DIF III – Global Co-Investment Fund LP v Babcock & Brown International Pty Limited
The recent NSW Supreme Court decision in DIF III – Global Co-Investment Fund LP v Babcock & Brown International Pty Limited ruled that section 54 the Insurance Contracts Act 1984 (Cth) (ICA) did not cure a lack of notification of circumstances if those circumstances were not known during the policy period. Here, this finding was based on the particular policy wording governing when a Claim is considered to be made for the purposes of the policy. However, it may also apply more generally in situations where a policy has a deeming provision permitting notification of ‘circumstances reasonably expected to give rise to a claim’. Although knowledge of the circumstance is irrelevant, if no circumstances which could reasonably be expected to give rise to a claim exist, section 54 cannot assist.
The factual matrix of this case is quite complex. Prior to its collapse in 2009, Babcock & Brown Limited (BBL) was a publicly listed company which carried on business in Australia and elsewhere as a specialist investment and advisory firm. The BBL Group and its members were generally referred to as “Babcock & Brown”. In a nutshell, Babcock and Brown were accused of withholding information from investors and having a conflict of interest in relation to a 2007 US laundry business, Coinmach.
BBL’s businesses included a funds management business carried on through DIF Capital Partners Limited (third defendant), formerly known as Babcock & Brown Direct Investment Fund Limited (the Manager). The Manager was a wholly owned (indirect) subsidiary of BBL. It did not appear at the hearing. The Manager had an Investment Committee comprising a number of executive and non-executive directors or officers of members of the BBL group. Proceedings were brought against 5 members of the Investment Committee.
The proceedings were also brought against a number of other parties, including but not limited to:
- Babcock & Brown International Pty Ltd (BBIPL), an intermediate holding company through which BBL held operating and investment subsidiaries;
- Babcock & Brown LP (BBLP), one such subsidiary; and
- the Insurers who provided professional indemnity insurance to Babcock & Brown (PI Insurers) (seeking to recover the amount for which the Manager is liable).
In addition to the substantive proceeding there were a number of groups of cross-claims. Firstly, BBIPL, BBLP and four of the five Investment Committee members filed cross-claims against the insurers who provided relevant directors and officers liability insurance (D&O Insurers) for Babcock & Brown. BBIPL and BBLP also sought an indemnity from three of the Investment Committee members for the costs they incurred in funding the defences of those Investment Committee members, as well as for any loss for which BBIPL and BBLP were liable to indemnify those individuals. Each of BBIPL, BBLP and the three Investment Committee members sought indemnity for their own liability. Further, various Committee Members also sought indemnity from the PI Insurers for any liability they may have been found to have to the Plaintiffs.
It is the claims against both the D&O and PI Insurers that attracted arguments as to the application of section 54 of the ICA. Section 54 was found to not apply in either case. Owing to the different policy wordings, the reasoning for this was slightly different for each of the cases put forward.
The claims against the PI Insurers
The PI Insurers conceded any failure to give notice of known circumstances could reasonably be anticipated to give rise to a claim could be cured under section 54. However, it was submitted that section 54 cannot cure a failure to give notice of circumstances which were not known.
In support of arguments to the contrary, the plaintiffs sought to rely on a number of documents which, they submitted, were sufficient to constitute notice of a claim against the Manager or provide evidence that, as required by the PI policy wording, the Manager’s management first became aware during the policy period of a “fact, circumstance or event which could reasonably be anticipated to give rise to” the Claim which eventuated (that is, these proceedings).
The claim against PI Insurers failed on this notification point. His Honour held that based on the communications relied upon as “notification” to PI Insurers:
- it was far from obvious that any of the correspondence established that the claim in respect of which indemnity was sought was a direct result of matters known to the Manager’s management during the policy period; and
- there was no suggestion in any of the correspondence that the plaintiffs might make a claim or that any claim possibly arose out of the conduct of the Manager or its Investment Committee.
Section 54 applies to a failure to give notice of circumstances but it does not apply to restrictions inherent in the claim itself. A restriction under the wording of the PI policy was the Assured’s Management must first have become aware of the relevant circumstance during the Policy Period. The evidence did not establish that it (or any of the members of the IC) had any basis, during the Policy Period, for thinking that the Plaintiffs would bring this claim against them. In these circumstances, section 54 cannot apply to the absence of the requisite awareness.
The claims against the D&O Insurers
The claim against the D&O insurers also failed on the notification point. However, under the D&O policy, the knowledge of the insured of the circumstances was irrelevant.
The D&O Policy contained a deeming provision which gave the person seeking indemnity an option to notify, within the policy period, circumstances out of which a claim might arise and would treat any claim subsequently arising from those circumstances as a claim under the D&O Policy.
The D&O Insurers accepted that in light of the deeming provision, section 54 could operate to cure any late notification of circumstances. However, they submitted that the claims in respect of which indemnity was sought did not arise out of the notification of circumstances relied on. The Court accepted this and said the only question was whether the claim that was made arose out of the circumstances which were notified (whether late or not).
The only evidence adduced was of notification of a potential claim by BBGP against BBLP and there was found to be no sufficient connection between this and the claim which was brought. The Judge said it could not reasonably be expected that the Plaintiffs would bring a claim against the Manager based on the way the Plaintiff’s investment in Coinmach was managed because there were circumstances that suggested some other entity might bring a claim because of the way its investment in Coinmach had been managed by a different fund manager.
One of the Investment Committee’s written closing submissions made reference to a notice of the proceedings given to D&O insurers on 3 January 2014. His Honour commented in obiter that it may be arguable that s 54 would apply to this notice subject to the question of any prejudice the late notification might cause to the D&O Insurers. However, as this notice was not pleaded and any potential prejudice issues were not canvassed, the notice could not be relied on.
This begs the question would the Insureds have been better off arguing there had been no notification of relevant circumstances but that section 54 should operate to forgive the failure to notify because the D&O policy contains a deeming provision? This could work if the Insured could prove the existence, during the relevant period, of circumstances reasonably expected to give rise to a claim. As discussed above, this was not possible on the evidence adduced.
Importance of the ruling
Insurers and insureds alike should be mindful of the application of section 54 in light of the relevant policy wording. If this requires relevant knowledge on the part of an Insured during the policy period, section 54 cannot cure any failure to give notice of circumstances which were not known as required during the policy period.
In pleading indemnity cases which involve notifications of circumstances which gave rise to claims which were commenced after expiration of the relevant policy period, careful consideration should be given to what, if anything, is relied on as the relevant notification. If any relevant notification documents are to be relied on, all and any relevant material should be expressly pleaded.