineptly tried to delete it, I figured I should put it up for good.

This little gem is from yesterday's hearing of Totani v State of South Australia (at [2010] HCATrans 157). One can only imagine how Hayne J was acting:

MARTIN HINTON QC: Agreed, those last three factors may all be relatively routine. Your Honour Justice Hayne is licking his lips, your Honour.

KIEFEL J: Justice Hayne is very keen to ask you a question.

HAYNE J: No, no, no.

MR HINTON: If I keep talking I might be able to keep him at bay a little longer.

HAYNE J: Good luck, Mr Solicitor.

Friday Afternoon HCA Transcript

David Bennett QC is well known for his entertaining High Court advocacy back when he was Commonwealth Solicitor General. He was back before the bench this week in the case of Aid/Watch Incorporated v Commissioner of Taxation (transcript at [2010] HCATrans 154 and [2010] HCATrans 155) regarding whether entities with a purpose of affecting politics can maintain a ‘Charity’ status for tax purposes.

He came out guns-a-blazing with quite a conceptually complex argument, discussing ‘purpose’ in terms of ‘differing levels of generality’ as apposed to competing purposes. Sound confusing? Here’s what the Bench said (from HCA transcript):

HAYNE J: For my own part, Mr Bennett, I am not yet grasping the levels of generality argument and I, at the moment, am not finding that helpful. That tells you a lot about me; it tells you nothing about the argument.

And later:

MR BENNETT: Yes. Well, your Honour, one can talk about means and ends and intermediate purposes where one has a purpose of achieving X and the reason one wants to achieve X is that X will lead to Y. X is the intermediate purpose, Y is the ultimate purpose and, as I have said, they cannot be compared or weighed against each other. They are not in the same universe of discourse. That may be a better phrase than level of generality.

FRENCH CJ: I am not sure it is.

MR BENNETT: Universe of discourse. I will try and remember to shift to that phrase.

FRENCH CJ: I did not want to encourage you to do that.

Bennett is also a famous sesquipedalian and grammarian. This week he was particularly concerned about the grammatical structure of the names of charities. Here are some highlights:

MR BENNETT: In the United States there is Regan v Taxation with Representation of Washington – a slightly ungrammatically named society – (2003) 461 US 551. I have copies for your Honours.

….

There are two Canadian cases which deal with the Charter of Rights and Freedoms. The first is called Human Rights International in Canada Incorporated - so Human Life International in Canada Incorporated. The misuse of prepositions in names seems to be a characteristic of many of these bodies.

CRENNAN J: Be charitable, Mr Bennett.

MR BENNETT: Yes. I was hoping my learned friend could explain the justification for the slash in the middle of his client’s name.

HAYNE J: It is the promotion of education, Mr Bennett.

And finally (I’m not sure the transcript quite captures what must have been the emphasis):

HEYDON J: Do you know of any convenient place where there is evidence on those things?

MR BENNETT: The answer is an unfortunate one, your Honour. The answer is passim.

HEYDON J: Passim?

MR BENNETT: Passim, yes, your Honour. There is a large quantity of evidence.

God bless.

Lehman Brothers v City of Swan

Lehman Brothers Holdings Inc v City of Swan [2010] HCA 11

Summary

Majority: French CJ, Gummow, Hayne and Kiefel JJ (Heydon J also dismissed the appeal).

Decision: Appeal Dismissed.

A Deed of Company Arrangement (“DOCA”) was entered into by a majority of creditors of Lehman Brothers Australia. The respondents were creditors who voted against the DOCA. The DOCA purported to require the respondents to release entities from claims other than the company which was the subject of the DOCA. The Court found that s 444D of the Corporations Act does not empower a DOCA to bind creditors with respect to claims against any entity other than the company under administration without their consent.

