Bailey v Medical Defence Union

184 CLR 399
69 ALJR 890
132 ALR 1

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(Judgment by: BRENNAN CJ, DEANE AND DAWSON JJ)

BAILEY v NSW MEDICAL DEFENCE UNION LTD (estate of BAILEY) NSW MEDICAL DEFENCE UNION LTD v CRAWFORD

Court:

Judges: Brennan CJ, Deane and Dawson JJ
McHugh and Gummow JJ

Judgment date: 3 November 1995

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Judgment by:
BRENNAN CJ, DEANE AND DAWSON JJ

BRENNAN CJ, DEANE AND DAWSON JJ. These two appeals were heard together. The respondent in the second of them, Mr Crawford, was a patient of Dr Bailey who is deceased and whose executrix is the appellant in the first appeal. The New South Wales Medical Defence Union Ltd ("the Union") is the appellant in the second appeal and the respondent in the first appeal. The Union was at all relevant times a company limited by guarantee with a membership which was, speaking generally, confined to members of the medical profession. One of its objects was to protect, support and safeguard the character and interests of legally qualified medical practitioners. Another was to indemnify its members against claims for damages "in any wise affecting the professional character or interest" of such members. Dr Bailey was a member of the Union from 1951 until his death in 1985.

Mr Crawford was treated by Dr Bailey at Chelmsford Hospital in Sydney between 1972 and 1974 and, as a result of the treatment, suffered injuries between December 1973 and January 1974. On 28 November 1980, Mr Crawford commenced an action against Dr Bailey in the Supreme Court of New South Wales claiming damages for the injuries which he had received. He subsequently obtained an extension of the limitation period within which to pursue the action. At first the Union, through its solicitors, acted for Dr Bailey in the conduct of his defence. Subsequently, after Dr Bailey's death and in circumstances to which it will be necessary to refer in more detail, the Union terminated its assistance and instructed its solicitors to file a notice that they ceased to act in the matter. Mrs Bailey, as executrix of Dr Bailey's estate, was substituted as defendant. She requested assistance from the Union. The request was refused on 7 November 1985. As a result the estate cross-claimed against the Union seeking an indemnity against Mr Crawford's claim.

Meanwhile, on 8 October 1985, Mr Crawford sought leave in the same proceedings to make a claim against the Union under s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW). At the same time, the Union sought a declaration in those proceedings that it was no longer an insurer within the meaning of s 6. By an interlocutory judgment delivered on 5 May 1986, Yeldham J refused both the declaration and leave to Mr Crawford to commence proceedings under s 6. The latter decision was reversed by the Court of Appeal on 18 September 1987 and leave was granted ^[F1] . On 28 July 1988, Mr Crawford commenced separate proceedings against the Union pursuant to the leave granted.

Orders were made that both sets of proceedings - the claim by Mr Crawford against Dr Bailey's estate and his claim against the Union - be heard together. On 28 February 1992, Enderby J gave judgment in the first action in favour of Mr Crawford against the estate and in favour of the estate upon its cross-claim against the Union. In the second action he gave judgment in favour of Mr Crawford against the Union under the provisions of the Law Reform (Miscellaneous Provisions) Act.

Both the estate and the Union appealed against the judgments against them. Eventually, after certain vicissitudes which need not trouble us, the Court of Appeal upheld the liability of Dr Bailey's estate to Mr Crawford in damages and the liability of the Union to indemnify the estate. It also upheld the liability of the Union to Mr Crawford in the proceedings brought under the Law Reform (Miscellaneous Provisions) Act.

No appeal is brought against the judgment in favour of Mr Crawford against Dr Bailey's estate. These appeals therefore raise two questions. The first is whether the Union is liable to indemnify Dr Bailey's estate against the damages awarded to Mr Crawford. The second is whether the provisions of the Law Reform (Miscellaneous Provisions) Act afford any right of recovery to Mr Crawford against the Union.

Article 57 of the Union's articles of association required the Union to indemnify each member or the personal representative of a deceased member against liability for damages or costs arising from any claim against him for any act or omission in the course of his practice while he was a member other than an unfinancial or unindemnified member. The amount of the indemnity in respect of all claims arising from any one act or omission was limited to $100,000 or such greater sum as the regulations might provide. Various classes of membership were provided by Art 4, including that of an unindemnified member who did not require indemnity for a period. Under Art 6, an applicant for membership of the Union was deemed to have become a member on receipt by the Secretary of an application for membership and upon payment of the prescribed entrance fee and subscription. Such an applicant was entitled to the benefits of indemnity and assistance conferred by succeeding articles from the date of such payment until the date of his becoming a member or the notification of refusal of his application for membership as the case may be. After an application for membership was accepted, membership, unless terminated, was by Art 7 deemed thereafter to have been renewed for a further period of twelve months from the end of each calendar year unless the member did not desire continuance of membership or the Council notified the member that his membership would not be renewed.

