1. Case citation
Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226
2. Brief summary of facts
In 1976, Con-Stan Industries of Australia Pty. Ltd. (“Con-Stan”) obtained several general insurance policies through a broker, Bedford Insurances Pty. Ltd. (“Bedford”).
Con-Stan paid the required premiums to Bedford, however Bedford did not forward the premiums on to the Insurer, Norwich Winterthur Insurance (Australia) Ltd. (“Norwich”).
In September 1978, Norwich successfully obtained a winding-up order against Bedford. The premiums were not recovered and Norwich then sought to recover the premiums from Con-Stan directly.
3. Brief summary of procedural history
On the 29 June 1978, Norwich presented a wind-up order to Bedford and the order was made on 20 September 1978.
In 1981, Norwich commenced action seeking to recover the premiums from Con-Stan in the NSW Supreme Court.[1] Rogers J. held that an insurer had no recourse against an assured if the assured had paid premiums to the broker who had procured the insurance.
In 1983, the judgment was reversed by majority in the Court of Appeal.[2] Glass and Mahoney JJ. held that the implied terms were not able to be implemented because they were not capable of being formulated so as to define the rights of the parties and did not pass the business efficiency test as there was no evidence that Norwich would have agreed or have treated the terms as so obvious that it goes without saying.[3] Hutley J.A. in his dissenting judgment, found that Con-Stan and Norwich were contracting on the basis of the implied term he noted that if the implied term did not exist Con-Stan may have acted differently, by paying the broker direct or insisting on the broker maintaining a trust account.[4]
In 1986 Con-Stan appealed to the High Court by special leave on the basis that there was an implied term in the contract of insurance, arising by custom or usage, that Bedford alone was liable to Norwich for payment of the premium, or that there was an implied term that payment of the premium to the Bedford discharged the assured's obligation to Norwich.[5]
4. Brief summary of the ratio decidendi
The court was willing to imply a term into a contract, based on custom or usage, provided four key propositions were met. (1) The existence of the term is a question of fact, (2) it is so well known that everyone making a contract in that situation can reasonably be presumed to have imported that term into the contract, (3) it is not contrary to an express term and (4) that the parties did not have to have knowledge of the custom for it to be implied. [6]
However, the court decided not to imply the terms as Con-Stan had not met these propositions for two main reasons.
Firstly, Con-Stan failed to prove the existence of the term, as a matter of fact, as they had not established a clear pattern of conduct that insurers did not look the assured for payment of the premium, when the broker failed to pay.
Secondly, Con-Stan had failed to demonstrate that the requested term was so well known that it could be presumed to have been included in the contract. There was still a great deal of uncertainty around the parties actual position and, whilst there was evidence that in other cases insurers had not looked to the assured or had accepted a compromise, it did not establish the foundation of the rights and liabilities required to imply a term.[7]
The court was also willing to imply terms in order to give business efficacy to the contract provided the term implied was necessary to make the contract work and was so obvious it goes without saying.[8] However the court held that the contract was able to sensibly operate without the sought terms and only served to make the contract less onerous on Con-stan.[9]
5. Critique
The argument of this work is that the primary role of the court to uphold the legitimacy of private law and that the court was correct not to imply the terms requested leaving any changes for the elected members of parliament.
Insurance, the commercial relationship in which a person, with some ascertainable benefit that would count as a loss if it were no longer available, is indemnified by an insurer who assumes the risk of that loss occurring,[10] is based on the premise that an insured and insurer can create a binding contract, enforceable at law, which is tailored to cover certain risk(s) whilst omitting others in return for differing levels of premium(s). In short, insurance relies on the ability of the parties to create private law.
Private law originates from the classical contract theory view, based on will theory, that Con-Stan and Norwich should be free to enter whatever bargains they consider would benefit them and that the courts should facilitate that freedom by enforcing whatever bargains they choose to make. [11]
Express Terms
In this context, it is essential that Con-Stan and Norwich have certainty about the terms of the contract that will become private law. Additional terms or omissions can fundamentally alter the positions of the parties influencing the insurance offered and the premiums payable under the contract.
In its decision, the court supports the proposition, discussed in Summers v The Commonwealth[12], that terms will not be implied in law, in fact or by custom where they are expressly excluded by the parties or are inconsistent with the express terms of the contract.[13] This proposition, which was later confirmed in Castle Maine Tooheys[14], provides the basis for private individuals to create the necessary private law with a degree of certainty.
The express terms in the agreement between Con-Stan and Norwich called for payment of the premium to Norwich not Bedford.[15] Therefore any implied term would have to be consistent with this express term.
