Admiral International Pty Ltd v Insurance Australia Ltd

Introduction

1. These are two appeals from a decision of Fagan J (the primary judge) in which his Honour dismissed claims brought by Admiral International Pty Ltd (Admiral) against its insurer, Insurance Australia Ltd trading as CGU Insurance (CGU), following the destruction by fire early in the morning of 16 April 2018 of a warehouse at 1/64-66 Burrows Road, Alexandria (the warehouse), from which Admiral conducted its customs warehousing business: Admiral International Pty Ltd v Insurance Australia Ltd; Brightcity International Trading Pty Ltd v Admiral International Pty Ltd [2021] NSWSC 1440 (the primary judgment or PJ).
2. Admiral was permitted to receive and store bonded goods at the warehouse pursuant to two licences issued to it conjointly by the Australian Border Force (ABF) and the Australian Taxation Office. The first was a "depot licence", under s 77G of the Customs Act 1901 (Cth), which permitted Admiral's short-term storage of bonded goods in order to enable unpacking and consolidation for safe and secure management. The second was a "warehouse licence", under s 79 of the Customs Act, which generally permitted Admiral's indefinite storage of bonded goods in a specific section of the warehouse (the bond store) and subject to certain conditions, including that bonded goods were required to be kept intact, ordinarily through the application of wrapped sheet plastic to unloaded pallets of alcohol or tobacco products, until the outstanding duty had been paid on them. [1]
3. Admiral stored both duty-paid goods (free goods) and those on which customs duties were outstanding (bonded goods) at the warehouse in consideration of a specified sum calculated on a per unit per week basis and payable by a customer (ordinarily an importer of goods into Australia). [2] The majority of the goods held by Admiral were imported alcohol and tobacco products. [3] A significant delivery of tobacco products having a retail value of well over $6 million had been delivered to the warehouse in the business week ending Friday 13 April 2018, although the precise date of delivery was not apparent from the business records.
4. Neither Denis Fateev (Denis), the then 27-year-old Managing Director of Admiral who had been running the business for five years at the time of the fire, nor his father, Dmitry Fateev (Dmitry), who worked part-time in the business, was in the country at the time of the fire, which occurred in the early hours of 16 April 2018. Because of the frequency with which it will be necessary to refer to them in the balance of these reasons, Denis and Dmitry will be referred to by their first names.
5. Denis departed for Hong Kong early in the afternoon of Friday, 13 April 2018 and his father departed Sydney for Vladivostok, Russia at 7.45am on the morning of Sunday, 15 April 2018, some 17 hours prior to the fire. He suffered a stroke in June of that year and died in Vladivostok of natural causes on 28 January 2021, prior to the trial. He never returned to Australia following his departure from Sydney on the morning of 15 April 2018. It should be noted that Dmitry's mother lived in Vladivostok, and there was evidence that she was very ill at the time of Dmitry's trip (she later died) and that Dmitry had visited her in Vladivostok previously.
6. The primary judge held that Dmitry was the architect both of a theft of a valuable quantity of goods, including cigarettes, from the warehouse on the evening of Friday, 13 April 2018 and in the course of Saturday, 14 April 2018 as well as of the subsequent arson although, self-evidently due to his departure from Australia prior to the fire, he was not the arsonist. Police inquiries into the arson were still ongoing at the time of the trial and the hearing of the appeals.
7. The primary judge held that there was: [4] "clear proof that Dmitry Fateev facilitated the theft of many millions of dollars' worth of Admiral's customers' goods from the warehouse on 13 and 14 April 2018, that he deliberately caused motor tyres to be spread around the warehouse to provide fuel for a fire and that he left the premises unsecured to facilitate the entry, at about 12:24 am on 16 April, of an arranged arsonist."
8. The central issue before the primary judge, in terms of Admiral's claim for indemnity by CGU, was whether Admiral, through Denis, knew of and consented to the deliberate theft and subsequent arson of the warehouse and its remaining contents. [5] His Honour held that it did, meaning that Admiral's claim against CGU for indemnity was precluded by the "fraudulent or dishonest acts" exclusion clause in the relevant insurance policy, reproduced at [20] below. The primary judge held that: [6] "The 'fraudulent or dishonest acts' were those of Denis Fateev, attributed to the insured of which he was the directing mind and will; namely, the acts of consenting to and conniving at the deliberate destruction of the warehouse and its contents by fire. On the findings of fact that I have made the exclusion is engaged and CGU is entitled to refuse indemnity to Admiral under the policy."
9. On appeal, Admiral originally challenged the primary judge's findings as to Dmitry's role in the theft and arson, of which he held that Denis both knew and approved. Admiral abandoned that challenge in the course of the hearing of the appeal.
10. The central issue on appeal therefore concerned the primary judge's findings, based on circumstantial reasoning, as to Denis' knowledge of, consent to and connivance in the deliberate destruction of the warehouse and its contents by fire, which he held was designed to conceal the earlier theft of valuable goods.
11. Further issues on appeal concerned an alleged failure by Admiral to take "reasonable precautions" to prevent the destruction of a customer's goods in the fire, which CGU relied upon to refuse indemnity under Admiral's liability insurance policy, discussed below, as well as Admiral's claim for consequential loss beyond policy limits.
12. As noted above, in relation to the "reasonable precautions" issue, Admiral had brought a separate claim for indemnity against CGU arising from its liability to Brightcity International Trading Pty Ltd (Brightcity), a firm that operated a business importing alcohol and tobacco products from China into Australia, and which was a major (if not the largest) customer of Admiral, with its goods constituting 23% of the total goods in storage at the warehouse at the time of the fire. The entirety of Brightcity's goods in storage at the warehouse was destroyed in the fire.
13. It was agreed between the parties that Brightcity's goods were valued at $2,364,460.20, that Brightcity had incurred $967,393.80 in transport and duty costs on free goods prior to the fire, and that profit in the sum of $246,132.90 could have been earned on the sale of the destroyed goods. [7]
14. Brightcity sued both CGU and Admiral in relation to goods which had been destroyed in the fire, and those proceedings were heard concurrently with Admiral's claim for indemnity against CGU (the Brightcity proceedings).
15. In the Brightcity proceedings, judgment was entered for Brightcity against CGU in the sum of $3,337,854, with CGU to pay one-third of Brightcity's costs on its claim. In the present appeal, CGU did not challenge this decision.
16. Brightcity also obtained judgment against Admiral for $246,132.90 in damages for breach of bailment, together with two-thirds of Brightcity's costs of its proceedings.
17. Admiral's separate claim for indemnity from CGU, against its liability to Brightcity, had been brought as a cross-claim in the Brightcity proceedings pursuant to a General & Products Liability Policy issued for the period of 12 months from 30 September 2017 (the Liability Policy).

Insurance

1. Admiral was insured by CGU pursuant to an Industrial Special Risks Policy (the ISR Policy) issued for a period of 12 months from 30 September 2017, as well as by the Liability Policy. By the ISR Policy, CGU agreed to indemnify Admiral in accordance with the following insuring clause: "In the event of any physical loss, destruction or damage … not otherwise excluded happening during the period of insurance at the Situation [defined in the Schedule as the property at 1/64-66 Burrows Road, Alexandria] to the Property Insured … the Insurer will, subject to the provisions of this Policy including the limitation on the Insurer's liability, indemnify the Insured in accordance with the applicable Basis of Settlement."
2. That insuring clause was qualified by a "fire and perils only endorsement", which was expressed as follows: "FIRE AND PERILS ONLY ENDORSEMENT Notwithstanding anything contained herein to the contrary, it is hereby declared and agreed that damage means physical loss, damage or destruction caused by or arising out of fire, lightning, thunderbolt, explosion, implosion, earthquake, subterranean fire, volcanic eruption, impact, the acts of persons taking part in riots or civil commotions or of strikers or locked-out workers or persons taking part in labour disturbances or malicious persons or the acts of any lawfully constituted authority in connection with the foregoing acts or in connection with any conflagration or other catastrophe, storm, and/or tempest and/or rainwater and/or wind and/or hail, water or other liquids or substances discharged overflowing or leaking from apparatus, appliances, pipes or any other system at the premises or elsewhere."
3. Exclusion 7 of the ISR Policy (the fraud exclusion), as modified by an endorsement, relevantly excluded indemnity for: "Physical loss, destruction or damage occasioned by or happening through: (a)(i) fraudulent or dishonest acts ... by the Insured or any employee(s) of the Insured acting alone or in collusion with any other person(s); Provided further that the term 'dishonest acts', in relation to any of the Insured's employees, shall not be deemed to mean acts of arson or vandalism for the purposes of Perils Exclusion 7".
4. The ISR Policy also contained an Interests of Other Parties Clause in the memorandum to s 1 of the policy wording (the IOP clause). The IOP clause provided that: [8] "The insurable interests of only those lessors, financiers, trustees, mortgagees, owners and all other parties specifically noted in the records of the Insured shall be automatically included without notification or specification; the nature and extent of such interest to be disclosed in event of damage. Where the insurance covers the interests of more than one party, any act or neglect of an individual party will not prejudice the rights of the remaining party/parties; provided the remaining party/parties shall, immediately on becoming aware of any act or neglect whereby the risk of damage has increased, give notice in writing to the Insurer(s) and on demand pay such reasonable additional premium as the Insurer(s) may require."