Facts

Lehman Australia and some related entities were involved in the sale, and in the providing of advice on the sale, of Collateralized Debt Obligations (“CDOs”) as financial products to investors. Following the Sub-prime Mortgage Crisis, this market collapsed causing the downfall of the Lehman Bros group of companies of which Lehman Australia was a part. In September 2008, Lehman Australia was put into voluntary administration under Pt 5.3A of the Corporations Act 2001 (Cth).

Among the creditors of Lehman Australia were the respondent councils (“the Councils”). In addition to being creditors of Lehman Australia, the Councils also had claims against other entities related to Lehman (“the Lehman Related Entities”).

Many of the Lehman Related Entities were also significant creditors of Lehman Australia.

At a meeting of creditors, the creditors adopted a Deed of Company Arrangement (“DOCA”), by majority vote. The Councils voted against the adoption of the DOCA.

In addition to providing a moratorium and release against Lehman Australia, the DOCA purported to require all creditors, including the Councils, to release the Lehman Related Entities from claims arising from their investment with Lehman Australia.

The Councils sought to have the DOCA set aside.

The Question and the Arguments

The question for the Court was whether a DOCA can force a creditor to release companies, other than the company which was the subject of the DOCA, from claims without the creditor’s consent.

The Majority considered that this question turned on the correct interpretation of s 444D of the Corporations Act which relevantly states:

Effect of deed on creditors
(1) A deed of company arrangement binds all creditors of the company, so far as concerns claims arising on or before the day specified in the deed under paragraph 444A(4)(i).
(emphasis added.)

The important terminology in the Court’s view was the phrase “so far as concerns claims”. The creditor’s could only be bound without their consent if ‘claims’ in that section included claims against entities other than the company under administration.

One of the Lehman Related Entities, Lehman Holdings, argued that this section could bind the creditor to release claims against any party if there is “a connection or association between the claim in question and a claim against the insolvent company” (at [46]).

Another entity, Lehman Asia, argued that s 444D provides that a DOCA will bind a creditor in relation to any claims if the DOCA, properly construed, “provides for a regime of provisions which relate to” a claim or claims against the company.

These constructions of s 444D were rejected.

Findings

The Majority gave a thorough exegesis of the process of meetings in Pt 5.3A, and found that the statutory context of the section supported the argument of the Councils (at [48]), that the ‘claims’ to which creditors are bound under s 444D are claims to the company under administration only (at [55]-[56]).

The Majority concluded (at [53]):

Because creditors are bound under s 444D(1) only to the limited extent identified in that provision, the assent of some creditors (even a majority by number and value of those who vote) to giving up claims against another does not bind other creditors to do so. No creditor is bound to give up such claims because the Act does not bind them beyond the limit prescribed by s 444D(1). More particularly, the Act does not bind creditors to give up a claim against a person other than the subject company – here, Lehman Australia.

Heydon J in his separate reasons also found that s 444D did not extend to claims by any company other than the company the subject of the DOCA. However his Honour rested this interpretation on the presumption of statutory interpretation that the Parliament does not intend to remove proprietary rights (ie the causes of action) unless there is a clear indication.

The relevant part of the DOCA was therefore not enforceable against the Councils. In the absence of any submission by the appellants that the DOCA survived such a finding, the Court declared the DOCA void.

The appeal was dismissed.

Comment

One argument of the appellants was that the claims which were released were inextricably tied to claims of the company, in the sense that certain creditors would not be willing to make concessions releasing the company unless they were released from other related claims. I call this the ‘clearing house’ argument and it has a sort of utilitarian appeal, in that the chances of reaching a financially sensible resolution are greater if there is greater flexibility. If s 444D could not bind smaller creditors without their consent, this could lead to smaller creditors upsetting substantial financial compromises with international implications (of course the contrary argument is that if the creditors are really so small it would not upset anything substantial).

The Court categorically dismissed the ‘clearing house’ argument (at [50]-[52]).

