By and -

Key decisions

  • Allianz Australia Insurance Limited v Delor Vue Apartments CTS 39788
    [2021] FCAFC 121
  • Caffitaly System S.p.A. v One Collective Group Pty Ltd [2021] FCAFC 118


Insurance Contracts Act 1984 (Cth), s 28(3) – where insurer agreed to indemnify despite non-disclosure of prior defects – consideration of the doctrine of election

Allianz Australia Insurance Limited v Delor Vue Apartments CTS 39788 [2021] FCAFC 121 (9 July 2021) (McKerracher, Derrington and Colvin JJ)

Background: The respondent (‘Delor’), is the body corporate for apartment buildings located in Far North Queensland. Prior to a policy of insurance for public liability and property damage to the buildings having been taken out by Delor with the appellant (‘Allianz’), issues had arisen in relation to the soffit sheeting on the eaves of the apartment buildings with some sheeting having fallen away from the frame, and a quotation had been obtained to remove the soffit sheeting, install battens and fix new sheeting. Delor had also received a report from a consulting engineer that the construction of the roof framing along the eaves did not meet Australian standards and the spacing supports for the soffit lining did not comply with the manufacturer’s recommendations for installation. Before any works could be undertaken to repair defects concerning the soffit sheeting, there was substantial roof damage to the buildings during a tropical cyclone and Delor notified Allianz of a claim under the policy of insurance shortly after the cyclone.

In an email dated 9 May 2017, Allianz notified Delor that prior to the policy being effected it had not been advised of defects to the property despite these being clearly known to Delor. The email then stated: ‘Despite the non-disclosure which is present, [Allianz] is pleased to confirm that we will honour the claim and provide indemnity to the Body Corporate, in line with other relevant policy terms, conditions and exclusions’. For over a year thereafter, the parties proceeded on the basis that Allianz had agreed to indemnify. During the course of adjusting for the loss, latent problems with the roof trusses and related issues with the construction of the buildings had been exposed.

By letter dated 28 May 2018, Allianz proposed a mechanism for the settlement of the claim by Delor which included an ultimatum that was expressed in the following terms under the heading ‘Reservation of Rights’: ‘If the Body Corporate does not agree to proceed as set out above within 21 days [Allianz’s] offer in relation to indemnity will lapse and [it] will pay $nil pursuant to section 28 of the Insurance Contracts Act 1984 on the basis of the Body Corporate’s non-disclosure as referred to in the [May 2017 Email] and misrepresentation regarding the defective soffit panels…’

As to the non-disclosure claim, there was no suggestion that the relevant material was not provided to Allianz before the May 2017 Email. Therefore, from before the time of the May 2017 Email, Allianz was aware of the matters that had not been disclosed prior to the issue of the policy of insurance for over a year.

Section 28 of the Insurance Contracts Act 1984 (‘the Act’) provides, relevantly, that where there has been, for example, a failure to comply with a duty of disclosure in relation to a contract of general insurance and the insurer is not entitled to avoid the contract or, being entitled to avoid the contract, has not done so, the liability of the insurer in respect of a claim is reduced to the amount that would place the insurer in a position in which the insurer would have been if the relevant failure had not occurred.

Delor rejected Allianz’s offer. Allianz then advised that it had reduced its liability to nil on the basis of alleged non disclosure. Following a hearing on separate questions, the primary judge found that:

  1. Allianz was entitled to reduce its liability to nil under the Act;
  2. Allianz was estopped from resiling from the representation made in the May 2017 Email that the claim by Delor would be honoured and indemnity provided, such that the rights of the parties were to be determined by application of the terms of the policy of insurance and not by reference to an assertion of right under s 28(3) of the Act;
  3. Allianz had waived any entitlement to adopt a position based on an assertion of rights under s 28(3) of the Act; and
  4. In seeking to resile from the representations made by the May 2017 Email and in seeking to rely on the non-disclosure of Delor, Allianz failed to act towards Delor in relation to the resolution of the claim with the utmost good faith, contrary to s 13 of the Act.

His Honour rejected Delor’s claim that Allianz had, by the May 2017 Email, made an election not to rely upon its strict legal rights under s 28(3) of the Act. As to election, the primary judge found that the doctrine only applied where there was a ‘clear position of competing, inconsistent and mutually exclusive rights’ and held that such ‘a simple choice of inconsistent rights is not present here’ (at [317]).

Appeal by Allianz: Allianz appealed against each of the findings. The Full Court found that Delor was entitled to relief based upon election and further that the primary judge had not been shown to be in error in upholding the claims of Delor insofar as they were based on estoppel, waiver and utmost good faith.

In disposing of the appeal, the Full Court undertook a thorough analysis of the principles that apply to the doctrine of election and warned that ‘conceptual precision is important’ especially as the cases often refer to the same labels to describe conceptually distinct principles. It traced the history of the law of election from the early decision of the High Court of Australia in Craine v Colonial Mutual Fire Insurance Co Ltd (1920) 28 CLR 305 including grappling with the various views expressed by the High Court in Commonwealth v Verwayen (1990) 170 CLR 394.

The Court stated that the doctrine of election applies where the law regards it as unfair for a party to be allowed to maintain two inconsistent positions. In short, election is concerned with the circumstances in which a party is required by law (not by an enforceable bargain) to make a binding choice.

In a contractual context, the Court said that ‘care must be taken in not confining the doctrine of election to instances where a party has a right to make a choice, such as the right to choose whether to terminate a contract. It extends to instances where the party has no such right but nevertheless the law requires a choice to be made between inconsistent alternatives.’ (at [100]).