The management of the business and the control of the Union was vested in a Council by Art 55. The Council was empowered by Art 10 to determine different rates of subscription for different classes of members. Each member was required to pay to the Union annually in advance the subscription determined by the Council. The Council was empowered to expel from the Union any unfinancial member. Unfinancial members ceased, subject to Arts 58 and 60, to be entitled to receive assistance from the Council. Under Art 15 a member ceased to be a member of the Union if he died or was expelled and, subject to Arts 57 to 67, forfeited all the rights and privileges of membership. Article 58 required the Union to indemnify a member or his personal representative to the extent provided for by Art 57 in the event of the member's death.

Article 60 provided:

"Notwithstanding the provisions of Article 57 where the action, proceeding, claim or demand is one in respect of which the Union shall give indemnity to a member under Article 57 and all conditions entitling such member to such indemnity have been fulfilled but before such action, proceeding, claim or demand has been finalised such member was expelled from the Union under the provisions of these Articles the Council shall have complete and absolute power and discretion to refuse to indemnify such member or his personal representative in the case of his death either wholly or in part and subject to such conditions as the Council may impose and the Council shall not be required to give reasons for decisions made by it in the exercise of its said power and discretion and any decision so made shall be final and conclusive and binding on all members as well as the member so expelled and the personal representative of such member in the event of his death and such decision shall not be the subject of any question or discussions at any general meetings of the Union." [emphasis added]

Dr Bailey was never expelled from membership.

In 1972 the limit upon the extent of the indemnity provided by Art 57 was increased to $250,000 in respect of a member who applied and whose application was accepted by the Council. The increase was effective upon payment by the member of a surcharge. In 1973 Dr Bailey commenced payment of the surcharge for the increased indemnity. On 1 December 1977 Art 60 was amended by substituting for the words "such member was expelled from the Union" the words "such member ceased to be a member of the Union" and by a further consequential amendment. In other words, Art 60 was by amendment made operative upon a member ceasing to be a member (which, under Art 15 included the death of the member) rather than upon being expelled from membership. In 1979 the indemnity under Art 57 was increased to $500,000 upon payment of a surcharge. In 1980 Dr Bailey commenced payment of the surcharge.

On 4 November 1982 the articles of association were amended by substituting new Arts 57 to 67. Significant for present purposes were the new Arts 57 and 58 and the new Arts 60 and 61. Those articles provided:

"57. The Council shall investigate all cases in which assistance is sought from the Union by a member.

58. The Council may in its sole and absolute discretion and either in whole or in part and upon such terms and conditions as to the Council may seem proper determine that the Union will assist a member:

(a) by undertaking the conduct of or assisting in the conduct of or defence of any matter or proceedings whether of a strictly legal nature or otherwise and,

(b) by granting indemnity to such member in respect of any action, proceedings, claim or demand arising in the course of the practice of such member from an event which occurred while he was a member.

...

60. The Council may in its sole and absolute discretion terminate any grant of assistance or indemnity and thereafter cease to assist any member in whose favour a determination had been made under Article 58.

61. Any member who has sought assistance from the Union before 4 November, 1982 shall be deemed to have requested assistance and the Council shall as soon as expedient make a determination under Article 58 in respect of such request."

On 2 December 1982, the Council of the Union resolved to afford assistance to Dr Bailey in respect of the claim made against him by Mr Crawford. Dr Bailey died on 8 September 1985. On 3 October 1985 the Council resolved:

"1.That the assistance granted to Dr Bailey in respect of the claim by Mr Crawford (OR1981/8) be terminated;

2. That the Defence Union's solicitors be instructed to file a Notice of Ceasing to Act in the Supreme Court proceedings;

3. That consideration of any application for assistance by the legal representative of Dr Bailey be deferred until any such application is made."

As we have said, Mrs Bailey's application for assistance as the executrix of Dr Bailey's estate was refused on 7 November 1985.

Both the Companies Act 1961 (NSW) and the Companies (New South Wales) Code 1981 contained familiar provisions relating to the alteration by a company of its articles and the effect of the memorandum and articles of association as between the company and the members. It is convenient to refer only to the Companies Act 1961 because the relevant provisions of that Act were not relevantly different in effect from those of the Companies Code. Section 31(1) of the Companies Act 1961 provided:

"Subject to this Act and to any conditions in its memorandum, a company may by special resolution alter or add to its articles."