One might say then that this could be an area for legislative change, to provide for greater flexibility. However, if this were to be the case, attention needs to be paid to the criticisms of the Court and in particular Heydon J. For example, Heydon J pointed out the dangers of such a scheme because the administrators of the Company are currently not under an obligation to provide information to creditors about those secondary claims (at [69]). There is also the danger of limited Court supervision.

In my view, if any proposed legislative amendment tried to incorporate protections to these dangers identified by Heydon J, the scheme would then become increasingly expensive and potential so similar to other insolvency mechanisms so as to lose relevance. Perhaps the conclusion to draw from all this then is that requiring creditor consent is the correct balance to draw.




[[UPDATE: Some people have queried whether or not consent by the creditor (ie voting in favour) would prevent a Court from setting aside a DOCA, given that the Court said (at [12]) “Although some attention was given in argument to the composition of the majority, and in particular to what was said to be the role of Lehman companies in procuring the Deed, that is not a matter that bears upon the issues that are to be decided in these appeals.”

My answer to that is as follows: I couldn’t imagine that this situation would arise too often, but in any event the answer is that consent by the creditor would prevent the DOCA being set aside. This is not necessarily because of the construction of s 666D, but because they would be bound to the DOCA in contract law (subject to potentially curly questions of consideration), or perhaps in some cases estoppel, and therefore there would be no need to rely on s 444D for the enforcability of that clause of the DOCA. ]]

New HCA Judgments

Three new judgments were published today. The decisions were all unanimous and fairly brief. We'll have the summaries up soon but for now:

Dupas v The Queen [2010] HCA 20

The Court dismissed an appeal from Peter Dupas. Dupas was successful in the Court of Appeal at having his conviction set aside for the murder of Mersina Halvagis. A retrial was ordered. Dupas now argues that the retrial should be stayed indefinitely because the adverse pre-trial publicity has prevented the possibility of having a fair jury trial. The Court found that in the circumstances (and in all but the rarest of circumstances) any unfairness can be relieved against by the trial judge during the course of the trial. No stay was ordered.

One notable topic of discussion is the constitutional protection of the capacity of a (Chapter III) court to prevent abuses of its processes (see [15]).

[[UPDATE: a Lamp Post Summary can now be found here.]] 

Hogan v Australian Crime Commission [2010] HCA 21

During its investigation of a certain fraudulent tax scheme, the Australian Crime Commission required the production of documents relating to the appellant, Australian personality Paul Hogan. Those documents were the subject of suppression orders. Upon application of Nationwide News and Fairfax, those suppression orders were set aside and those news companies were permitted to inspect the documents. The Court found that the trial judge did not err in setting aside the suppression orders or permitting their inspection.

There is some interesting commentary on the nature of an appeal from a suppression order as well as the right to privacy/confidentiality in Australia (or as they understand it: “the absence of a right in any other person to view such documents and things”: at [38]-[39]).

[[UPDATE: a Lamp Post Summary can now be found here.]]

Wicks v State Rail Authority of New South Wales; Sheehan v State Rail Authority of New South Wales [2010] HCA 22

This case concerns a claim in negligence for pure mental harm suffered by police who witnessed the aftermath of the Waterfall Rail Accident in 2003. Legislation in NSW prevents a court from imposing a duty of care in such claims unless inter alia, “the plaintiff witnessed, at the scene, the victim being killed, injured or put in peril”. The question for the Court was whether this section imposed a criterion of temporal connection that required the plaintiffs to actually witness the accident rather than merely the aftermath. The Court allowed the appeals, stating that the victims were still in “peril” until after they had been rescued by the plaintiffs. Therefore that section did not apply and the case was remitted for hearing in accordance with the Court's decision.

On a side note: the law of mental harm to witnesses in negligence is the example that Ronald Dworkin gave in his book Law’s Empire when discussing ‘Law as Integrity’ and the omnipotent judge Hercules. This case takes on some interesting levels when you read it with Hercules in mind.

