The Construction and Rectification of an Insurance Policy in Australia – Rectification
The increase in litigation in Australia examining the meaning of insurance policies provides a great opportunity to revisit the principles in Australian insurance law of policy construction and rectification.
In my last article, I covered the question of policy construction – how do we read a term or terms of a policy? How do we make sense of it all?
This time I propose to look at policy rectification. When and how do we fix a policy when the way we read a policy does not align with what the parties intended?
You will recall from the last article that the dispute driving this discussion centred on whether the limit of indemnity for Side C cover under as management liability policy held by Quintis Ltd (‘Quintis’), was $50million or $10million.
On the construction of the terms and conditions of the policy, the limit of indemnity was $10million.
Quintis argued that that construction did not align with what the parties had intended and asked the Court to rectify the policy to replace the limit of indemnity with the higher amount, $50million.
Any discussion about rectification starts with the premise that the terms and conditions of an agreement which the parties signed, represents their true intention whatever else others might think about it.
Courts are naturally very reluctant to depart from that premise and to persuade a Court to act otherwise is an onerous burden to discharge.
In broad terms, there are two steps: -
the identification of the parties’ ‘common intention’; and
the determination of whether the written agreement records that ‘common intention’.
The identification of the parties’ ‘common intention’ essentially involves presenting to the court clear and convincing proof of the parties’ intentions. That proof may be objective and subjective. Evidence of a party acting as if the contract was expressed in its rectified form will be received by the court as strong evidence of that party’s intention to execute the contract in its rectified form.
Once the ‘common intention has been ascertained, the next step is to measure it against the terms and conditions of the agreement. If the two are not aligned the groundwork is set for the court to intervene to rectify the agreement to record the ‘common intention’.
The evidence in the Quintis case being limited to circumstantial evidence, the Court had to review it carefully to satisfy itself what the parties’ intention was. That review revealed that parties had intended that the relevant limit of indemnity be $50million.
But was it a ‘common intention’ in the sense that it was understood by each party to be an intention held by the other? In Franklins Pty Ltd v Metcash Trading Pty Ltd (2009) 76 NSWLR 603 at 660, Justice Campbell of the New South Wales Court of Appeal observed: -
In my view, when that intention relates to the terms upon which they will contract with each other, it is still necessary for them to know enough of each other’s intentions for it to be said that there is a common intention. They might come to know of each other’s intentions in this way through those intentions being directly stated, or they might come to know of them through the various other means by which one person’s intention can become known to another person. Those means can sometimes involve a process of conscious and deliberate inference. Those means can sometimes involve simply perceiving a gestalt in a series of events. Those means can depend to some extent on the people involved sharing a common understanding of how particular bodies of knowledge or markets or social institutions they are operating in work – the experienced surgeon, or the experienced chess player, can sometimes see what another surgeon, or chess player, is seeking to do, in a way that an inexperienced person cannot. What matters for present purposes is that for a negotiating party to perform actions or say words from which the other party can gather his or her intention is itself a form of communication. Negotiation of any contract takes place in a context in which various facts are known or assumed by the negotiating parties. Sometimes, for example, if a contract is negotiated in a context where there are well understood business practices and conventions, and nothing is said about those practices and conventions not applying, it can be legitimate to conclude that both parties to the contract intended to act in accordance with those practices and conventions, even if they did not expressly communicate to each other that they intended to act in accordance with those practices and conventions.
This view of what is needed before an intention is a common intention, accords, it seems to me, with the Australian case law since Joscelyne.
It is not necessary for the parties to state their intentions to each other expressly. But each party must still be aware of the terms and conditions with the other party intends to accept. They may become aware of those terms and conditions through the words and actions of the other party even where those words or actions fall short of any express statement of intention.
There was no evidence that the parties had expressly stated to each other that it was their intention that the relevant limit of indemnity be $50million. But following the views expressed by the New South Wales Court of Appeal in Franklins, the Court found in the documents and inferences drawn from those documents, sufficient evidence that the parties were aware that the other party intended the limit of indemnity to be $50million.
Having determined what the parties’ intention was and that it had been a common intention at the time the parties entered into the relevant policy, it was not a stretch to see how the terms of the policy did not align with that intention.
So, what could the Court do?
While the rectification of the policy may be complicated, nuanced, and respectful of the parties’ particular positions into account, the outcome may still be achieved. The court must be careful though. It cannot turn the policy into something that the parties intended and more. It also must ensure that in fixing one aspect of the policy, it does not create problems elsewhere. And most of all, the policy must be coherent.
Taking all these matters into account, the Court found the policy capable of being rectified to record the intended limit of indemnity without tarnishing the balance of the agreement.
The key to rectification is an intention common to the parties which the agreement does not record.
The remedy does not necessarily follow, but once the discrepancy is recognised, the Court will work had to make the policy work in accordance with that common intention.
In memory of my mother.