Relevantly, in the case of an insurance contract, the principle of election applies ‘…at least where the insurer has a right to disclaim liability but proceeds to exercise rights conferred by the contract of insurance. In such a case, the insurer cannot reserve its position. It can disclaim liability and request the insured to take steps of the kind that would be taken if there was liability under the policy as part of a process of considering whether the insured may reverse its decision to disclaim. But the insurer, knowing the relevant facts, cannot seek to exercise rights under the contract of insurance whilst at the same time denying liability under the policy. In such a case, having regard to the nature of an insurance contract, as a matter of fairness, the law requires the insurer to elect between disclaiming any liability and seeking to rely upon the rights conferred by the policy.’ (at [118]).

The position is different in those instances where the insurer is investigating the claim and is yet to uncover the relevant facts or is seeking clarity as to position. It is well established that there is no obligation to elect unless and until the relevant party is aware of the relevant facts.

In the present case, that aspect was not in issue. The insurer in the May 2017 Email referred to the non-disclosure that Allianz, over a year later, sought to rely upon to reduce its liability to nil under s 28 of the Act. The Court found that the May 2017 Email evidenced an election to accept liability under the policy from which Allianz could not then resile as it purported to do. For similar reasons, the Court upheld the primary judge’s determination based upon estoppel and waiver.

The appeal was accordingly dismissed with costs.


Requirement for inventive step – requirement invention be fully described in complete specification

Caffitaly System S.p.A. v One Collective Group Pty Ltd [2021] FCAFC 118 (30 June 2021) (Yates, Moshinsky and Burley JJ)

The issue before the Full Court of the Federal Court of Australia was the validity of three patents held by the appellant (‘Caffitaly). The primary judge had held that, under ss 7(2) and 18(1)(b)(ii) of the Patents Act 1990 (Cth) (‘the Act’), Patents 1 and 2 were invalid for lack of inventive step and that, under s 40(2)(a), Patent 3 was invalid because the invention was not fully described in the complete specification of the patent. The Full Court considered the content of the requirements of the inventive step and full description.

Background: Caffitaly was the holder of three patents relating to single-use coffee capsules for espresso machines. The respondent (‘One Collective’) imported and sold coffee capsules. Caffitaly sued One Collective for patent infringement. One Collective was successful at first instance, both on the question of patent infringement as such and on the validity of the three patents in the first place. Caffitaly appealed to the Full Court against the decision that Patent 1 and Patent 2 had not been infringed, against the decision that Patents 1 and 2 lacked an inventive step, and against the decision that Patent 3 was not fully described in the complete specification.

Decision: The Full Court upheld the primary judge’s decision that Patent 1 and Patent 2 were not infringed, for reasons of specific detail relating to those patents. Of broader significance was the Court’s decision in respect of inventive step and full description.

Inventive Step: The Court adverted to the fact that s 7(2) of the Act provides that an invention is taken to involve an inventive step unless it is established that it does not involve one (at [103]). In effect, the onus is upon a respondent to displace the presumption that an inventive step is involved.

The Court held that Patent 1 did, in fact, involve an inventive step. The evidence of one of One Collective’s experts (at [99]-[102]) did not establish that either of the key aspects of Patent 1 were part of the prior art, nor that they were mere design variants on the prior art, thus distinguishing the situation from DSI Australia (Holdings) Pty Ltd v Garford Pty Ltd [2013] FCA 132.

On the other hand, the Court held that Patent 2, the key feature of which was an annular groove to affix a filter to the inside bottom of the capsule, lacked an inventive step. Even though One Collective’s expert, when asked to produce a design based on the prior art, did not produce one involving the annular groove, ‘the skilled person [under s (7(2)] is not an avatar for expert witnesses whose evidence is accepted or rejected by the Court’ (at [155]). There was indeed evidence (from one of Caffitaly’s experts, as it happened) that a snap-fit fixture was part of common knowledge at the relevant time and that a snap-fit was interchangeable with a groove-fit (at [155]-[156]). Further, the fact of a prior patent including an annular collar (the opposite of an annular groove) to fix the filter did not teach away from the invention of an annular groove, but rather ‘it would have been obvious to a person skilled in the art… that he or she could… include a different means of fixing the filter element in place’ (at [157]).

Full Description: The whole purpose of Patent 3 was, the Court found, to allow for successful pre-infusion of coffee grounds contained in the coffee capsule. Pre-infusion was achieved when water was injected into the capsule, compressing the coffee grounds and forcing the water into the micropores of the coffee, extracting desirable organoleptic compounds. The Court found that the description of Patent 3, however, failed to specify the time, temperature and pressure of the pre-infusion step, or the specific elasticity of the capsule material to allow it to perform as required.

Evidence from one of One Collective’s experts established that the complexity of interrelating parameters as to to pre-infusion in the capsule meant that a person skilled in the art could not use the supposedly complete description of Patent 3 to perform the invention as described, nor could proceed by trial and error, at least not without undue difficulty. The Court commented that a reasoned basis for not proceeding by testing, such as this, did not constitute ‘a refusal to go any further’ under Pfizer Overseas Pharmaceuticals v Eli Lilly & Co [2005] FCAFC 224 at [332], which might otherwise have defeated One Collective’s argument on this point (at [266]).

Anthony Lo Surdo SC is a barrister, arbitrator and mediator in 12 Wentworth Chambers, Sydney; Lonsdale Chambers, Melbourne; William Forster Chambers, Darwin and Outer Temple Chambers, London, Abu Dhabi and Dubai.
Dr David J Townsend is a barrister in Third Floor Wentworth Chambers.