Section 50 of the ASIC Act – KPMG v Commonwealth

On Tuesday, Hayne J referred to the Full Court a Constitutional challenge to the validity of s 50 of the Australian Securities and Investment Commission Act 2001 (Cth).

Section 50 says:

Section 50 - ASIC may cause civil proceeding to be begun

Where, as a result of an investigation or from a record of an examination (being an investigation or examination conducted under this Part), it appears to ASIC to be in the public interest for a person to begin and carry on a proceeding for:

(a) the recovery of damages for fraud, negligence, default, breach of duty, or other misconduct, committed in connection with a matter to which the investigation or examination related; or
(b) recovery of property of the person;
ASIC:
(c) if the person is a company--may cause; or
(d) otherwise--may, with the person's written consent, cause;

such a proceeding to be begun and carried on in the person's name.

ASIC has initiated proceedings against KPMG for negligence in relation to its auditing of companies in the Westpoint Group, which collapsed devastatingly in 2006.

Those proceedings were lodged on behalf of the company pursuant to s 50.

I haven’t seen the documents but I understand from ASIC press releases that KPMG argue that s 50 purports to compulsorily acquire property – a cause of action – of the company on other than just terms, contrary to s 51(xxxi) of the Constitution. (At least I assume the alleged acquisition is from the ‘company’, a more nebulous argument might suggest the acquisition is from KPMG.)

It’s hard to consider the case properly without the documents but a few matters immediately jump to mind.

First, the argument could only extend to s 50(c) and not to s 50(d), because a ‘method of agreement’, such as consent, is accepted as being ‘just terms’ (John Cook & Co v Commonwealth (1928) 34 CLR 269).

Secondly, this is not an acquisition in the traditional sense. Rather than the Commonwealth expropriating the property from the company, it is forcing the company to use the property in a particular way. That is, it is forcing the company to convert its chose in action into cash by enforcing a claim. So the Government does not receive any proprietary interest in the chose. And there is a real question as to whether there is even any extinguishment of a property right. (NB: section 50 does not permit ASIC to take over proceedings that are already being pursued: Carey v ASIC (2008) 169 FCR 311.)

As Mason CJ, Dean and Gaudron JJ said in Georgiadis v Australian and Overseas Telecommunications Corporation (1994) 179 CLR 297 (at 305):

Accordingly, "acquisition" in s 51(xxxi) extends to the extinguishment of a vested cause of action, at least where the extinguishment results in a direct benefit or financial gain (which, of course, includes liability being brought to an end without payment or other satisfaction) and the cause of action is one that arises under the general law. (emphasis added)

Thirdly, even if there were an acquisition, it is likely that it has been on just terms. This is because ASIC doesn’t keep the proceeds of a claim pursued under s 50, they go back to the Company. So, assuming that there is no unreasonable settlement for less than the amount of the claim, ASIC would be paying the exact right price for the chose in action. Indeed, in the context of liquidation, the conversion that it is enforcing (from claim to cash) is usually financially beneficial to the Company.

So, I don’t consider this to be a strong case for KPMG, but if they were successful, this case would drastically undermine ASIC’s efficacy, not just in relation to enforcing audit negligence but also with respect to a host of other claims, in particular breach of directors’ duties.

In any event it will be interesting for the Court to reconsider the nature of the proprietary interest that a person has in a cause of action, as well as the degree to which regulation of proprietary rights might amount to ‘acquisition’.

[[UPDATE 18/10/2010: post on next hearing here]]

Wallaby Grip Ltd v QBE Insurance (Australia) Ltd

Wallaby Grip Limited v QBE Insurance (Australia) Limited; Stewart v QBE Insurance (Australia) Limited [2010] HCA 9

Summary

Majority: French CJ, Gummow, Hayne, Heydon and Kiefel JJ (unanimous).

Decision: Appeal allowed.

