Financial Ombudsman Service Update - review of FOS decisions
Insurance eBulletin - 31 August 2012
The Victorian Court of Appeal has confirmed that FOS decisions are not subject to judicial review.
The Court did not consider it necessary to make a decision about the application of the Datafin principle.
The Court has confirmed that decisions of FOS may be challenged on contractual grounds, although the terms of reference may severely restrict this right.
Last year we reported on a decision of the Victorian Supreme Court1 which determined that decisions of the Financial Ombudsman Service (FOS) are not subject to judicial review. The Court ruled, however, that FOS decisions can be challenged on contractual grounds.
The Victorian Court of Appeal recently dismissed an appeal from that decision and, while it largely agreed with Justice Pagone in relation to the availability of judicial review in the context of FOS decisions, it qualified the contractual right of review.2
Mr Mickovski issued proceedings in the Supreme Court of Victoria seeking to challenge a Panel Chair decision that FOS lacked jurisdiction to deal with his complaint against MetLife Insurance Limited (MetLife) in relation to entitlements under a salary continuance policy.
The Panel Chair's ruling was based upon a clause in FOS's then terms of reference that excluded complaints where the complainant knew or should reasonably have known of all the relevant facts more than six years before notifying FOS of the complaint. Another clause in the terms of reference provided that the decision of the Panel Chair will be final.
Mr Mickovski sought judicial review of the Panel Chair's ruling on the basis that the Panel Chair's decision that FOS lacked jurisdiction to deal with his complaint was reviewable in accordance with the principle in Datafin, discussed below. Alternatively he sought a declaration that by reason of the Panel Chair's decision about jurisdiction, FOS had breached a contractual obligation owed to him. His claim was dismissed on the grounds that FOS decisions are not subject to judicial review and even though they can be challenged on contractual grounds, there had been no breach of contract on the facts.
Court of Appeal's decision
Essential to the issue of whether judicial review of FOS decisions is available is the so-called Datafin principle. It stems from an English case3 and provides that the source of the power being exercised by a body is not the sole test of whether or not its decisions are judicially reviewable. The principle operates in the middle ground between cases where bodies exercising powers are clearly subject to judicial review, because their powers derive from statute, and cases where bodies are not subject to judicial review because their powers derive entirely from private contract. In this middle ground the Datafin principle may be used to determine whether decisions are subject to judicial review. Applying Datafin, courts would look not solely to the source of the power being exercised but should also examine the nature of the power and whether the body in question is exercising public law functions or if its functions have public law consequences.
The Court of Appeal described the Datafin principle as "appealing"4 in the context of the increasing privatisation of governmental functions in Australia. However, their Honours refused to rule on whether Datafin operates under Victorian law because it took the view that, on the facts of the case, it was not called upon to do so and, consistent with earlier High Court authority 5, it should avoid making a decision about the application of Datafin unless and until necessary to do so. The Court of Appeal's reluctance to comment upon Datafin is at odds with Justice Pagone's decision at first instance, where His Honour gave support to the English authority, citing with approval to an earlier Victorian Supreme Court decision of Justice Kyrou6. To date the only case in which the Datafin principle has been applied successfully is the NSW Supreme Court decision in Masu7, a case dealing with FOS's precursor, the Financial Industry Complaints Service (FICS).
In any event the Court of Appeal held that the Datafin principle could not apply on the facts of this case. Doubting whether the principle could have any application in relation to purely contractually based decisions, their Honours agreed with Pagone J that the public interest in having a compulsory mechanism for private dispute resolution of insurance claims was not a sufficient reason for concluding that FOS was exercising "a public duty or a function involving a public element in circumstances where FOS's jurisdiction was consensually invoked by the parties to a complaint."
In reaching its decision about Datafin the Court of Appeal applied a number of indicia referred to by Rose LJ in R v IOB; Ex parte AEGON Life Assurance Ltd  LRLR 1010 in relation to the Insurance Ombudsman Bureau, including the fact that members of the public do not need to use FOS and can instead sue insurers in the courts; FOS's power over its members is solely derived from contract; it cannot be said that FOS exercises a government function even if its powers are woven into a governmental system; and FOS decisions are of an arbitrative nature in private law and are not, save very remotely, supported by public law sanction.
The Court of Appeal agreed with the trial judge that upon Mr Mickovski and MetLife agreeing to submit their dispute to FOS, they became bound in contract to observe its rules and processes and were entitled, as a matter of contract, to require that FOS proceed in accordance with those rules. If the rules were breached, remedies in contract would be available.