Section 33(1) provided:

"Subject to this Act the memorandum and articles shall when registered bind the company and the members thereof to the same extent as if they respectively had been signed and sealed by each member and contained covenants on the part of each member to observe all the provisions of the memorandum and of the articles."

Whilst the articles of association of a company regulate the relations of the members amongst themselves as members and with the company ^[F2] , they do not preclude a member from contracting individually with the company upon terms which may or may not be defined by reference to the articles. Such a contract has been called a special contract to differentiate it from the deemed covenants to which s 33(1) refers ^[F3] , which regulate the position of a member as a member and not as an individual ^[F4] . Even if the terms of a special contract are to be determined by reference to the articles, an alteration to those articles will not necessarily mean an alteration to the terms of the contract. It will depend upon the intention of the parties to the contract, namely, the member and the company. Thus, a special contract may import as a term one or more of the articles upon the basis that they may be altered by the company and an alteration of the articles in those circumstances will alter the terms of the contract. On the other hand, a special contract may be concluded upon the basis of the articles but with the intention that the terms of the contract are not to be varied by an alteration to the articles. That will not confine the statutory power of the company to alter its articles, but the company in acting upon the basis of an alteration may be acting in breach of contract. That, we think, was what Lindley MR had in mind in Allen v. Gold Reefs of West Africa Limited ^[F5] when, in speaking of special contracts, he said that a "company cannot break its contracts by altering its articles". Put another way, a company cannot unilaterally vary its contracts by altering its articles unless that is the basis upon which the contract was made ^[F6] .

And where a special contract does import as a term one or more of the company's articles in an alterable form, an alteration to the articles will have the effect of varying the contract prospectively only because, save perhaps in extraordinary circumstances, any other result would be inconsistent with the intention of the parties to the contract. In Swabey v. Port Darwin Gold Mining Co ^[F7] the articles of the company provided for the remuneration of the directors. A special resolution was passed reducing their remuneration as from a date prior to the date of the special resolution. It was held that there was a contract between the directors and the company upon terms as to remuneration which were set out in the articles but subject to alteration by an alteration to the articles. It was held that the alteration to the articles reduced the entitlement of the remuneration of the directors under the contract, but did so prospectively only. There could hardly have been an intention that an alteration should vary the terms of the contract to the extent that they had already been performed by one side.

Swabey v. Port Darwin Gold Mining Co stands in contrast with Pepe v. City and Suburban Permanent Building Society ^[F8] . In the latter case, a member of a building society, who had given notice of withdrawal and who, under the rules as they then stood, became entitled to a sum of money, was held to be deprived of his right to that sum by an alteration to the rules before he had ceased to be a member. In Allen v. Gold Reefs of West Africa Limited ^[F9] , Lindley MR described this decision as going "very far". However, regardless of the view taken of the judgment of Chitty J in Pepe v. City and Suburban Permanent Building Society, that case may be distinguished from Swabey v. Port Darwin Gold Mining Co upon the basis that it involved no special contract between the member and the company, and the validity of the alteration properly fell to be determined by "those general principles of law and equity which are applicable to all powers conferred on majorities and enabling them to bind minorities" ^[F10] .

In Baily v. British Equitable Assurance Company ^[F11] the Court of Appeal held that a special contract existed between a policy holder and a mutual life insurance company with respect to the manner in which profits were, upon the basis of the by-laws of the company, to be divided. The by- laws were amended, but the Court held that a division according to the alteration would amount to a breach of contract. Cozens-Hardy LJ in delivering the judgment of the Court said ^[F12] :

"The rights of a shareholder in respect of his shares, except so far as they may be protected by the memorandum of association, are by statute made liable to be altered by special resolution: see Allen v. Gold Reefs of West Africa. ^[F13]

But the case of a contract between an outsider and the company is entirely different, and even a shareholder must be regarded as an outsider in so far as he contracts with the company otherwise than in respect of his shares. It would be dangerous to hold that in a contract of loan or a contract of service or a contract of insurance validly entered into by a company there is any greater power of variation of the rights and liabilities of the parties than would exist if, instead of the company, the contracting party had been an individual. A company cannot, by altering its articles, justify a breach of contract."

The decision of the Court of Appeal was reversed in the House of Lords ^[F14] upon the basis that there was no contract between the company and the policy holder that the company's practice in the division of profits would be unalterable, but no doubt was cast upon the passage from the judgment of the Court of Appeal set out above.