The Workers' Compensation Act 1926 (NSW) provided that an employer must have insurance cover for injury to workers of at least $40,000. An employee contracted mesothelioma. QBE was liable as the compulsory insurer of the employer. The existence of a contract of insurance was admitted, but the contract itself was never presented at trial. QBE argued that, in the absence of proof, the contract should be presumed to be limited to the statutory minimum of $40,000. The Court held that the purpose of the legislation promoted an interpretation that the onus of proof of the limitation of liability fell to the insurer. Therefore in the absence of proof to the contrary the indemnity was presumed to be unlimited.

Background

The appellant, Irene Stewart, was the trustee of the deceased estate of her late husband who had contracted mesothelioma in the performance of his employment. At the time he was employed, s 18(1) of the Workers' Compensation Act 1926 (NSW) (the “WCA”) required his employer to have insurance cover “for an amount of at least forty thousand dollars in respect of his liability … for any injury to any such worker and shall maintain such policy in force”.

The liability of the compulsory insurer for the employer fell to the respondent, QBE Insurance. It was not disputed that a contract of insurance existed between the employer and the compulsory insurer but the contract itself could not be located and so was not tendered at trial. Therefore, although it was accepted that there was an insurance agreement, there was no evidence as to the amount of cover under that agreement.

QBE argued that a court should consider such contracts to be for the statutory minimum of $40,000, unless the insured has proven otherwise. The appellant argued that the contract should be presumed to be for an unlimited indemnity, unless the insurer proved otherwise. Accordingly, the question for the Court was who has the burden of proof to prove any limitation of the insurance cover.

The Exception Cases

The Court affirmed a line of authority regarding burdens of proof in insurance law cases, which provides that the insured has the burden to prove that the case comes within the contract of insurance, but the insurer has the burden to prove that the facts come within any exception in the contract (the “Exception Cases”).

That is to say that if a matter is a ‘condition precedent’ to the indemnity – in that it is a fact that needs to be proved to establish an obligation to indemnify – then the burden to prove that matter falls to the insured. If the obligation to indemnify is established, but the insurer argues that an exception in the contract applies, then this matter is secondary and the burden falls to the insurer.

However, in those authorities the existence of the clause in the policy that sets out the exclusion is generally conceded and the burden is on the insurer to produce evidence that the circumstances come within the exception. In this case, the question is, 'who has the burden to prove the existence of the exception clause?’

Finding

The Court considered the purpose of the WCA (at [18]) and the statutory context (at [33]) and found that, in the circumstances, the insurer bore the onus of proof to prove that the contract of insurance was limited to $40,000.

In so finding, a strong analogy was drawn with the Exception Cases (at [35]). The Court looked at the nature of indemnity in insurance contracts. It said that a clause providing for a cap on payments under an indemnity insurance contract does not limit the indemnity but provides a limit to the amount that can be collected under that indemnity. That is, the maximum cover under the insurance contract was not a ‘condition precedent’ to the indemnity but merely a limitation on the amount recoverable under that indemnity, once established.

Accordingly, in the absence of proof to the contrary, the court will consider the insurance contract to be unlimited.

Comment

Some caution should be occasioned when trying to apply this case to insurance law generally. One ought not think it appropriate merely to plead a general indemnity on the insurer and require the insurer to plead the limited cover in its defence (except perhaps for insurance under the WCA). The Court was careful to base its reasoning, ostensibly at elast, upon construction of the particular contract of insurance alleged within its statutory scheme (at [37]). The Court did not make a general statement on proof of terms of insurance contracts. That said, it is not clear why the reasoning of the Court wouldn’t have more general application. The purpose of the Act was certainly consistent with the reasoning of the Court but the reasoning itself was based on principle not on the purpose of the Act. I don’t know that 'lost policy' cases arise that often outside of the dust diseases jurisdiction but it would be interesting to see what courts do with this case in cases of general insurance.