Clause 15.3 of FOS's terms of reference at the relevant time provided, however, that:
If a party to the complaint objects to the decision of the delegate, that objection will be considered either by the Investments, Life Insurance & Superannuation Ombudsman or by a different delegate of the Investments, Life Insurance & Superannuation Ombudsman (‘the second delegate’) of equal or greater seniority to the original delegate. If the Investments, Life Insurance & Superannuation Ombudsman or the second delegate is satisfied the party’s objection has substance, he or she will refer the decision to a Panel Chair for review, whose decision on the issue will be final. [Emphasis added]
The Court of Appeal held that in circumstances where parties have agreed that a determination is to be ‘final’, as they had done here, they are taken to have agreed that the determination will not be subject to review unless it is affected by fraud or dishonesty or lack of good faith, or unless it is otherwise apparent that the determination has not been carried out in accordance with the agreement.
In this case the complaint was that the Panel Chair had erred in the interpretation of clause 14.1(p) of the then terms of reference which provided that FOS cannot deal with complaints where the complainant knew or should reasonably have known of all the relevant facts more than six years before first notifying the Service about the complaint.
However the error by the Panel Chair was not considered sufficient to enliven a contractual remedy. This was because of the wording of clause 15.3 referred to above and the fact that the Panel Chair was not guilty of fraud or dishonesty or lack of good faith, he was not prejudiced and he did not misconceive the task he was required to undertake.
An error made in the process of the Panel Chair's reasoning was not found to be a jurisdictional error but rather an error made within the scope of the decision making power conferred on the Panel Chair by clause 15. Accordingly the error was not found to constitute a breach of contract.
Whereas previously judges of the Victorian and New South Wales Supreme Courts have seen fit to comment upon the general application of Datafin under Australian law, the Court of Appeal did not consider it appropriate to do so, absent a clear case, although some of their Honours' comments indicate consideration was being given to the principles referred to in Datafin. It remains to be seen whether or not the High Court will be called upon to consider the potential application of Datafin in this case, and to comment more generally upon its application under Australian law.
The threshold for a consideration of Datafin appears to be whether or not the powers being exercised by the body derive solely from private contract. In relation to FOS, the Appellant sought to rely upon section 912A of the Corporations Act 2001 (Cth) which mandates that persons holding a financial services licence servicing retail clients have a dispute resolution procedure approved by ASIC. It seems to us that FOS's jurisdiction cannot be said to have been consensually invoked by the insurer in such circumstances, as would be the case where parties freely decide to enter into a contract with one another. Whether or not that is a power being exercised by FOS every time it hears a dispute involving an insurer or other financial services provider subject to the Corporations Act requirements is an interesting question.
The power to compel MetLife's participation in the dispute resolution process is therefore arguably not entirely contractually based and would appear to have some basis in statute. Further, the sanctions ultimately compelling compliance by insurers and other financial service providers with FOS determinations can also arguably be traced to statute, albeit there may be a dispute about whether FOS exercises those powers when making determinations, or is merely a passive recipient of them. In Masu Justice Shaw considered it relevant, in deciding that FICS was subject to judicial review, that decisions of that body could result in the federal government cancelling a licence and exposing the licensee to prosecution if it continued to conduct a business. The Court of Appeal in Mickovski does not appear to have given consideration to the potential sanctions for insurers and other financial service providers in not complying with FOS determinations, which arguably goes to both the nature of the power being exercised by FOS, and the question whether or not it exercises public law functions or its functions have public law consequences.
The findings in relation to the contract point derive substantially from the wording in clause 15.3 of the terms of reference, which have now been superseded. However the Court of Appeal's findings in relation to the word "final" in clause 15.3 of the old terms of reference is of potential wider application. We note clause 8.7(b) of the current terms of reference states that "a Determination is a final decision and is binding upon the Financial Services Provider if the Applicant accepts the Determination within 30 days of receiving the Determination."
Patrick McGrath | Partner
Kate Clark | Special Counsel
1Mickovski v Financial Ombudsman Service Limited & Anor  VSC 257; Lander & Rogers Insurance eBulletin - 28 June 2011 – Reviewing FOS decisions 2Mickovski v Financial Ombudsman Service Limited & Anor  VSCA 185 (17 August 2012)
3R v Panel on Take-overs and Mergers; Ex parte Datafin Plc  QB 815
4At para 31.
5Neat Domestic Trading Pty Ltd v AWB Ltd  HCA 35 and Gould v Magarey  HCA 23 (per Gummow and Kirby JJ).
6CECA Institute Pty Ltd v Australian Council for Private Education & Training (2010)245 FLR 86
7Masu Financial Management Pty Ltd v Financial Industry complaints Service Ltd [No 2] (2004) 50 ACSR 554 (Shaw J).
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