Major shareholder and Board position exclusion and policy interpretation

Limelight Articles

Limelight 05/15

Major shareholder and Board position exclusion and policy interpretation

Authors, Gavin Beardsell , Ronan Guyomarc'h

Oz Minerals Holdings Pty Ltd & Ors v AIG Australia Ltd [2015] VSC 185

Introduction

Consistent with the principles of interpretation of an exclusion clause enunciated in the High Court of Australia decision in Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500, the recent decision of the Supreme Court of Victoria in Oz Minerals Holdings Pty Ltd v AIG Australia Ltd [2015] VSC 185 is a timely reminder that, whilst an exclusion clause must be construed objectively, according to its natural and ordinary meaning, with a view to giving it a business-like interpretation, it is not appropriate to strain to find ambiguity which is not there.

This was a decision of Justice Hargrave on an application by the plaintiffs seeking a declaration as to the true construction of the Major Shareholder and Board Position Exclusion forming part of the Directors & Officers Liability policy issued to the first plaintiff by the defendant (the Policy).

The Facts

The first plaintiff and the policyholder, Oz Minerals Holdings Pty Ltd, was formerly known as Zinifex Ltd (Zinifex), prior to its merger with Oxiana Ltd on or about 20 June 2008 (the Merger). The other plaintiffs were Zinifex’s directors and officer at the time preceding and during the Merger. Following the Merger, Oxiana was renamed Oz Minerals Ltd (Oz Minerals). Zinifex became a wholly owned subsidiary of Oz Minerals.

The Policy was issued by the defendant (the Insurer) prior to the Merger.

In February 2014, a former shareholder of Zinifex commenced a representative proceeding in the Federal Court of Australia against Oz Minerals alleging breach of continuous disclosure obligations and misleading and deceptive conduct (the Primary Proceeding).

Oz Minerals subsequently commenced a contribution proceeding against the plaintiffs seeking, amongst other things, contribution, indemnity or other relief from the plaintiffs in the event that Oz Minerals was found liable in the Primary Proceeding (the Contribution Proceeding).

The plaintiffs made a claim on the Insurer for indemnity under the Policy. The Insurer declined coverage to the plaintiffs in respect of the Contribution Proceeding in reliance on the Major Shareholder and Board Position Exclusion (the Exclusion).

The plaintiffs commenced a declaratory proceeding in the Supreme Court of Victoria against the Insurer, seeking a declaration that the Exclusion did not apply (the Declaratory Proceeding).

The Exclusion

For the Exclusion to apply, there were two cumulative conditions to satisfy.

First, there was a requirement that there be a claim brought by “any past or present shareholder who had or has direct or indirect ownership of or control over 15% [or] more of the voting shares or rights of Zinifex”.

Secondly, it was also a condition of the Exclusion that the “past or present shareholder had or has a representative individual or individuals holding a board position(s) with Zinifex”.

The Issue

The gist of the plaintiffs’ case was that, at the time of the alleged wrongful act(s) giving rise to the Contribution Proceeding, the two conditions for the operation of the Exclusion were not met because Oz Minerals was not a shareholder of Zinifex.

The plaintiffs contended that the purpose of the Policy was to provide cover for defence costs and loss arising from wrongful act(s) and that it made no commercial sense to assess the conditions of the Exclusion at the time the claim was brought. The plaintiffs argued that the Exclusion required a necessary temporal connection to the wrongful act(s) giving rise to the Contribution Proceeding and that the “claims made” structure was merely an additional condition of cover.

The Insurer contended that the Exclusion applied because at the time the Contribution Proceeding was commenced, Oz Minerals was the sole shareholder of Zinifex. Put another way, the Insurer argued that the conditions for the operation of the Exclusion applied to the time of both the wrongful act and of the claim and that this construction was consistent with the terms of the Exclusion and the “claims made” structure of the Policy.

The decision

Justice Hargrave accepted the Insurer’s submission.

His Honour first found that the evidence established that the two conditions for the operation of the Exclusion were satisfied at the time the Contribution Proceeding was commenced and that they were not at the time of the alleged wrongful act(s).

His Honour also found that the Insurer’s construction of the Exclusion:

should be preferred because it was grammatical and it was consistent with the “claims made” structure of the Policy; and
it served an objectively reasonable commercial purpose.

Justice Hargrave rejected the plaintiffs’ contention that the “claims made” structure was merely an additional condition of cover. His Honour reasoned that the “claims made” structure was “an essential condition precedent to cover, and its existence [was] consistent with the use of the past and present tenses” in the Exclusion.

Justice Hargrave said that “each case will depend on the words of the relevant exclusion clause, construed in the context of the policy as a whole” and that, absent ambiguity in the Exclusion, it was inappropriate to read into the Exclusion words that were not there.

His Honour also agreed with the Insurer that the Exclusion served an objectively reasonable commercial purpose to protect it from the risk of co-operation and misuse of confidential information even if other clauses in the Policy might also deal with these risks.

Justice Hargrave made a declaration that, on its true construction, the Exclusion operated to exclude from cover the claim made by Oz Minerals against the plaintiffs in the Contribution Proceeding.

Ramifications

The decision confirms that policy interpretation will vary according to the “claims made” or “occurrence-based” structure of an insurance policy. The decision is also a helpful reminder that policy interpretation starts with the words of the insuring clause and that, if those words are unambiguous, one cannot strain to find ambiguity.

Gilchrist Connell acted for the Insurer in the Declaratory Proceeding.

Date: 11 May 2015

This publication constitutes a summary of the information of the subject matter covered. This information is not intended to be nor should it be relied upon as legal or any other type of professional advice. For further information in relation to this subject matter please contact the author.