Post Script – QBE’s argument

It’s worthwhile to quickly state QBE’s argument because the Court spent some time on it. The form of the insurance contract, that was required under the WCA, was found in the Regulations. That precedent form stated that the insurer was to pay an amount not exceeding “forty thousand dollars”.

QBE argued that if the parties wanted insurance in excess of $40,000, the legislation required the parties to execute a contract in terms of the form in the regulations (ie for $40,000) and then to execute an variation document increasing the cover. Applying basic contractual principles concerning variations, the burden to prove the variation would then fall on the insured.

The Court dismissed this interpretation. The purpose of the WCA promoted an interpretation of the regulation in which the words “forty thousand dollars” in the form of contract in the regulations were merely an example of what the parties might insert as a limitation on cover (at [17]).

Health World Ltd v Shin-Sun Australia Pty Ltd
Health World Ltd v Shin-Sun Australia Pty Ltd [2010] HCA 13 (21 April 2010)

Summary

Majority: French CJ, Gummow, Heydon, Crennan, Bell JJ (unanimous; separate reasons by Crennan J)

Decision: Appeal allowed.

This case in essence involved an issue of standing that arose as a result of the appellant seeking to have the respondent’s trade mark cancelled or removed under the Trade Marks Act 1995 (Cth), which required that the appellant be an “aggrieved” person under the Act. The Court departed from a line of reasoning that stipulated that an “aggrieved” person must demonstrate that they intend to use the trade mark or show that there is a reasonable possibility of being disadvantaged as a result of the continuing registration of the trade mark. Instead, the Court held that the word “aggrieved” is to be construed liberally in this circumstance and the applicant gained standing by demonstrating that it and the respondent were trade rivals dealing in similar goods which were the subject of the challenged trade mark.

Facts
The appellant in this case, Health World, manufactures and supplies nutritional supplements under the names “Inner Health” and “Inner Health Plus”. The respondent, Shin-Sun, also manufactures and supplies nutritional supplements, which are marketed under the name “HealthPlus”. In 2001 the appellant and respondent each applied for registration of trade marks. In May 2001, Shin-Sun applied for the registration of “HEALTHPLUS” as a trade mark and in September 2001, Health World applied for registration of “Inner HEALTH PLUS” as a trade mark.

Soon after, the appellant filed a notice of opposition to the respondent’s application to register “HEALTHPLUS” as a trade mark, claiming it was deceptively similar to its “INNER HEALTH PLUS” mark. The appellant’s opposition was rejected by the Registrar of Trade Marks and a subsequent appeal in the Federal Court was dismissed. This meant that the “HEALTHPLUS” mark was entered on the Register.

In 2006 Health World brought two proceedings before the Federal Court, which were heard together. In the first proceeding, the appellant argued that it was an “aggrieved person” and sought cancellation of the registration of the respondent’s “HEALTHPLUS” under s. 88(1) of the Trade Marks Act 1995 (Cth) on the ground that Shin-Sun did not intend to use the mark in Australia, as provided for by s. 59(a) of this Act. The primary judge dismissed this claim and found that Health World was not an “aggrieved person” under s. 88(1) of the Act. However, were it not for this finding, the primary judge would have decided in favour of the appellant on its two other claims – viz., that the appellant had successfully made out its grounds for removal of the trade mark with respect to Shin-Sun lacking an intention to use the mark in Australia (s. 59(a)) and that Shin-Sun had allowed the mark to become deceptive or to cause confusion (s. 88(2)(c)) [14].

In the second proceeding, the primary judge held that the appellant was not an “aggrieved person” under s. 92(1) of the Act. Similar to the first proceeding, had the judge found that the appellant was an “aggrieved person” for the purposes of this section of the Act, he would have decided that the appellant demonstrated use of the trade mark during the relevant period and thus would have removed the mark from the Register.

The third proceeding, this time commenced by Shin-Sun, again turned on the “person aggrieved” test under the Act. This time, however, the judge found that Shin-Sun was not a “person aggrieved” and so dismissed the proceeding.