Admiral

1. As of 16 April 2018, all nine issued shares in Admiral were held by Admiral Corporate Group Pty Ltd, of which Svetlana Fateev (Svetlana) was the sole shareholder and director. Svetlana (who was Dmitry's wife and Denis' mother) had also managed Admiral's bookkeeping since it commenced operating. Dmitry had operated a predecessor freight carrying and courier business through Admiral Management Group Pty Ltd until 2013, when it went into liquidation. He thereafter worked part-time at Admiral assisting with the receipt, despatch and delivery of customers' goods.
2. At all relevant times, Denis was the de facto Managing Director of Admiral. He was 27 years old, married and had a young family when the warehouse was destroyed by fire. His unchallenged evidence was that he was: "the only person responsible for the management and operation of Admiral's business affairs, including but not limited to the practices and procedures utilised in the operation of the business, the entry into respective agreements with customers and service providers and the making of the insurance claim on CGU."
3. Denis' younger brother, Nickita, worked part-time at Admiral in a similar capacity to Dmitry and lived with his parents. [10] Admiral also employed a number of persons who were not members of the Fateev family, including Mr Artur Russkikh (Mr Russkikh), who served as Admiral's Operations Manager throughout 2018.

Events preceding the fire

1. Admiral had occupied the warehouse for almost four years as at the date of the fire, having commenced occupation under a four-year lease on 1 May 2014, which was due to expire on 30 April 2018. An extension of three months had been negotiated as at the time of the fire.
2. On 9 March 2018, Denis had signed heads of agreement to lease a warehouse at Birnie Street, Lidcombe, with a floor area of over 2,000m2 for a term of five years commencing on 1 April 2018, with an option for a further five years. At about the same time a bond of $104,500, representing three months' rent, was paid by Svetlana.
3. On 9 April 2018, the landlord of the Alexandria warehouse foreshadowed giving Admiral notice under its current lease, to which Denis replied "we will need to relocate to a cheaper facility. 90 days will be more than enough time for us to vacate this unit". The landlord subsequently confirmed a handover date of 9 July 2018. The lease of the Lidcombe premises was executed on 9 April 2018 with a commencement date of 16 April 2018 (the Lidcombe lease).
4. There was evidence that, on 9 April 2018, Denis told Mr Stanislav Kozinets (Mr Kozinets), a sub-tenant at the Alexandria warehouse, that "it would be two to three months while [Admiral] moved all the stock over" to the Lidcombe premises. As shall be seen, this evidence is significant in view of one aspect of the primary judge's analysis.
5. Also of significance was that Denis was the guarantor under the Lidcombe lease, personally guaranteeing payment of annual rent of $380,000 plus GST in monthly instalments over the five-year term of the lease.

Mr Gazzara, the booking of a delivery of auto parts and the actual delivery of used tyres

1. On Thursday 12 April at 12.43pm, Admiral received an email from Mr Maurizio Gazzara (Mr Gazzara) of Morris Automotive Pty Ltd, which read as follows: "Hi to the Logistics team. I would like to enquire if you would be able [to] store car parts and accessories on pallets for export in the next few weeks until I am ready to export What is you charge rate per pallet, per week." (emphasis added)
2. Mr Russkikh (of Admiral) replied to this inquiry at 1.26pm on the same day, indicating that the storage cost was $15 per pallet per week. Mr Gazzara responded at 2.14pm, acknowledging this reply and inquiring whether it would be possible to drop some pallets off "in the next few days". Further communication ensued with Mr Gazzara emailing Mr Russkikh at 1.19pm on Friday, 13 April 2018, asking whether he could start to drop pallets at the warehouse on Saturday morning, indicating that he had 20-30 pallets, and seeking confirmation that someone would be present at the warehouse to receive them. Mr Russkikh responded shortly thereafter as follows: "Yes, tomorrow is fine, but we will charge AUD 65 per hour due to weekend. PIC: name Dmitry, phone number … Please call at least 30 minutes before arriving to the warehouse."
3. The evidence, in the form not only of an Affidavit of Mr Gazzara but also CCTV footage, disclosed that the deliveries in fact commenced on the Friday evening and continued on the Saturday morning.
4. Although the initial inquiry received from Mr Gazzara referred to storage of "car parts and accessories", it appears that the actual delivery that was made comprised used tyres, which the primary judge found were spread around the warehouse and in effect used to fuel the fire when it was lit early on the Monday morning. The link between the delivery and the presence of used tyres was reinforced after the fire, when Mr Gazzara supplied Mr Russkikh with an invoice that referred to 318 mixed used tyres and 53 used vehicle batteries. This information was only supplied after Mr Gazzara had been chased up by Admiral on many occasions, seeking information relating to the goods delivered to the warehouse for the purposes of formulating an insurance claim. Mr Gazzara's covering email to Mr Russkikh on 22 June 2018 included the following: "Arthur I will attach only one invoice for a portion of the stock I had dropped off at the warehouse, I do not intend on claiming for additional stock as I cannot locate invoices to substantiate the claim and I do not want to delay your claim any further. It is unfortunate that this event has occurred and I hope you could assist me with at least recovering the amount on the invoice I have provided. Please let me know if this will suffice."

Denis' trip to China and Hong Kong

1. More than a month prior to the fire, on 9 March 2018, Denis travelled to Chongqing, China on business and arranged, on his way back to Australia on the afternoon of 4 April 2018, to meet in Hong Kong with a solicitor acting for Juhao Flavor (Hong Kong) Co Ltd (Juhao) with whom Admiral appeared to have been in discussions about the proposed storage of imported food products at Admiral's warehouse. The purpose of the proposed meeting was "purely to clarify the warehousing and logistic protocol and to understand Admiral's standard trading terms and conditions".
2. Denis cancelled the meeting shortly after midday on 4 April and returned to Australia shortly thereafter.
3. The primary judge then recorded that, on Thursday, 12 April 2018, Ms Debbie Fu (Ms Fu), a solicitor acting for Juhao, wrote to Denis requesting a number of documents relating to Admiral's business, such as insurance policies, audited accounts, a list of major contracts and an organisational chart. The letter included the following: "We have instructions from [the Vice President of Juhao] to contact [Admiral] for the purpose of the due diligence exercise to facilitate the preparation of a due diligence report for consideration by the Board. We also have instructions that the due diligence report should be ready for the Board's consideration no later than Wednesday, 18 April 2018."
4. On Thursday 12 April 2018, Denis booked a flight to Hong Kong departing Sydney at 2.20pm the next day, Friday, 13 April 2018. The booking included a return flight departing at 8.00pm on Tuesday, 17 April 2018, Hong Kong local time, and arriving in Sydney on the morning of 18 April 2018. That trip involved a meeting with Ms Fu in relation to the Juhao transaction. According to the evidence, the meeting occurred on Sunday, 15 April 2018. As shall be seen, the primary judge considered that this trip was designed to provide Denis with an alibi in relation both to the theft of goods and the subsequent arson in order to conceal the theft.
5. More detail of Denis' engagements in Hong Kong is considered later in these reasons, in the context of considering Admiral's attack on the primary judge's finding of alibi.

Friday 13 and Saturday 14 April 2018

1. According to its inventory schedule entry for Friday, 13 April 2018 (being the last business day before the fire in the early hours of Monday, 16 April 2018), Admiral was storing approximately 609 pallets of goods for its customers (the approximation likely being the result of the presence of "part pallets"). Those 609 pallets included 18 intermediate bulk containers (IBCs), each of which contained 1000 litres of pure alcohol and were recorded by the primary judge as constituting a whole pallet. Of 609 pallets in total, 271 contained cigarettes and 129 contained alcohol.
2. As noted above at [47], Denis left for Hong Kong at 2.20pm on Friday, 13 April 2018. His evidence was that he thought that Dmitry drove him to the airport.
3. There was evidence of extensive movement of three trucks to and from the warehouse on the evening of 13 April 2018 and throughout the next day, which was captured on CCTV. There were five individual arrivals and departures by the trucks on Friday, 13 April 2018 between 6.16pm and 10.35pm, and a further 14 arrivals and departures on Saturday, 14 April 2018 between 6.21am and 11.11pm. CCTV footage showed that Dmitry was present at the warehouse at all of the relevant times over the Friday and Saturday, bar three periods totalling approximately three hours on the Saturday. He was also involved in the loading of the trucks by forklift. Dmitry had arrived at the warehouse at 5.52am on Saturday, 14 April 2018. He departed and returned on numerous occasions throughout the remainder of that day before departing for a final time at 11.11pm.
4. Mr Gazzara's discredited and disbelieved evidence as to what transpired between him and Dmitry to explain the movement of trucks on the Saturday has already been noted: see [40]-[41] above.
5. It was an agreed fact between the parties that Dmitry was the last person to have access to the warehouse prior to the entry of the anonymous arsonist in the early hours of 16 April 2018.