Promise Theory & Power Imbalance
This use of express terms is consistent with the promise principle suggested by Charles Fried.[16] Fried suggests a contract is first a promise and a promise must be kept.[17] The court should therefore enforce a promise made by Con-Stan for payment of the premium. However promise theory, and will theory, fail to consider the power imbalance which exists between Con-Stan and Norwich. Norwich as an insurer would generally have many clients and expertise in insurance law whilst Con-Stan’s general business was not insurance and their policy would not represent most of Norwich’s income. In these circumstances, it appears Con-Stan is at a disadvantage and would not have been able to alter any the terms of agreement advanced by Norwich leading to the courts supporting an unfair advantage to Norwich.
Gap Filling
Difficulties arise when the express terms, or promises, do not cover a particular event or are ambiguous on how an express term should be implemented. Intervention by the court to imply a term is at odds with the concept of freedom of contract and the ability to make private law.
In this case neither Con-Stan or Norwich appears to have considered the possibility of the broker not passing on the premiums and therefore have not included express provision to cover this scenario. As a result, it is extremely difficult for the court to determine what the actual intentions of the parties would have been when considering this dispute. Accordingly, the court can only seek to resolve the dispute by reference to the parties presumed intention.[18] To determine presumed intention the court will look to what the words and conduct of each party would lead a reasonable person, in the position of the other party, to believe.[19]
Consent Theory, proposed by Randy Barnett[20], argues that by choosing to enter into a contract, Con-Stan and Norwich have implicitly committed themselves to the jurisdiction of the legal system. This includes the use of the background rules of contract law to fill gaps in their agreement.[21] Barnett suggests that those terms should reflect the conventional or common-sense understanding existing in the relevant community of discourse.[22]
The courts method of determining the presumed intention of the parties based on the general notoriety of the custom then assuming it is reasonable that the parties contracted on that basis.[23] Is evidence of the court following this suggestion.
This approach is consistent with the promise theory view that it is acceptable, where the original promise didn’t cover the situation, to imply terms by applying non-promissory principles of fairness.[24] There has been some discussion within the court of a concept of reasonableness.[25][26] This would restrict Norwich’s ability to recover from Con-Stan on the basis that it was reasonable for them to do so given the circumstances of the case. However, the use of such a concept is limited by its inability to override the exercise of powers conferred by a contract.[27]
Fairness
The ability to enforce private law and fill gaps makes no distinction on the fairness of the decision. American legal philosopher John Rawls described fairness as a "fundamental idea in the concept of justice"[28] and there is an inherent unfairness in the courts finding requiring Con-Stan to pay the premiums twice. Con-Stan acted in good faith and was not responsible for the failure of Bedford to pass on the premiums. However, there is also an inherent unfairness in requiring Norwich to forgo the premium. Norwich has also acted in good faith and provided the promised cover. Legal theorist Edmond Cahn,[29] suggests that we have a better sense of injustice than we have of justice and this seems true in this case.
To resolve this unfairness, the court has generally accepted that the laws that are currently in force within a society form part of the facts of each matter and must be taken into account in order to render full justice to the parties.[30] The court having taken the, “black letter” view that it is their role to declare and interpret the laws not to create new law directly give rise to the problem, theorized by Hume that the law can only deicide based on what the law is, not what the law ought to have been. [31]
As businesses use the courts selectively this formalist approach gives the contract law some predictability which is useful in the business community. It would be counterproductive if the law was not predictable and business were unable to rely on the courts to resolve disputes the way businesses expect.[32]
The court then leaves any issues of fairness to the parliament and its elected representatives.[33] It is in this forum that the unfairness of the decision can be best addressed and it is perhaps indicative of the success of this model that at the same time this case was proceeding through the courts the Law Reform Commission was investigating the law(s) affecting the insurance brokerage industry. The Commission recognized the unfairness of the outcome and recommended the insurer should be held responsible for the receipt of premiums by a broker.[34]
This recommendation was adopted by the parliament in 1984, effectively reversing the precedent which would have been set by Con-Stan. [35]
6. Brief conclusion to draw together the themes/ main points of your critique.
The court facilitates private law by upholding the express terms of an agreement over any other term and only implying terms that would have been consented to by the parties if they had considered them during the negotiating process. The court determines the presumed intentions of the parties using strict criteria and the concept of what a reasonable person would have agreed to in the same circumstances. By only implying terms that meet strict criteria the court defends the classical understanding that the role of contract law is to facilitate the legitimacy of private law.
Whilst the court was legally correct, based on the finding that the evidence did not support an implied custom or that it was necessary to give the contract business efficacy, to refuse to imply the terms sought, the resulting decision was not fair on Con-Stan. However, there is no capacity, within the law, for the court to consider alternate solutions and these decisions are best left for the elected members of parliament.