Health World then appealed the primary judge's finding that it was not an "aggrieved person" under the Act to the Full Court. The Full Court agreed with the primary judge and dismissed Health World's appeals.

In the decision of the High Court, the majority note, with a sense of frustration, the “curious character of the Full Court’s conclusion, where there are two rival traders who have lost no opportunity to attack each other’s attempts to register trade marks both before the Registrar and in four sets of court proceedings which have so far been heard by 10 judges, that neither of them is aggrieved, and each is to be regarded as falling in a class of intermeddlers, lacking any interest to be protected.” [16] With this, the majority set about articulating the errors in the Full Court’s reasoning.

Decision
The Court held that the Full Court should not have followed Kraft Foods Inc v Gaines Pet Foods Corporation (1996) 65 FCR 104 (“Kraft’s case”) in determining the meaning of an “aggrieved person” as it was plainly wrongly decided.

In Kraft’s case, it was held that McLelland J in Ritz Hotel Ltd v Charles of the Ritz Ltd (1988) 15 NSWLR 158 (“Ritz Hotel case”) had adopted an exhaustive test to determine whether an applicant was a person “aggrieved”. The majority in Kraft’s case held that an applicant must demonstrate a reasonable possibility of being ‘appreciably disadvantaged in a legal or practical sense’ by the trade mark on the register (see Kraft’s case at [113]).

However, the Court found that the Full Court in Kraft’s case, in using the word “must”, erroneously attributed an exhaustive test to McLelland J in the Ritz Hotel case. Further, the Court stressed that McLelland J was not propounding a “general” test to offer a complete account of the meaning of the legislative provision or “marking the outer boundary of the words ‘aggrieved person’” [41], but was simply deciding the particular controversy before him.

In sum, the Court held that Kraft’s case was wrong and should not have been followed by the Full Court. The Court went further explicitly to overrule that portion of Kraft’s case purporting to require an exhaustive test of an “aggrieved person” and stressed that the word “aggrieved” in the Trade Marks Act 1995 (Cth) is to be “liberally construed” [30].

Comment
The Court was clearly dissatisfied with the lower court’s findings that neither party was an “aggrieved person”, and thus lacked standing, even though they were rival traders in similar goods and had vigorously opposed each other’s trade mark applications. Although the Court’s finding as to the construal of “aggrieved” was clearly supported by the authorities, and Kraft’s case was plainly wrong insofar as it is understood to have attributed an exhaustive test to McLelland J in the Ritz Hotel case, in the end this case clearly follows a developing trend on the French Court to decide cases narrowly.

This decision is narrow in the sense that it offers little to assist one to understand what the word “aggrieved” means when used legislatively and undefined. Simply finding that this word should be construed liberally and that there is no exhaustive test as to determining when a party is an “aggrieved person” under the Act, says very little. This, I suggest, is unnecessarily cryptic and generates little precedential value or clarity in reasoning expected of the highest court in the land. It does, however, give the appearance of the Court acting in unison, which may be comforting to some.

While some may favour this apparent harmony on the Court, I’m not so convinced of it. The streak of unanimous decisions by the French Court, this case included, indicates to me that this Court is pursuing a minimalist jurisprudence in a quest for apparent, but perhaps superficial, unanimity. This superficiality is evidenced, for instance, by the number of concurring opinions containing important disagreements that are left to a later day or a later court.

In the early days of the Roberts Court in the US, many trumpeted the sheer number of unanimous decisions coming out of this Court and praised its new Chief’s “leadership skills”. After the honeymoon, the Court sensibly returned to dealing with the vexing questions, including general principles and defined threshold tests. With this, so did 5-4 decisions.

As French CJ and Bell and Kiefel JJ settle in and others approach retirement, I anticipate this narrow, wooden jurisprudence may give way to a more robust, critical analysis of the hard questions and a revival of the old disagreements. Indeed, that is my hope.