Security at the warehouse

1. The warehouse was fitted with an alarm system, including motion sensors and reed switches on certain internal doors, which had been upgraded by Mr Peter Yammine (Mr Yammine) at some time prior to April 2015, from which time he subcontracted Securitas Australia Pty Ltd (Securitas) to provide back-to-base monitoring of the alarm system.
2. Mr Yammine gave evidence and was cross-examined before the primary judge. He deposed that Admiral's alarm system was working properly during March and April 2018 and that "if the alarm was in an armed condition early on 16 April 2018 before the fire started a person could not have forced entry into the warehouse without triggering one of the motion sensors" and causing an "alarm event" to be signalled to and recorded by Securitas. [16]
3. No such event, including the arming of the alarm system, was signalled or recorded following the activation of the internal office-to-warehouse door at 5.59pm on Saturday 14 April 2018, at which time Dmitry was present at the warehouse, until Securitas recorded a "direct wireless complete communications failure" at 12.28am on Monday, 16 April 2018. That final alarm event corresponded with the approximate timing of the fire taking hold of the warehouse.
4. On the basis of that sequence of events, the primary judge was satisfied that "Admiral's warehouse alarm was not armed at the time of the fire and had not been since Dmitry Fateev left the premises late on the preceding Saturday night". [17]
5. The primary judge described the overall security infrastructure at the warehouse as consisting of: [18] 1. a cyclone wire fence on the street boundary; 2. double gates at each vehicle entryway; 3. locks for the vehicle entry to the warehouse and the pedestrian entry to the adjoining office; 4. motion sensors at doorways and throughout the warehouse storage area, linked to a monitored alarm panel; 5. a data transmission unit for transmitting signals from the alarm system to a 24-hour monitored base; 6. CCTV within the warehouse and at the front of the building, displayed on monitors in the downstairs area of the office and in Denis' office upstairs; 7. a network video recorder (NVR) in Denis' upstairs office, which comprised a hard drive capable of recording up to 30 days of surveillance footage; and was connected to 8. a mobile phone application (the CCTV app) which allowed users to monitor the CCTV footage in real time.

The fire and following

1. As the primary judge recorded: [26] "A person entered the warehouse at about 12:24 am on Monday, 16 April 2018 and set it alight. A very destructive fire instantly took hold, with a powerful explosion at 12:31:35 am. The fire destroyed the warehouse building and Admiral's contents within, such as office equipment, forklift vehicles, pallet racks and pallet jacks."
2. The site of the fire became a crime scene and investigations were commenced not only by the police and the ABF but also CGU. There was no suggestion that Admiral, through Denis, did not give full cooperation to the investigating authorities and CGU. Indeed, there was evidence that he facilitated inquiries as he was no doubt obliged to do under the insurance policies. The warehouse was subsequently demolished, with the process of demolition and debris removal commencing on Monday, 16 July 2018.
3. As has already been noted, the primary judge accepted Mr Pellegrino's evidence [27] and held that the fire was fuelled by tyres located within the warehouse which had been brought onto the premises for that purpose, with the tyres acting as an accelerant "because of their fuel load and high heat release rate". [28] The tyres had been brought onto the premises by Mr Gazzara and two associates, outside of ordinary business hours, and there was no obvious commercial benefit to either party in moving the tyres into the warehouse. As noted at [40]-[41] and [52] above, Mr Gazzara's evidence that the tyres were intended for export was not accepted as plausible and was undermined by his inability to provide any satisfactory explanation in this respect.
4. It was also held, based upon the expert report of Mr Pellegrino, who had inspected the remains of the warehouse shortly after the fire in April and July 2018 but whose report was only served in September 2020, that the tyres were located around the floor of the warehouse in a configuration which could not be explained and which made no practical sense because they would have obstructed the ordinary use of the warehouse. It was also noted that other combustible items, including ethanol and toilet paper, were placed around and near the tyres. [29]
5. Denis arrived back in Sydney on 17 April 2018, having been informed of the fire whilst he was in Hong Kong. As noted above, he was originally scheduled to return home on the morning of the following day.

Notification of claim and declinature of cover by CGU

1. Following the fire, Admiral's insurance broker notified CGU of a claim for indemnity under the ISR Policy on 16 April 2018. CGU had not notified Admiral of a decision on indemnity by 8 November 2018, on which date Admiral commenced proceedings in the District Court relevantly seeking a declaration that CGU was bound to indemnify it. These proceedings (the CGU proceedings) were subsequently removed into the Supreme Court and were heard concurrently with the Brightcity proceedings: see [14] above.
2. On 9 April 2019, CGU's solicitor wrote to Admiral and advised that, based on the facts and circumstances known to CGU following a professional investigation conducted by, amongst others, Mr Pellegrino, it had determined that Admiral was not entitled to indemnity and that CGU therefore declined its claim.
3. It was CGU's position that Admiral's claim was excluded by the ISR Policy Condition 7 (Fraud) (the fraud condition) so as to engage s 56 of the Insurance Contracts Act 1984 (Cth). The fraud condition was expressed as follows: "If any claim be in any respect fraudulent or if any fraudulent means or devices be used by the Insured or anyone acting on the Insured's behalf to obtain any benefit under this Policy, or if any destruction or damage be occasioned by the wilful act or with the connivance of the Insured, the Insurer, without prejudice to any other rights the Insurer might have under this Policy, shall be entitled to refuse to pay such claim."
4. Also relevant to CGU's decision to refuse indemnity was the fraud exclusion, the relevant terms of which have been noted above at [20].
5. According to CGU, the fraud exclusion and condition were both engaged in circumstances where "the fire was deliberately started with the knowledge, consent or authorisation of Admiral and, in any case, Admiral has made fraudulent misrepresentations to CGU for the purposes of pursuing the Claim under the Policy" (emphasis added).
6. CGU provided the following particulars of its determination that Admiral had committed arson fraud: "(a) the Fire was deliberately lit; (b) the Fire was lit by a person entering the Premises at approximately 12.23 a.m. on 16 April 2018 and leaving the premises 8 minutes later at approximately 12.31am; (c) at the time of entry into the Premises by the person the security gates were open which allowed access to the Premises; (d) at the time of entry into the Premises by the person the security alarm system was not working or working properly; (e) at the time of entry into the Premises by the person the CCTV camera system was not working or was not working properly; (f) at the time of entry into the Premises by the person there was combustible material in the nature of tyres spread around the Warehouse; (g) the tyres had been delivered to Admiral at the Premises on 14 April 2018; (h) prior to 14 April the Warehouse was full of large quantities of stock to the approximate value of $14,000,000; (i) by the time of the Fire, the Warehouse was not full of stock and large quantities of stock had been removed from the Premises prior to the Fire; (j) the stock had been removed from the Premises in the 48 hours prior to the Fire and with the knowledge of Admiral; (k) according to Admiral, the last person on the Premises prior to the night of the Fire was Dmitry Fateev, who was formerly the director of Admiral, the father of the current director, a person working for Admiral, who left Australia the next day and has not returned; (l) the door to the Warehouse was not securely bolted when the last person was on the Premises; (m) Admiral has falsely asserted or implied that: (i) no stock had been removed from the Premises during the 48 hours prior to the Fire; (ii) the Premises were full of stock at the time of the Fire; (iii) it was unaware that either the security system or CCTV system was not working properly; and (iv) the tyres said to have been delivered and accepted by Dmitry Fateev on Saturday 14 April 2018 were stored in a specific area of the warehouse (and not spread around the Warehouse); and (n) in all the circumstances CGU considers the Fire was lit with the knowledge, consent or authorisation of Admiral." (emphasis added)

