Australia: Company Indemnity Read Strictly In NRMA-Whitlam Case

Last Updated: 30 April 2007
Article by Chern Tan

In an important decision for companies and their directors, the Court of Appeal has held that Mr Nicholas Whitlam, former NRMA President, was not entitled to an indemnity for his costs in defending the defamation proceedings he commenced against 2GB and Channel Nine in 2002.

The decision found that Mr Whitlam was not entitled to an indemnity under general law or under the terms of the deeds between himself and NRMA.

Reining in the breadth of indemnities

In 2006 Bergin J handed down a decision which held that the indemnity in NRMA's D&O insurance policy covered Mr Whitlam, for the cost of commencing defamation actions against 2GB and Channel Nine.

The decision was a potential watershed, creating as it did the possibility of companies and insurers becoming responsible for the legal costs of any directors and officers who commenced proceedings in defamation forpersonal loss of reputation. It was a result that was unexpected and not within the contemplation of companies when providing their directors with indemnities. It highlighted the importance for companies to ensure that indemnities were tightly crafted.

The Court of Appeal has now overturned the decision of Bergin J, holding that:

  • the term 'liability', even in the broad indemnities provided by NRMA, does not extend to cover loss of reputation
  • NRMA's indemnities did not cover Mr Whitlam's legal costs for proceedings that he had personally commenced.

Seeking indemnity: the original decision

In 2002, Mr Whitlam (on authorisation by NRMA) participated in an interview with Mr John Lyons, a Channel Nine journalist. The interview was broadcast several times, on radio and television, but never in its entirety. Instead, it was edited and Mr Whitlam's words were interspersed among statements and comments by other people. Mr Whitlam submitted that the programme that went to air changed the meaning of what he had said and was defamatory. Separate proceedings were commenced against 2GB and Channel Nine.

Mr Whitlam sought indemnity from NRMA for his legal costs incurred in the defamation proceedings, but NRMA refused.

At first instance, Bergin J held that Mr Whitlam was entitled to indemnification by NRMA, because:

(a) Mr Whitlam's interview with Channel Nine was authorised by NRMA, therefore he was defamed in the performance of his duties as an officer of NRMA

(b) the indemnity provided for in the relevant deed was very broad and the only pre-requisite to indemnification by NRMA was that Mr Whitlam incurred 'loss, liability, cost, charge or expense… as an officer' of NRMA. Bergin J said that this prerequisite was satisfied because NRMA's authorisation of the interview meant that Mr Whitlam incurred the liability in his capacity as an officer, rather than in his personal capacity.

Bergin J found that the indemnities covered not only actions brought against an officer but also actions commenced by an officer when defending allegations (in this case, defamatory imputations) made against them in their capacity as an officer. This was in stark contrast to the general interpretation of most company indemnities, which only provide protection for actions made by third parties against officers.

Court decides on meaning of 'loss' and 'liability'

The Court of Appeal considered the meaning of the words 'loss' and 'liability' as they were used in the indemnity. Campbell JA, who gave the leading judgment, said that the context of those words within the indemnity indicated that the notion of 'liability' was not meant to extend to a loss of reputation of the kind actionable in defamation. Instead, the words accompanying 'loss' in the definition of 'liability' in the indemnity all related to a payment actually made, or payment the person in question sustained as a matter of legal obligation.

His Honour held that:

  • So construed, the word 'loss' in this context did not include a loss of reputation.
  • A consideration of the likely purpose of the indemnity did not lead to a conclusion that it was likely to have been intended to extend to cover a loss of reputation arising from a defamation.
  • The legal costs of Mr Whitlam's defamation proceedings could not be considered to fall within the definition of 'liability' in the indemnity. This was because even though when Mr Whitlam incurred those costs he was seeking to redress consequences of actions he had taken as an officer, in incurring those costs, he was not, then and there, acting as an officer. Mr Whitlam's commencement of the defamation actions was not part of his duties as an officer of NRMA. Therefore, the liability for those legal costs did not fall to NRMA.

The Court rejected the submission put on behalf of Mr Whitlam that, outside of the company indemnity, there is a general principle of law that a person acting on behalf of another is entitled to be indemnified for loss that they may suffer as a result of so acting. The Court observed that what Mr Whitlam did at the request of NRMA was to give the interview. His giving the interview did not turn out to be injurious to the rights of a third party; rather, as the interview was used, it turned out to be injurious to his own rights.

Finally, no term could be implied into the policy that Mr Whitlam was to be covered for any damages to reputation suffered in the course of carrying out NRMA business.

Implications for companies and directors

The breadth of Bergin J's construction of the NRMA indemnities would have caused concern for companies and led them to re-visit their indemnity wording. The Court of Appeal's decision restores the scope of indemnities to what is commonly expected and accepted. As before, it is more likely now that indemnity will be sought only in respect of claims made by third parties against officers in their capacity as officers of the company. Given the very high cost of running defamation proceedings, this Court of Appeal decision must therefore be heralded as good news for both companies and insurers.

This series of decisions highlights the need for companies and directors to carefully and clearly record the agreement between them so as to avoid future argument about the scope of indemnities.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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