It is clear that where the articles of a company embody a co-operative scheme governing individual members' dealings with the company with respect to such matters as the marketing of the members' produce, the existence of a contract outside the articles with each participating member is more readily discernible. In Heron v. Port Huon Fruitgrowers' Co-operative Association Ltd ^[F15] there was a co- operative scheme for the marketing by a company of fruit grown by members of the company upon terms which were to be found in the company's articles. Isaacs J described the relationship between the fruitgrowers and the company as follows ^[F16] :

"Here, as already shown, the Company is merely an agency company, and, though the only shareholders are to be orchardists and fruitgrowers ... yet the business of the Company is selling the fruit of individuals, and, when shareholders and 'others' employ the Company to sell their fruit, they stand in the capacity of principals, of clients, of independent contractors, and as such employers, on the same footing. The right to charge for the service is not a charge against him a member, but a employer. The right to receive the proceeds is not a member, but a employer. The fruitgrower cannot stand on both sides of the line at once, and be individually both agent and principal."

In Shalfoon v. Cheddar Valley Co-operative Dairy Co Ltd ^[F17] the New Zealand Court of Appeal was concerned with a co- operative dairy company incorporated under the New Zealand Companies Act 1908. Salmond J observed ^[F18] :

"It is possible, therefore, for a person, on accepting shares from a company, to bind himself by an actual contract, express or implied, to accept at the same time the burden of collateral and accessory obligations purporting to be imposed upon the shareholders by a clause of the articles, even though that obligation is of such a nature that it cannot be imposed in invitos by a regulation as such. Such a contract, however, would differ in essential respects from an obligation imposed upon him by the authority of the regulations of the company as such. In the first place, a contract cannot be altered except by the mutual consent of the parties, whereas a regulation can be altered by the legislative authority of the company even as against dissenters. In the second place, a contract is personal and binds only the party who made it and his executors and administrators; whereas a regulation binds the owners of the shares for the time being, and the obligation imposed thereby is appurtenant to the shares and passes with them to every person who for the time being is the owner of them."

Shalfoon v. Cheddar Valley Co-operative Dairy Co Ltd was applied in Johnson v. Eltham Co-operative Dairy Factory Co Ltd ^[F19] .

There can be no doubt that during each of the years in which Mr Crawford suffered injury there was a contract of insurance between the Union and Dr Bailey. Nor, in our view, can there be any real doubt that, notwithstanding that its terms were largely to be found in the company's articles, the contract was made individually with Dr Bailey as an insured and was therefore a special or actual contract which was distinct from the covenants which were deemed to arise from the articles under the relevant companies legislation.

Not all members were covered by insurance as a result of their membership, some members being unindemnified under Art 5. The subscriptions payable by members, which were not fixed by the articles but by the Council under Art 10, differed according to the class of membership to which they belonged. They were payable annually and plainly included a premium for insurance cover for a stipulated period, namely, one year, where a member wished to be covered. Unfinancial members were not entitled to receive assistance but remained subject to the liabilities of a member. Indemnity for an increased amount was obtainable upon payment of a surcharge. The insurance cover commenced in accordance with Art 6 when Dr Bailey applied for membership and before he became a member. All of these circumstances point only in the direction of an individual contract of insurance with a member, the terms of which were to be found largely, but not wholly, in the articles of the company.

Subscriptions being payable annually, the insurance cover was continued from year to year. There was, of course, no express reference in the articles to any contract of insurance. Hence, the articles were silent as to whether renewal from year to year constituted an extension of the existing cover or a new contract. In the circumstances, the correct conclusion is that each renewal constituted a new contract ^[F20] . Thus in respect of each of the years in which the treatment which caused Mr Crawford's injuries was administered there was a contract of insurance in existence between the Union and Dr Bailey under which Dr Bailey was indemnified in respect of the claims for those injuries subsequently made by Mr Crawford.

There is also, we think, only one answer to the question whether, under an individual contract of insurance such as existed between Dr Bailey and the Union, the terms which were imported into the contract by the relevant articles were alterable merely by means of an alteration to those articles. The relevant articles specified the extent of the indemnity to be afforded to an insured under the contract of insurance. The whole purpose of the contract being the purchase of cover up to a specified limit for acts done and omissions made during a specified period, it is hardly to be thought that the parties to the contract intended that the Union should be able unilaterally to reduce the indemnity in respect of claims arising from such acts or omissions or to refuse it altogether, particularly after the period of the cover had expired. An alteration to the relevant articles would, of course, affect the terms of any contract made after the alteration. But it cannot have been the intention of the parties that insurance cover already purchased upon terms contained in the articles should be diminished by a subsequent alteration to those articles.