Proceedings at first instance

1. In the proceedings at first instance, it was not in dispute between the parties that the fire had been deliberately lit. Admiral denied any knowledge either of the theft of any goods from its warehouse or the act of arson. It has already been noted that Dmitry had left the country early on the morning of 15 April 2018, prior to the fire having occurred. In addition, Denis was overseas at the time of the fire, having flown to Hong Kong some two-and-a-half days prior to the fire.
2. As noted above at [8], the primary judge framed the central issue for his determination as being "whether Admiral knew of and consented to the deliberate burning of the warehouse and its contents", [30] in circumstances where his Honour had found there to be: [31] "10 … clear proof that Dmitry Fateev facilitated the theft of many millions of dollars' worth of Admiral's customers' goods from the warehouse on 13 and 14 April 2018, that he deliberately caused motor tyres to be spread around the warehouse to provide fuel for a fire and that he left the premises unsecured to facilitate the entry, at about 12.24am on 16 April, of an arranged arsonist … 11 … Despite clear evidence that Dmitry Fateev took part in the massive theft of Admiral's customers' goods and that he enabled the staging of a fire to cover the stock deficiency, Admiral has actively disputed Dmitry Fateev's involvement. It tendered an implausible statement from him denying complicity and it adduced equally unimpressive evidence from Maurizio Gazzara, one of three truck drivers who helped remove the stock and who delivered the tyres that fuelled the subsequent fire."
3. The primary judge's finding that Dmitry orchestrated and participated in the theft of a significant quantity of goods stored at the warehouse by Admiral, during the weekend prior to the fire, was reached by inference from the following circumstances: [32] "(1) Admiral's stock records establish what was in the warehouse up to Friday 13 April. (2) I am satisfied from Mr Pellegrino's evidence that the fire debris was not materially altered between the time when the fire was extinguished and the dates upon which he examined and catalogued the debris. By 'not materially altered' I mean that no debris was removed, no additional debris was brought to the site and the material was not in any significant degree rearranged, so that Mr Pellegrino's conclusions are properly based upon the true remains of the fire. (3) Mr Pellegrino's examination was rigorous and it satisfies me that all or substantially all of the goods listed at [147] and [150] were removed between the Friday afternoon and the commencement of the fire. (4) The missing goods were of very great value, in the order of $34 million. The cigarettes, which represented most of the value, were marketable and easily transported. Hence, they would have been a target for theft. (5) The seizure by police, in August 2018, of significant quantities of ICT's Top Smoke cigarettes, that had been stored in the warehouse until 13 April, supports Mr Pellegrino's evidence concerning goods on Admiral's stock list of which there was no evidence in the fire debris and which must have been removed before the warehouse was set alight. (6) Between the late afternoon of Friday 13 April and the commencement of the fire there were 19 movements from the warehouse of trucks that had the capacity to remove stock of the description and quantities identified by Mr Pellegrino as missing from the debris. There were no other means by which and no other time at which the stock could have been taken. (7) Dmitry Fateev was present at the warehouse throughout the truck movements on 13 and 14 April 2018. (8) He departed for Vladivostok, on a one-way ticket, at 7:45 am on Sunday, 15 April 2018. I infer that that was either the first departure for the Far East, or one of the first departures, after the last truck movement from the warehouse late on the previous evening."

The standard of proof

1. First, the nature of the allegations, namely Admiral's connivance in acts of theft and arson, and a subsequent fraudulent insurance claim in light of its knowledge and connivance, engaged s 140(2) of the Evidence Act 1995 (NSW), which has been equated with the well-known observations in Briginshaw v Briginshaw (1938) 60 CLR 336 at 360-362; [1938] HCA 34 (Briginshaw); see also Clancy v Plaintiff A (2022) 318 IR 31; [2022] NSWCA 119 at [26], citing Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170; [1992] HCA 66 (Neat Holdings); Amalgamated Television Services Pty Ltd v Marsden [2002] NSWCA 419 at [61], where it was said that "[i]t is well accepted that the test to be applied under s 140(2)(c) is the Briginshaw test"; and New South Wales v Hathaway [2010] NSWCA 184 at [263], where it was said that in a case involving allegations of serious misconduct with grave consequences, "clear or cogent or strict proof" is required.
2. In Briginshaw, a case involving a charge of adultery, Dixon J conceived of the principle that a "court should only make a finding of wrongdoing if satisfied to a standard that recognises the seriousness of what is alleged" (see Jagatramka v Wollongong Coal Ltd [2021] NSWCA 61 at [7]) in the following terms: [38] "Except upon criminal issues to be proved by the prosecution, it is enough that the affirmative of an allegation is made out to the reasonable satisfaction of the tribunal. But reasonable satisfaction is not a state of mind that is attained or established independently of the nature and consequence of the fact or facts to be proved. The seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question whether the issue has been proved to the reasonable satisfaction of the tribunal. In such matters 'reasonable satisfaction' should not be produced by inexact proofs, indefinite testimony, or indirect inferences. Everyone must feel that, when, for instance, the issue in on which of two dates an admitted occurrence took place, a satisfactory conclusion may be reached on materials of a kind that would not satisfy any sound and prudent judgment if the question was whether some act had been done involving grave moral delinquency." Later in his Honour's judgment, Dixon J elaborated upon what is now referred to as the Briginshaw principle, in the context of a circumstantial case, as follows: [39] "[u]pon an issue of adultery in a matrimonial cause the importance and gravity of the question make it impossible to be reasonably satisfied of the truth of the allegation without the exercise of caution and unless the proofs survive a careful scrutiny and appear precise and not loose and inexact. Further, circumstantial evidence cannot satisfy a sound judgment of a state of facts if it is susceptible of some other not improbable explanation. But if the proofs adduced, when subjected to these tests, satisfy the tribunal of fact that the adultery alleged was committed, it should so find." (emphasis added)

Pleading allegations of fraud

1. Secondly, it is a fundamental requirement of procedural fairness that allegations of fraud are pleaded with strict particularity: ET-China.com International Holdings Ltd v Cheung (2021) 388 ALR 128; [2021] NSWCA 24 at [172]. This principle is explicitly enshrined in r 15.3 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR), titled "allegations of behaviour in the nature of fraud", which requires that "[a] pleading must give particulars of any fraud, misrepresentation, breach of trust, wilful default or undue influence on which the party relies". Rule 15.3 operates in conjunction with r 15.4, concerning "allegations as to condition of mind", which is expressed as follows: "(1) A pleading that alleges any condition of mind must give particulars of the facts on which the party pleading relies. (2) In subrule (1), condition of mind includes … any fraudulent intention, but does not include knowledge." (emphasis added)
2. The significance of the requirement that fraud be specified and particularised clearly in pleadings is further indicated by the fact that it is expressly raised in the UCPR's "general rule as to matters to be pleaded specifically", in the following r 14.14: "(2) In a defence or subsequent pleading, a party must plead specifically any matter - (a) that, if not pleaded specifically, may take the opposite party by surprise, or (b) that the party alleges makes any claim, defence or other case of the opposite party not maintainable, or (c) that raises matters of fact not arising out of the preceding pleading. (3) Matters which must be pleaded pursuant to subrule (2) include (but are not limited to) fraud". (emphasis added)
3. This requirement is well established and of long standing, as was noted by Mason CJ and Gaudron J (with whom Brennan and Toohey JJ respectively agreed) in Banque Commerciale SA (En Liqn) v Akhil Holdings Ltd (1990) 169 CLR 279; [1990] HCA 11 (Akhil), a case in which a party sought to defeat a limitation defence under the now-repealed s 69 of the Trustee Act 1925 (NSW) on the basis of a fraudulent breach of trust. Their Honours observed that: [40] "It has long been recognised that fraud may take a variety of forms and is, on that account, incapable of precise definition. See, e.g., Draper v Dean (1679) Finch 439 [23 E.R. 239]; Reddaway v Banham [1896] AC 199, at p 221; Allcard v Skinner (1887) 36 Ch. D 145, at p 183. The variety of matters which may constitute fraud prevents any construction of the proviso to s. 69(1) of the Act which would require a defendant to negate fraud. That variety effectively deprives a party who may or may not have acted fraudulently from ascertaining precisely what must be negatived. Indeed, it is this feature of fraud which underlies the rule of practice, now embodied in Pt. 15, r. 13 and Pt. 16, r. 2 of the Rules, that fraud must be pleaded specifically and with particularity. See Wallingford v Mutual Society (1880) 5 App. Cas. 685, at p. 701, per Lord Hatherley; Middleton v O'Neill (1943) 43 SR (NSW) 178, at p. 184, per Jordan CJ. And the same feature necessitates that the proviso be construed as requiring a plaintiff to establish fraud to defeat a limitation defence." (emphasis added)

Circumstantial proof in civil proceedings

1. Thirdly, as the primary judge observed at PJ [169], the approach to be taken to circumstantial proof in a civil case was described in Bradshaw v McEwans Pty Ltd as follows: [43] "The difference between the criminal standard of proof in its application to circumstantial evidence and the civil is that in the former the facts must be such as to exclude reasonable hypotheses consistent with innocence while in the latter you need only circumstances raising a more probable inference in favour of what is alleged. In questions of this sort where direct proof is not available, it is enough if the circumstances appearing in the evidence give rise to a reasonable and definite inference: they must do more than give rise to conflicting inferences of equal degrees of probability so that the choice between them is mere matter of conjecture. But if circumstances are proved in which it is reasonable to find a balance of probabilities in favour of the conclusion sought then though the conclusion may fall short of certainty it is not to be regarded as a mere conjecture or surmise." (citations omitted)
2. In Palmer v Dolman [2005] NSWCA 361 at [41], this Court (Ipp JA, Basten and Tobias JJA agreeing) extracted the following principles from the relevant authorities which were said to have "become well-established in determining, in a civil case, whether circumstantial evidence leads to an inference of fraud": "(a) The jury [i.e. the tribunal of fact] must consider 'the weight which is to be given to the united force of all the circumstances put together' (per Lord Cairns in Belhaven & Stenton Peerage (1875) 1 App Cas 278 at 279 - quoted with approval by Gibbs CJ and Mason J in Chamberlain v The Queen (No 2) [(1984) 153 CLR 521 at 535; [1984] HCA 7]). (b) The onus of proof is only to be applied at the final stage of the reasoning process: '[i]t is erroneous to divide the process into stages and, at each stage, apply some particular standard of proof. To do so destroys the integrity of [a] circumstantial case' (per Winneke P in Transport Industries Insurance Co Ltd v Longmuir at 129). (c) The inference drawn from the proved facts must be weighed against realistic possibilities as distinct from possibilities that might be regarded as fanciful. (d) Where the competing possibilities are of equal likelihood, or the choice between them can only be resolved by conjecture, the allegation is not proved: Bradshaw."

