The Full Court of the Federal Court of Australia held that an insurer was liable to indemnify its real estate insured for defence costs incurred in (successfully) defending a claim that it engaged in misleading or deceptive conduct and/or breached its fiduciary duty to its vendor client by charging a 50% commission on a property.
The insurer argued that the claims against its insured, in effect, amounted to claims for restitution of monies had and received or for restoration of an unconscientiously gained benefit and that such a claim did not, and should not, enliven the insuring clause that covered claims for civil liability for claims for compensation.
The Court found the mere possibility of a claim being made as one for monies had and received did not mean that such a claim was made. There was no basis to read down the insuring clause in the manner contended by the insurer.
- Whether an insurer was liable to indemnify its real estate agent insured in respect of defence costs incurred in defending claims brought by a vendor client that it breached its fiduciary duty and s 18 of the Australian Consumer Law by charging a 50% commission on a property transaction worth $24m.
- The insurer argued that the claims against its insured, in effect, amounted to claims for restitution of monies had and received or for restoration of an unconscientiously gained benefit and thus should not enliven cover under the policy.
In 2009, the Vendor purchased a vacant parcel of land on the Gold Coast, Queensland (Property). It subsequently obtained development approval in around 2014 to construct 203 apartments on the Property. The Vendor was unable to obtain funding for such construction and resolved that it had no alternative but to sell the Property.
The Vendor engaged the Agent to sell the Property. Between 2015 and 2016 the Vendor entered into several iterations of an agency contract with the Agent. The relevant contract, entered into on 5 November 2016, provided that 'up to a purchase price of $12,245,000, the [Vendor’s] commission was 2.2% of the contract price and any amount above $12,245,000, the commission was 2.2% of $12,245,000 plus 99% of the difference between the contract price and $12,245,000'.
In early 2017, the Property was sold to a Chinese buyer for $24m plus GST (ie. $26.4m including GST). Of that amount, the Vendor paid the Agent commission of $13.2m (including GST). The Agent in turn paid $5.5m to another agent, Mint Property, that introduced the Property’s buyer on the basis that it was a 'conjunction agent'.
The Vendor alleged that it agreed to the 50% commission arrangement on the basis of false representations made by the Agent that all of the commission except 2% plus GST (which would be paid to the Agent and a 'conjunction agent' as their agents’ commission) would be paid back to the Vendor. It was further alleged that the purchase price was artificially inflated above the actual value of the Property as a means of the Chinese interests behind the purchaser transferring money into Australia.
The Vendor alleged that the Agent’s representations were misleading or deceptive, that the Agent’s conduct was unconscionable and claimed against the Agent for breach of ss 18 and 21 of the Australian Consumer Law and breach of fiduciary duty. The Vendor sought the difference between the commission in fact paid to the Vendor and a reasonable rate of commission (being 2.2% of the sale price).
The Vendor also brought a claim against its solicitor for breach of duty (for whom Barry.Nilsson acted and against whom the proceedings were dismissed).
The Agent claimed on a policy of professional indemnity insurance (Policy) in respect of the claim.
The insuring clause to that Policy provided that the 'Insurer agrees to indemnify the Insured against civil liability for any claim for compensation first made against the Insured during the Policy Period and which is notified to the Insurer during the Policy Period arising from breach of professional duty on the part of the Insured incurred in the conduct of the Insured’s Professional Business'.
The Agent’s Insurer declined indemnity for the claim brought by the Vendor against the Agent on the basis that the Vendor’s claims against the agent were, in effect, claims for restitution of monies had and received or for restoration of an unconscientiously gained benefit, such that the claims were not indemnifiable under the Policy.
The decision at trial
The judge at first instance dismissed the Vendor’s claims against the Agent and the solicitor, finding the Vendor to be an unreliable and unimpressive witness and finding that the Agent had not represented that the commission would be paid back to the purchaser.
His Honour accepted that the Insurer was not bound by the way in which the Vendor had chosen to formulate its claim; the Court must ascertain the true nature of the claim in order to determine whether Vendor’s claim for indemnity was within the insuring clause.
The Insurer argued that the true nature of the claim would be exposed if the Court were to find that the Agent was required to account to the Vendor for its 'unauthorised benefit' because it 'would be against conscience to allow them to retain it' and that 'it would be wholly against conscience that, in those circumstances, the insurer should finance a resolution of this tawdry dispute'. It was on that basis that the Insurer submitted that the wording of the insuring clause should be read down so as to exclude any claim in respect of liability for unconscionable conduct or to repay some ill-gotten gain.
While His Honour found that the Insurer’s reasoning had some force, he noted that the Insurer’s analysis failed to take into account that if the Vendor’s claims were established then the Policy would not indemnify the Agent because indemnity would be excluded by the Policy’s dishonesty exclusion. On that basis, His Honour found no reason to read down the plain meaning of the operative words in the insuring clause.
Additionally, His Honour found the Insurer was liable under the Policy to indemnify the Agent in respect of its defence costs on the basis that none of the claims pressed against the Agent were ones for a debt or for restitution or for performance of a contract, and that each of the claims pressed against the Agent were for breach of duty, being either a statutory duty or a breach of fiduciary duty. His Honour considered that the liability that the Agent would have been exposed to, had the Vendor’s claims been established, would not have been a liability in debt for monies had and received, but would have been liabilities that enlivened the insuring clause of the Policy.
The issues on appeal
The Insurer appealed against the primary judge’s order requiring it to indemnify the Agent in respect of its defence costs incurred in defending the proceedings on the basis that the primary judge erred:
- by rejecting the Insurers’ argument that the claims against the Agent were not claims for civil legal liability but in effect claims for restitution for monies had and received;
- by rejecting the Insurers’ argument that the true nature of the claims against the Agent would create a situation wholly against conscience in which the Agent could retain an unauthorised benefit; and
- in characterising the argument in (2) as a contention for exclusion from 'civil liability for any claim for compensation' of liability for unconscionable conduct or to repay some ill-gotten gain, rather than such liability not being a civil legal liability for a claim for compensation.
The decision on appeal
The FCAFC noted that it is a well-settled principle of law that a party may sue for alternative and inconsistent remedies, but it was not persuaded that the Vendor’s claims against the Agent could be characterised as claims in restitution (and therefore falling outside the scope of the insuring clause).
The FCAFC found that the claims against the Agent should be characterised as claims for compensation and thus fell within the scope of the insuring clause by reason of the following:
- given that the Agent was required to on-pay part of its commission to other people, including a substantial portion to its conjunction agent (ie $5.5m to Mint Property), an order requiring the Agent to pay an amount of money to the Vendor would not merely have involved the repayment of a benefit or ill-gotten gain, and the Agent would have suffered a loss;
- The Vendor’s claims were not pleaded as claims for monies had and received or debt, but as claims for compensation for contravention of statutory provisions and for breach of fiduciary duty;
- while there may be several alternative remedies arising out of a factual scenario, the mere possibility of recovery based on money had and received is not sufficient to characterise the claims made by the Vendor as falling into that category.
For these reasons, the FCAFC dismissed the Insurer’s appeal.
Implications for you
The FCAFC’s decision serves as a reminder to have regard not only to the general nature of a claim, but the specific causes of action pleaded, and the remedy sought. The mere possibility of a claim being pleaded as one for money had and received is, on its own, not enough to characterise a claim as falling into that category for the purposes of assessing whether an insurance policy responds.