Thus, the alteration to Art 60 in 1977 to extend the discretion of the Council of the Union to refuse indemnity to a member who had ceased to be a member whether by expulsion or otherwise did not affect the terms of a contract made upon the basis of the article before the alteration. a fortiori , the amendments to Arts 57, 58, 60 and 61 in 1982 were ineffective to vary the terms of any contract previously made upon the basis of the articles in their unaltered form. Those amendments sought to give the Council sole discretion whether to grant indemnity at all and were entirely inconsistent with the terms of a contract concluded upon the basis of the articles as they stood before the amendments. It follows that the attempt by the Union to vary the terms of such a contract by means of an alteration to its articles giving its Council discretion to terminate any grant of assistance or indemnity to a member who sought assistance from the Union before 4 November 1982 was ineffective.

The result is, in our view, that the Court of Appeal was correct in upholding the liability of the Union to indemnify Dr Bailey's estate in respect of the claim against it. That result also provides an answer to the question arising under s 6 of the Law Reform (Miscellaneous Provisions) Act. It was not argued that if, as we hold to be the case, the alterations to the articles of the Union were incapable of affecting the liability of the Union to indemnify Dr Bailey or his estate, s 6(1) of the Act did not impose a charge upon all insurance moneys that were or may have become payable by the Union in respect of the liability of Dr Bailey or his estate to Mr Crawford. However, as the proper construction of s 6 appears to have given rise to difficulty and as the matter was argued, it is appropriate that we express our agreement with McHugh and Gummow JJ upon the effect of that provision.

An amendment to Art 57(3) in 1972 raised the maximum indemnity level under the insurance contract between Dr Bailey and the Union to $250,000. In 1979, the maximum was again raised, to $500,000. Dr Bailey took advantage of each increase. But the level of indemnity which existed between 1973 and 1974 was only $250,000. It being common ground that the insurance cover afforded by the Union was upon an "occurrences", rather than a "claims made", basis, the judgment in favour of Mr Crawford against the Union should have been $250,000 (for the brain damage) and $62,000 (for the footdrop), totalling $312,000.

On 8 December 1994, this Court granted special leave to the estate of the late Dr Harry R Bailey to appeal against orders made in the Court of Appeal in favour of the Union. The appeal became Matter No S200 of 1994. The leave granted was leave to appeal "from part of the judgment and orders of the Court of Appeal of New South Wales in Matters No 40134 of 92 and 40128 of 92". This did not reflect the intention of the parties in seeking special leave or of the Court in granting special leave. The order granting special leave should be amended to read: "to appeal from part of the judgment and orders of the Court of Appeal of New South Wales in Matter No 40127 of 92". On the same day, this Court granted special leave to the Union to appeal against orders made in the Court of Appeal in favour of Mr Crawford. The appeal became Matter No S205 of 1994. In that instance, leave was correctly granted to appeal "from part of the judgment and orders of the Court of Appeal of the Supreme Court of New South Wales in Matter No 40128 of 1992".

In these two matters, which are the matters before the Court, the following relief should be granted:

Matter No S200 Marjorie Jocelyn Bailey (as Executrix of the

Estate of the Late Dr Harry R Bailey)

v

New South Wales Medical Defence Union Ltd

Order that:

1. Appeal allowed with costs.

2. Set aside the order of the New South Wales Court of Appeal and in lieu thereof order:

(a) Vary the order of Enderby J in Matter No 17289 of 1980 in the Supreme Court of New South Wales by substituting the sum of $312,000 for the sum of $500,000 in pars 2 and 5 of that order.

(b) Otherwise appeal dismissed.

(c) The appellant, New South Wales Medical Defence Union Ltd, pay the respondent's costs of the appeal to the Court of Appeal.

Matter No S205 New South Wales Medical Defence Union Ltd

v

Maxwell Duncan Crawford

Order that:

1. Appeal allowed in part.

2. Vary the judgment of the New South Wales Court of Appeal by

(a) substituting the sum of $312,000 for the sum of $562,000 in sub par (1) of par 4 of that judgment;

(b) inserting sub-par (1A) in par 4 to read:

Declare that payment by the defendant of the said sum of $312,000 be deemed satisfaction of the order of Enderby J in Matter No 17289 of 1980 in the Supreme Court of New South Wales.

3. The appellant pay the respondent's costs of the appeal.