Appellate review

1. Finally, in Lee v Lee (2019) 266 CLR 129; [2019] HCA 28 at [55] (citations omitted), it was said by the plurality that: "A court of appeal is bound to conduct a 'real review' of the evidence given at first instance and of the judge's reasons for judgment to determine whether the trial judge has erred in fact or law. Appellate restraint with respect to interference with a trial judge's findings unless they are 'glaringly improbable' or 'contrary to compelling inferences' is as to factual findings which are likely to have been affected by impressions about the credibility and reliability of witnesses formed by the trial judge as a result of seeing and hearing them give their evidence. It includes findings of secondary facts which are based on a combination of these impressions and other inferences from primary facts. Thereafter, 'in general an appellate court is in as good a position as the trial judge to decide on the proper inference to be drawn from facts which are undisputed or which, having been disputed, are established by the findings of the trial judge'." (citations omitted)
2. Lee v Lee made plain that earlier observations by the High Court in Robinson Helicopter Co Inc v McDermott (2016) 90 ALJR 679; [2016] HCA 22 at [43] were not intended to undermine, still less overrule, what had been said by the High Court in Warren v Coombes (1979) 142 CLR 531 at 551; [1979] HCA 9.
3. It was stressed by Mr Watson SC, who appeared for CGU with Mr Kalyk, that the primary judge had made an adverse credit finding against Denis (see [164] and [205] below) and, in this context, he made reference to the recent judgment of Kirk JA in Mt Pleasant Stud Farm Pty Ltd v McCormick [2022] NSWCA 191 at [58]. His Honour, having referred to a portion of the passage from Lee v Lee extracted above, there said: "The impressions formed by seeing and hearing a witness are not limited to impressions of demeanour in some narrow sense of what is observed. What is heard, and the context of the evidence, is also important: note further, generally, White Constructions Pty Ltd v PBS Holdings Pty Ltd [2020] NSWCA 277 at [104]-[109] per Bell P, [155]-[156] per White JA. The tone in which evidence was given may be important. Sarcasm, arrogance, humour or humility may not be conveyed to a subsequent reader of the transcript. Such a reader may not appreciate that an answer was given angrily in response to some provocation, such that its significance is not what might appear from the page. Nor may such a reader understand the impression formed by any pauses in answering a question. Pauses themselves might communicate a diligent care for truthfulness on the one hand, or a crafty search for a path through landmines on the other."