Bibliography
A Articles / Books / Reports
Cahn Edmond, The sense of injustice (New York University Press 1949)
Gava John, How Should Judges Decide Commercial Contract Cases? (2013) 30 Journal of Contract Law 140
Mann, Trischa et al (eds) Australian Law Dictionary (Oxford, 2nd ed, 2013)
McLauchlan David, The Contract That Neither Party Intends (2012) 29 Journal of Contract Law
Paterson Jeannie, Andrew Robertson and Arlen Duke, Principles of Contract Law (Thomson Reuters, 5th ed, 2016)
Rawls, John, 'Justice as Fairness' (1958) 67 The Philosophical Review
The Law Reform Commission, Report No 16 Insurance Agents and Brokers (Australian Government Publishing Service Canberra 1980)
Wacks, Raymond, Understanding Jurisprudence (Oxford, 4th ed, 2015)
B Cases
Castle Maine Tooheys Ltd v Carlton & United Brewers Ltd (1987) 10 NSWLR 468
Commonwealth Bank of Australia v Barker (2014) 253 CLR 169
Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226
Gary Rogers Motors (Aust) v Subaru (Aust) [1999] FCA 903
Norwich Winterthur Insurance (Aust) Ltd v Con-Stan Industries of Australia Pty Ltd [1983] 1 NSWLR 461
Norwich Winterthur Insurance (Aust) Ltd v Con-Stan Industries of Australia Pty Ltd [1981] 2 NSWLR 879
Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596
Summers v The Commonwealth (1918) 25 CLR
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [(2004) 219 CLR 165
C Legislation
The Insurance (Agents and Brokers) Act 1984 (Cth)
D Treaties
E Other
D'Amato Anthony, On the Connection Between Law and Justice (Northwestern University School of Law 2011). Faculty Working Papers. Paper 2.
[1] Norwich Winterthur Insurance (Aust) Ltd v Con-Stan Industries of Australia Pty Ltd [1981] 2 NSWLR 879.
[2] Norwich Winterthur Insurance (Aust) Ltd v Con-Stan Industries of Australia Pty Ltd [1983] 1 NSWLR 461.
[3] Ibid 473.
[4] Ibid 467.
[5] Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226.
[6] Ibid 236.
[7] Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226 240.
[8] Ibid 241.
[9] Ibid 241.
[10] Mann, Trischa et al (eds) Australian Law Dictionary (Oxford, 2nd ed, 2013) 394.
[11]Jeannie Paterson, Andrew Robertson and Arlen Duke, Principles of Contract Law (Thomson Reuters, 5th ed, 2016) 6 [1.10].
[12] Summers v The Commonwealth (1918) 25 CLR 148.
[13] Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226 236 [3].
[14] Castle Maine Tooheys Ltd v Carlton & United Brewers Ltd (1987) 10 NSWLR 468 490 [3].
[15] Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226 per A M Gleeson Q.C 231.
[16] Jeannie Paterson, Andrew Robertson and Arlen Duke, Principles of Contract Law (Thomson Reuters, 5th ed, 2016) 10 [1.20].
[17] Ibid 10 [1.20].
[18] David McLauchlan, The Contract That Neither Party Intends (2012) 29 Journal of Contract Law.
[19] Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [(2004) 219 CLR 165; 211 ALR 342 [40].
[20] Jeannie Paterson, Andrew Robertson and Arlen Duke, Principles of Contract Law (Thomson Reuters, 5th ed, 2016) 14 [1.25].
[21] Ibid 16 [1.25].
[22] Ibid 16 [1.25].
[23] Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226 237.
[24] Ibid n 20 11 [1.20].
[25] Gary Rogers Motors (Aust) v Subaru (Aust) [1999] FCA 903 [34].
[26]Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 [14.155].
[27] Gary Rogers Motors (Aust) v Subaru (Aust) [1999] FCA 903 [35].
[28]John Rawls, 'Justice as Fairness' (1958) 67 The Philosophical Review 164.
[29] Edmond Cahn, The sense of injustice (New York University Press 1949).
[30] Anthony D'Amato, On the Connection Between Law and Justice (Northwestern University School of Law 2011). Faculty Working Papers. Paper 2.
http://scholarlycommons.law.northwestern.edu/facultyworkingpapers/2, 6.
[31] Raymond Wacks Understanding Jurisprudence (Oxford, 4th ed, 2015) 285.
[32] John Gava, How Should Judges Decide Commercial Contract Cases? (2013) 30 Journal of Contract Law 140.
[33] Commonwealth Bank of Australia v Barker (2014) 253 CLR 169 At [19].
[34] The Law Reform Commission, Report No 16 Insurance Agents and Brokers (Australian Government Publishing Service Canberra 1980).
[35] The Insurance (Agents and Brokers) Act 1984 (Cth).