The primary judge's key findings on the central issue

1. The primary judge's key findings as to the central issue of Admiral's knowledge and consent regarding the theft and fire were set out at PJ [186]-[207]. Significantly, his Honour's ultimate conclusion as to Denis' (and therefore Admiral's) knowledge and consent was expressed to have been reached by "[t]aking together all of the circumstances considered above", [44] namely those discussed at PJ [186]-[206]. In light of this acknowledgment, the nature of the primary judge's inferential reasoning and the detailed attack on it in this appeal, that section of the primary judgment needs to be set out in full: "Knowledge and consent of Denis Fateev and therefore of Admiral 186 Dmitry Fateev's actions were necessarily preceded by planning and preparation. He had to arrange: a buyer for the goods that were to be stolen; an arsonist; trucks and drivers to remove stock and to deliver tyres to fuel the fire. Even if the plan should be implemented with complete success, by disposal of the stolen goods for a significant proportion of their wholesale value without detection of either the theft or the deliberate lighting of the fire, there was potential for collateral damage to Admiral's business. The claims of customers who did not have their goods independently insured against fire might exceed the $4 million sub-limit for Customer Goods in the ISR policy. Those customers might claim against Admiral for breach of bailment. The ATO might allege failure adequately to secure dutiable goods and might claim duty on the contents that were in bond, under s 35A of the Customs Act. There would necessarily be loss of income for Admiral during the delay before new goods could be deposited by customers at the replacement warehouse in Lidcombe. 187 Whether or not the plan was carried out successfully in the sense referred to above, Admiral would likely suffer some loss of custom. If the plan should meet with less than complete success, there was an obvious risk of very much greater detriment to Admiral. If the theft and the deliberate lighting of the fire were to be detected, the reputations of Admiral and of the Fateev family, including Denis as managing director, would be severely damaged. The company's goodwill and its standing as a licensee under the Customs Act would be destroyed. 188 Admiral operated as a family concern. All members of the Fateev family worked in the business and there is no evidence that any of them had any other gainful employment. The company was Denis Fateev's career and his future. The family held the entire proprietary interest in Admiral. As Svetlana Fateev was and is the sole shareholder and director of a holding company that has at all times owned all the issued shares in Admiral, I am satisfied that through that structure the beneficial ownership of Admiral lies with one or more or all of the Fateev family. Given those economic interests and the risks posed by Dmitry Fateev's plan, to be gambled on the possibility of a massive gain from selling stolen cigarettes, it is a very strong inference that he would not have proceeded without consulting his son and obtaining his agreement. 189 On the facts that I have found concerning Dmitry Fateev's involvement, the only alternative hypothesis is that he carried out the theft and arranged the arson without the prior agreement of his son. The only circumstance in which that hypothesis could be anything more than fanciful is if there had developed a deep rift between Dmitry Fateev and the other members of the family, in particular, Denis. Only under conditions of major disharmony and divergence of interests would it be plausible that Dmitry Fateev would have pursued illegal gains for himself by perpetrating these crimes, at such grave risk to his family's legitimate economic interests and to his son's business reputation and future. There is no evidence of any such disharmony or divergence of interests. To the contrary, the evidence is that all family members worked cooperatively in the business, that Svetlana Fateev controlled the holding company, that she and Dmitry Fateev lived together and that their younger son resided with them. Those circumstances all indicate harmonious family relationships. 190 Admiral has not even propounded the hypothesis that Dmitry Fateev took part in the theft and facilitated the arson but did so without consulting Denis and without his agreement. 191 It was essential to Dmitry Fateev's own interest of avoiding detection that Denis Fateev should be informed of the scheme and should cooperate. I infer that Dmitry Fateev's planning of the enterprise was in place by no later than Thursday, 12 April, when Mr Gazzara sent the first of his emails to Mr Russkikh to create the appearance of a commercial storage transaction and to provide a cover for Dmitry Fateev to attend the warehouse on Friday evening and Saturday: see [101]-[102] and [111] above. On the same day Denis Fateev booked his travel to Hong Kong. That timing supports the inference of collaboration. There was no pressing need for Denis Fateev to go to Hong Kong for the period 13 to 18 April. From the terms of Ms Fu's letter of 12 April 2018, it is not apparent that there had arisen by that date any requirement for Denis Fateev's presence in Hong Kong at all. The due diligence process of Ms Fu's client had not progressed beyond review of documents listed in her letter. They could have been provided to her by email. From the point of view of Admiral's business, there were good reasons for Denis Fateev to have remained in Sydney at this time, notably, to advance the arrangements for the company's impending move to Lidcombe. 192 It is extremely improbable that Dmitry Fateev would have accepted the heightened risk of detection that would arise if his son was not a party to the undertaking. If he acted behind his son's back, the latter might change his mind and not travel to Hong Kong; or he might return early and go to the warehouse on Sunday, where he might find half the stock missing; or he might phone his younger brother or Mr Russkikh or another employee from Hong Kong on the Sunday, to have a check made that the warehouse was secure after the departure of Dmitry Fateev for Vladivostok that morning. Unless Denis Fateev's approval was secured, he could become the principal informant against his father; or he could frustrate his father's attempt to leave the warehouse unprotected for the arsonist's entry. These considerations strengthen the inference that Denis Fateev acted in concert with his father. They are cumulative upon the other matters referred to, especially the timing of Denis Fateev's trip to Hong Kong that provided his alibi. 193 My observations at [181(5)] and [184] concerning Dmitry Fateev's failure to notify the alarm monitoring service of his impending absence overseas and to nominate a substitute contact apply equally to Denis Fateev. Denis Fateev's departure without nominating another contact supports the inference that he knew the security of the warehouse would be breached by someone who would start a fire and that he did not want the monitoring service to be able to reach anyone for approval to send a patrol car. I find it highly unlikely that Denis Fateev would have departed for Hong Kong, knowing that his father would also be out of the country from the following Sunday, without turning his mind to the fact that this would render the alarm system substantially ineffectual. His failure to nominate an alternative contact was not inadvertent. 194 I have rejected Denis Fateev's evidence that he did not have on his mobile phone the application for remote monitoring of the CCTV in the warehouse, which Mr Yammine had installed in September 2017. I am satisfied that remote monitoring was available to him and that he either he saw what was taking place in the warehouse on the Friday evening and/or the Saturday and did nothing about it, because he was complicit in the theft, or he did not look at the mobile phone application because he was aware that large quantities of goods would be removed. I find that he has denied having the ability to monitor the CCTV remotely in order to disavow knowledge of what occurred in the warehouse. I do not find it credible that the managing director of a business such as this would fail to utilise such a remote monitoring application over the whole course of a weekend while he was absent in Hong Kong, knowing that the warehouse was to be opened up for an after-hours delivery. Even if he did not look at the CCTV on his phone during the time when goods were being removed, having regard to the quantity that was stolen, if he had looked at any time on the Sunday he would have seen the warehouse half empty. Denis Fateev's lack of credibility 195 Denis Fateev denied that he had known in advance that the warehouse would be set alight or that he had agreed in such a plan. I do not accept his denial. He was not a credible witness. I found highly discrediting his evidence that after the fire, and especially in the context of CGU's refusal of indemnity, he did not make inquiries about inherently suspicious circumstances - circumstances that CGU has explicitly raised in defence of the insurance claim. 196 Denis Fateev acknowledged that it was exceptional for Admiral to open the warehouse after normal operating hours, which were 8:00am to 4:00pm Monday to Friday. He said that after-hours opening would be arranged 'when clients are running late or have an urgent shipment, especially if it's time sensitive cargo or it's bonded cargo and it's arriving from airport or port'. But when asked what was the urgency for which Dmitry Fateev opened the warehouse on the evening of Friday 13 April and the next day, he gave these answers: Q. When was this plan, to open the premises outside ordinary work hours, when was it made? A. On my understanding it was the Friday. Q. When on the Friday? A. I'm not aware of the time. Q. What was the urgency? A. My understanding is we had a client who would like to deliver cargo to our warehouse. […] Q. What was the urgency here? A. I am not aware. […] Q. I take it you've had enough interest to try and find out what happened? A. Yes. Q. What was the urgency which meant that this particular cargo would lead to the premises opening after 6pm on a Friday? A. I'm not sure, my assumption is that the client could have requested, that it was more convenient for him. […] Q. I'll move on to the Saturday. […] Q. And so, again, why was it that the premises were being open on a Saturday, well outside business hours? A. To receive a delivery. Q. Was it urgent? A. I'm not sure. Q. You've never looked into that? A. Into the urgency? […] Q. [In the] three and a half years [since the fire], haven't you asked about what the urgency was that led to the premises being opened on a Saturday? A. My understanding it was a request from our client. Q. Same client? A. Yes. Q. What was the urgency, why did the client want you to open on a Saturday? A. So he could make the delivery. It was his request. 197 These answers are banal and evasive. They do not identify any legitimate explanation, in Denis Fateev's understanding, for the after-hours opening. On Admiral's case that it had no knowledge of the theft or of the premises being set up to be burned, one would expect him to have pressed such inquiries in order to expose the deliverer of the tyres, and whoever cooperated with that person, as conspirators or accessories to the theft and arson. 198 Denis Fateev also claimed not to recall having made inquiries concerning the quantity of goods that were delivered after hours, or the background of the client who delivered the goods, or the client's intentions with respect to the goods. If he had made such inquiries, he did not recall any information he obtained. He answered questions about these matters as follows: Q. […] you must have asked your father, in case we get sued, what was there, was it 100 tyres or was it 10,000 tyres, Dad? Surely you asked him a question like that? A. It's possible but I don't remember, it's a long time ago. Q. How many tyres were there? A. I am not sure. Q Roughly, you must have a rough number, was it 100,000 or 100? A I'd have to go back and look at the paperwork from the client, because I don't remember. […] Q. I'll put it again. Surely, since the fire, you must have tried to find out who this client was? A. Not really, no. I haven't. Q. You've been sitting here for a few days while evidence has been given? A. Yes. Q. You would have heard evidence given that the tyres in the premises added to the fuel load, were extremely difficult to extinguish and apparently were responsible for a lot of damage done to your family business. A. Yes. Q. Where did the tyres come from? A. From my client who was intending to export them, as far as I'm aware. Q. And the name of the client please? A. As I said before, it was Morris and I don't remember the second half of - […] Q. You haven't bothered to find out the name of the man who delivered the tyres, is that what you're telling us? A. Well, there was a lot of cargo, from my understanding, in the warehouse and I would have had to have called everyone in to identify but I understand that the fire ..(not transcribable).. but I did not call the clients, like I didn't many others to find out. I don't understand what that would have given me. […] Q. Morris what? A. Like I say, I've never had the pronunciation of second one but it was G something. Q. Have you ever spoken to him? A. I have not. Q. The cargo was principally tyres delivered by this Morris, correct? A. Tyres but I believe there was other goods as well, [batteries] or something. Q. Let's focus on the tyres for a moment, I think you said that they were going to be exported? A. I think that was the initial request from the client. Q. Who told you that? A. I think I saw it in emails. Q. So you saw emails between the client and Admiral? A. Yes. Q. To where were they to be exported? A. I'm not sure, would have to ask Arthur who was looking after this one. HIS HONOUR Q. Haven't you asked him? A. No, I have not. 199 If Denis Fateev was not complicit in approving the theft from this warehouse and the burning of it, one would naturally expect him to have made thorough inquiries - of his father, of Mr Russkikh and of Mr Gazzaro - into the background of the client and the transaction. What was the client's name and the name of his business? Was he bona fide? Did he have a genuine commercial reason for storing his tyres at the warehouse and for delivering them on the Friday evening and Saturday? Could he have introduced this cargo with sinister intent? Given the notable coincidence between the unusual after-hours opening of the warehouse and the deposit of an odd cargo of used motor tyres and the conflagration that followed, such inquiries would naturally occur to a managing director in the position of Denis Fateev and would be pursued, long before the insurance company refused the claim. In the interests of greater security for future operations and to assist police with their investigation into whether crimes had been committed against the company and its customers, and if so by whom, the above questions would be asked. When the insurer's allegation of fraud was made on 9 April 2019, these obvious inquiries became more pressing. 200 Cross-examination by CGU's counsel did not establish whether Denis Fateev had some plausible reason for regarding such enquiries as unimportant. I therefore raised this with him myself in order to ascertain whether he had a perception of the case that may have rendered his failure to inquire into the circumstances of the fire less significant than it might otherwise appear. On the first occasion I asked him about this, he provided no sensible answer, as follows: HIS HONOUR Q. Mr Fateev, are you aware of the report of Mr Pellegrino for the insurer in this case in-- A. Yes, I am. Correct. Q. Yes, and particularly the report in which he described where he considered the tyres had been placed within the warehouse on pallets at various points distributed around the warehouse, have you seen all of that? A. Yes, I have, your Honour. Q. Were you aware that CGU is making an allegation in the case that the tyres were deliberately placed at points around the warehouse in order to provide fuel for a fire and to encourage fire? Did you realise that that was part of the case that they're making to-- A. Yep. Yes, your Honour. Q. With that knowledge, have you not made full inquiries to ascertain what were the origins of the dealing with Mr Morris that brought about the introduction of this quantity of tyres that the insurer says was deliberately used in that way? A. I'm sorry, your Honour, I didn't understand the question. Q. The tyres were delivered into the property possibly to some extent on the Friday afternoon, but according to other evidence on the Saturday, just within 48 hours before the fire, and CGU is alleging that they were deliberately then placed around the building in order to encourage fire that would destroy stock. Given that that seems to be, as the argument is presented to me, a significant part of the dispute between yourself or your company and the insurer, have you made inquiries to ascertain how it came about that your company [took] a delivery of tyres just at that point, and what is the background of this person Morris, and such things as that? A. Yes, your Honour, I understand now, but my understanding is that we would receive the cargo for export on the Friday and on the Saturday, and it was placed where we had space available, but I don't know if that's suspicious or not. 201 On a second occasion I gave Denis Fateev an opportunity to explain why he had not inquired into the circumstances of the delivery of tyres to the warehouse shortly before the fire. I find his answers, as follows, fatuous and unsatisfactory: Q. Let me just point out to you, it seems to me quite apparent on the documents and the papers that have been given to me, as the judge, to explain to me what this dispute is all about, that it's quite central to the very serious allegation of fraud that CGU is making that it is asserting that these tyres were all received into the premises in dishonest circumstances and that they were then placed about the premises in circumstances that were designed to cause a fire to proceed and to do a lot of damage. Now, in that situation, as it seems to me, this would be, this question of the tyres and how they came to be there and how long they were going to be there and what was the origin of this arrangement, it seems to me to be quite a central thing in the dispute. Is that how you have understood the place of this question about tyres in the case? A. Yes, I do, your Honour, but I just can't treat it differently to any other clients that had delivered cargo on the Friday or the Thursday of just I really don't understand what more we could have done or Q. I suppose part of Mr Watson's questions is directed to just querying why you are not more familiar now, with all the opportunity for inquiry about this to have been made since CGU refused your claim, why you are not more familiar with the detail of this transaction, to be able to answer the questions that he's putting to you about the nature of this transaction and whether its features may or may not indicate dishonesty on somebody's part. Is there a reason why you haven't made more detailed inquiry and gathered more detailed information about this? A. Well, your Honour, there's just been a lot of really information for me to adapt and adopt into and my understanding that there was something that I was to be made reference to would be in the Court books which were provided yesterday afternoon but that's my understanding of it. 202 In the absence of any coherent, plausible alternative explanation from Denis Fateev, the only possible reason for him not having sought answers to questions such as those referred to at [196]-[199] above is that he already knew the warehouse had been opened after hours for the purpose of being plundered and stuffed with fuel for a destructive fire and he either knew that Mr Gazzara was the operative who deposited the tyres and drove off with the stolen goods or he did not wish to confirm the name of whoever filled that role, or the number of tyres, or any other detail. 203 Despite Denis Fateev's admitted failure to make pertinent inquiries, Admiral's solicitors obtained the affidavit of Dmitry Fateev of 8 December 2020 and that of Morris Gazzara of 21 August 2021. When questioned on the circumstances of the after-hours opening of the warehouse and the delivery of tyres, Denis Fateev did not even demonstrate familiarity with those affidavits. Both of them are central to Admiral's denial that stock was stolen and to its denials that the tyres were placed so as to encourage a fire and that Dmitry Fateev left the premises unsecured. 204 A notable weakness of Dmitry Fateev's affidavit is that it contains no acknowledgement of his presence at the warehouse on the Friday evening, nor any description or explanation of his actions there at that time. Denis Fateev said that he had never asked his father about the events of the Friday night, although he had known from when Ms Garvin's report was served on 17 September 2020 that the same three trucks that attended the premises on the Saturday made five visits on the Friday evening when Dmitry Fateev was present. Denis Fateev gave the following evidence when questioned about the omission from his father's affidavit of any reference to the Friday evening: Q. But your father doesn't refer at all to the events of Friday 13 April. A. Possibly. Q. What do you mean 'possibly? Have you read the affidavit? A. I have but I don't I can't memorise every piece of evidence. Q. […] He doesn't refer to doing anything on Friday 13 April. A. Okay. Q. Can you explain that? A. I can't. Q. Did you ask him? A. Possibly but I can't remember now. I haven't spoken to him for a while. […] Q. Now, how many truckloads came from Morris to Admiral on the Friday and Saturday? A. I don't know. […] A. I can't say because I wasn't there. […] Q. You must know that the police extracted CCTV footage from across the road. A. I do. Q. It showed three different trucks attending the premises; you know about that, don't you? A. I don't recall how many trucks but I have seen the footage. […] Q. Who hired the Hertz trucks? A. I don't know that. Q. It was the third truck apparently not from Hertz but unbranded, and who owned that truck? A. I don't know. Q. Why don't you know? A. We have hundreds of trucks come into our premises and out during the week, and I don't know any of the owners. […] Q. [Those] other trucks are pretty irrelevant compared to the importance of these trucks, aren't they, Mr Fateev? A. I guess. Q. I want you to tell us why you wouldn't know where the trucks had come from? A. Because I was never told. Q. Did you ever ask? A. I did not. 205 CGU did not challenge the evidence that Dmitry Fateev suffered a stroke in Vladivostok in July 2018 and that he was medically unfit to fly back to Australia during the remainder of his life up to January 2021. The evidence does not suggest that after July 2018 he was unable to communicate with his son about the fire in the warehouse or about this litigation. The making of his affidavit on 8 December 2020 shows that he was well able to communicate on those subjects at least up to that date. The point made at [202] above is reinforced: in the absence of any alternative explanation from Denis Fateev, the inescapable inference from his failure to ask his father about events on the Friday evening and in particular about the trucks that attended the warehouse at that time is that he already knew they were the same trucks that attended again on the Saturday, as he would have seen from the CCTV, and he knew that what took place on both occasions was of the same character, namely, stealing from the warehouse and delivering tyres for fuel. 206 I infer that Denis Fateev did not make inquiries of his father concerning the Friday because he did not wish to confirm details of the perpetration of the crimes. Even before Mr Gazzara's affidavit was sworn, throwing up conflict between his account and that of Dmitry Fateev, Dmitry's affidavit was self-evidently deficient for want of explanation of the Friday night and for the absurd story about re-loading tyres and sending them away to be re-packed. An honest innocent person in Denis Fateev's position would have made the further inquiries of his father that counsel suggested in cross-examination and would not have endeavoured to pass off Dmitry Fateev's implausible evidence on the Court, unquestioned. 207 Taking together all of the circumstances considered above, I am satisfied on the balance of probabilities that Denis Fateev knew in advance of his father's plan to steal from the warehouse and to have its remaining contents destroyed by fire. I am satisfied that, in his capacity as the controlling mind and will of Admiral, he agreed to the execution of the plan and that he cooperated in it by absenting himself on a trip to Hong Kong for the critical weekend."

Strands 1 and 2 - family harmony

1. The first two impugned strands of the primary judge's reasoning identified by Mr Sullivan are contained in PJ [188]-[189], reproduced at [104] above and, in particular, the primary judge's observation that: [45] "Only under conditions of major disharmony and divergence of interests would it be plausible that Dmitry Fateev would have pursued illegal gains for himself [and without consulting his son] by perpetrating these crimes, at such grave risk to his family's legitimate economic interests and to his son's business reputation and future." (emphasis added)
2. Having set up the initial premise of a syllogism, the primary judge noted that there was no evidence of family disharmony or divergence of interests, from which his conclusion as to Denis' knowledge and acquiescence in the criminal activity followed.
3. The danger of syllogistic reasoning lies in the integrity of the initial premise.
4. Essentially, his Honour was positing that it was not plausible that Dmitry, who the primary judge had concluded was a serious criminal, viz. one who conceived and/or facilitated the multi-million dollar theft and then arranged for the arson to occur, would act without reference to his eldest son given the close family relationship.
5. This was not an hypothesis predicated upon or influenced by an assessment of Dmitry's character or demeanour in the witness box, as Dmitry had died in January 2021 and did not give evidence in the proceedings. His Honour enjoyed no advantage over this Court in that regard.
6. With great respect to the primary judge, and contrary to his initial premise, there are any number of reasons why a criminal, such as Dmitry was found to be by his Honour, may have acted without his son's knowledge of and consent to the arson, notwithstanding or even because of their close family relationship. These include: 1. arrogance on Dmitry's part, including a belief that he could conceal his own involvement from his son and the authorities; 2. avarice on Dmitry's part, such that he did not wish to cut his son in on any part of the potential fruits of the criminal enterprise; 3. concealed selfishness or indifference to his family, notwithstanding apparent family harmony; 4. a desire to protect his family by not tainting his wife and children with knowledge of his criminality, or what Admiral described in its submissions as "the real probability that a criminal father would try to insulate his son from conviction"; 5. a fear or concern about his criminal enterprise being pre-empted or thwarted by his son, either practically or by notifying police; 6. a belief that his innocent son would secure the benefit of an insurance payout without any involvement being attributed to him; 7. Dmitry's knowledge that his son would be overseas at the time of the theft; or 8. any combination of the above.

Strand 3 - the necessity of Denis' knowledge and cooperation

1. The third strand of reasoning challenged on appeal was the primary judge's finding that "[i]t was essential to Dmitry Fateev's own interest of avoiding detection that Denis Fateev should be informed of the scheme and should cooperate." [56] Admiral attacked this strand of reasoning as "pure speculation", based on "unconvincing reasoning". The primary judge's reasoning was set out as follows: [57] "It is extremely improbable that Dmitry Fateev would have accepted the heightened risk of detection that would arise if his son was not a party to the undertaking. If he acted behind his son's back, the latter might change his mind and not travel to Hong Kong; or he might return early and go to the warehouse on Sunday, where he might find half the stock missing; or he might phone his younger brother or Mr Russkikh or another employee from Hong Kong on the Sunday, to have a check made that the warehouse was secure after the departure of Dmitry Fateev for Vladivostok that morning. Unless Denis Fateev's approval was secured, he could become the principal informant against his father; or he could frustrate his father's attempt to leave the warehouse unprotected for the arsonist's entry."
2. As to the first matter, which is expressed in terms of the risk of Denis changing his mind and not travelling to Hong Kong or returning home early, in one sense, it is obvious that there would have been a heightened risk of detection by an innocent Denis were he in the country at the time of the theft and arson, but that observation at least equally points to Dmitry capitalising on Denis' absence overseas to perpetrate the theft and arson without his knowledge or consent. This hypothesis was conceded by Mr Watson during the course of the argument on appeal to have been "a possibility, but it's barely a possibility". He submitted that it was only a "bare possibility" because "the timing is just too bad", pointing to what he characterised as Denis' unnecessary trip to Hong Kong. That response, in turn, however, depended upon the Hong Kong alibi theory. That is a matter taken up and considered as part of the fourth strand at [136]-[159] below. As will be seen, contrary to the primary judge's conclusion and Mr Watson's submission, there appeared to be an entirely legitimate reason for the Hong Kong trip and its timing.
3. In my view, it may fairly be put as a matter of supposition no less plausible than that accepted by the primary judge that it was the very fact of Denis going to Hong Kong that created the window for the theft and arson to occur. There was no evidence one way or another as to the duration of time over which the theft and arson had been planned, or as to whether the timing was particularly critical in the sense that it may be assumed that the warehouse regularly contained extensive quantities of tobacco that could be stolen and re-sold whenever the opportunity arose. And, as shall be seen below, there was an apparently plausible reason for Denis travelling to Hong Kong which explains the timing of his trip, contrary to Mr Watson's submission noted above.

Strand 4 - was the timing of Denis' Hong Kong trip a coincidence or an alibi?

1. At PJ [192], the primary judge referred to the timing of Denis' trip to Hong Kong as providing an alibi in respect of the theft and arson. Earlier, the primary judge had said that "[t]here was no pressing need for Denis Fateev to go to Hong Kong for the period 13 to 18 April". [58] His Honour also observed in the same paragraph that "[f]rom the point of view of Admiral's business, there were good reasons for Denis Fateev to have remained in Sydney at this time, notably, to advance the arrangements for the company's impending move to Lidcombe."
2. There were two elements of the primary judge's reasoning in this respect: first, that there was no legitimate or pressing need for Denis to be in Hong Kong at the time; and, secondly, that there were good reasons for him to have been in Sydney. Both of these elements were challenged on appeal.
3. As to the first matter, namely that the Hong Kong trip was a deliberate alibi, although it was never particularised as an element of the alleged fraud (see [73]-[74] above), it was put to Denis briefly in cross-examination: "Q. You organised it so that you'd be overseas to give yourself an alibi? A. No, that's not true." However, no attempt was made by the cross-examiner to explore the legitimacy or otherwise of the trip to Hong Kong. It was never put to Denis in terms (or at all) that there was no pressing need for him to be in Hong Kong over the critical weekend of 14 April 2018. That was, perhaps, a somewhat surprising stance for the cross-examiner to take in seeking to establish that the trip was planned as an alibi, and no case was developed by CGU that the Hong Kong trip was a sham or had no legitimate purpose.
4. A consideration of such evidence as there was in relation to Denis' trip to Hong Kong on 13 April 2018 suggests that there was an entirely legitimate and indeed a pressing reason for it.
5. As already noted, Denis travelled to Hong Kong on Friday, 13 April 2018 at 2.20pm, prior to the first delivery of used tyres to the warehouse later that day and the related theft and arson across the following three days. His flight was booked at some unspecified time on 12 April 2018. The evidence disclosed that Denis attended a meeting in Hong Kong on Sunday, 15 April 2018 with a solicitor, Ms Fu, who was a consultant to Cheng & Co, the firm of solicitors acting for Juhao, with whom Admiral was in some commercial negotiations at the time. That was the same person with whom Denis had planned to meet in Hong Kong on 4 April 2018, but that meeting was not able to take place: see [44]-[45] above.

Strand 5 - alarm monitoring

1. The fifth strand of reasoning related in particular to the primary judge's observations at PJ [193], regarding Denis' failure to notify Securitas, the alarm monitoring service, "of his impending absence overseas and to nominate a substitute contact" in the event that the alarm was triggered and Securitas needed to contact someone associated with the business.
2. To put this aspect of the argument in context, the monitoring service had three contacts: Dmitry, Denis and Mr Yammine (the technician who had first installed the monitoring system and subcontracted Securitas).
3. The primary judge's central statement at PJ [193], that: "Denis Fateev's departure without nominating another contact supports the inference that he knew the security of the warehouse would be breached by someone who would start a fire and that he did not want the monitoring service to be able to reach anyone for approval to send a patrol car", has, as its unspoken premise, that Denis was not able to be contacted by the monitoring service when outside of Australia. This was confirmed by his Honour's statement in the following sentence of PJ [193] that Denis' absence overseas, together with that of his father, "would render the alarm system substantially ineffectual."
4. The difficulty with this premise is that the evidence demonstrated that Securitas had the mobile phone numbers of both Denis and Dmitry and indeed rang them, while both men were overseas, following the triggering of the alarm at the time of the fire. Whilst it is true that neither Denis nor Dmitry answered the call (which in Denis' case was made in the late evening in Hong Kong), this is not relevantly to the point. The point is that Denis did not need to "nominate an alternative contact" in order for the monitoring service to be able to obtain instructions while he was overseas. So much was also plain from the following exchange between the primary judge and Denis: "Q. Why didn't you contact the security company to give another number of somebody who could be called if there was a break-in or a fire? So that someone who also had an interest in the proper conduct of this company's business could react? A. Your Honour, because generally I - even when I travel, apart from being on the plane I still have - I still receive my calls, and the majority of the time if there was an alarm activation I do receive those calls and I do respond."

Strand 6 - Denis' failure to consult the CCTV app to monitor the warehouse from Hong Kong

1. The primary judge found that in August or September 2017, Denis and Dmitry requested that Mr Yammine replace the Digital Video Recorder which was installed in a cabinet in Denis' office at the warehouse, and which would receive feed from various CCTV cameras around the premises. His Honour found that Mr Yammine duly installed a later model NVR (see [58(7)] above), which had a single hard drive capable of recording up to 30 days of CCTV footage, with the CCTV system operating continuously and not just when the premises were unoccupied. The primary judge also held that, at the same time, Mr Yammine installed the CCTV app on each of Denis and Dmitry's mobile phones (see [58(8)] above), "by means of which they could view live feed from the premises' CCTV cameras, remotely, at any time." [59]
2. This sixth strand of reasoning relates to the primary judge's observation at PJ [194], that: "I am satisfied that remote monitoring was available to him [Denis] and that he either saw what was taking place in the warehouse on the Friday evening and/or the Saturday and did nothing about it, because he was complicit in the theft, or he did not look at the mobile phone application because he was aware that large quantities of goods would be removed. I find that he has denied having the ability to monitor the CCTV remotely in order to disavow knowledge of what occurred in the warehouse. I do not find it credible that the managing director of a business such as this would fail to utilise such a remote monitoring application over the whole course of a weekend while he was absent in Hong Kong, knowing that the warehouse was to be opened up for an after-hours delivery. Even if he did not look at the CCTV on his phone during the time when goods were being removed, having regard to the quantity that was stolen, if he had looked at any time on the Sunday he would have seen the warehouse half empty."
3. To the extent that the primary judge held that Denis either saw what was taking place in the warehouse "on the Friday evening … and did nothing about it, because he was complicit in the theft, or he did not look at the mobile phone application because he was aware that large quantities of goods would be removed" (emphasis added), this finding overlooks the fact Denis was on an international flight to Hong Kong for that whole period, having left Australia at 2.20pm on the Friday afternoon, which would not have seen him arrive in Hong Kong until approximately midnight on 14 April 2018, Sydney time, with the last of Mr Gazzara's trucks departing the warehouse at 10.35pm on the Friday night. It was not put to Denis that he could access his mobile device whilst flying and indeed, Denis had answered a question posed by the primary judge by stating that he could receive mobile phone calls when travelling overseas, "apart from being on the plane" (see [163] above).

Strands 7 and 8 - lack of inquisitiveness by Denis

1. These strands of reasoning are conveniently dealt with together as they are really the obverse of one another. They relate to PJ [196]-[202] and concern what the primary judge considered to be Denis' telling failure to ask questions of each of his father, Mr Russkikh and Mr Gazzara about the delivery of tyres and surrounding circumstances following the fire and, in particular, following CGU's allegation of arson fraud on 9 April 2019. This posited failure was central to the primary judge's finding, expressed at PJ [195], that Denis "was not a credible witness". The primary judge said in that paragraph that he "found highly discrediting his evidence that after the fire, and especially in the context of CGU's refusal of indemnity, he did not make inquiries about inherently suspicious circumstances - circumstances that CGU has explicitly raised in defence of the insurance claim" (emphasis added).
2. The reasoning from PJ [195] ff culminated in the primary judge's conclusion at PJ [202] that: "In the absence of any coherent, plausible alternative explanation from Denis Fateev, the only possible reason for him not having sought answers to questions such as those referred to at [196]-[199] above is that he already knew the warehouse had been opened after hours for the purpose of being plundered and stuffed with fuel for a destructive fire and he either knew that Mr Gazzara was the operative who deposited the tyres and drove off with the stolen goods or he did not wish to confirm the name of whoever filled that role, or the number of tyres, or any other detail."
3. Before turning to Mr Sullivan's detailed attack on this aspect of the primary judge's reasoning, two points should be noted. First, neither of the propositions contained at the end of the above passage, namely that Denis "either knew that Mr Gazzara was the operative who deposited the tyres and drove off with the stolen goods or he did not wish to confirm the name of whoever filled that role, or the number of tyres, or any other detail" was ever put to him by Mr Watson.
4. Secondly, insofar as PJ [202] draws upon PJ [196]-[199], I would respectfully take issue with the primary judge's description in PJ [197] (see [104] above) of Denis' answers to the questions set out at PJ [196] as "banal and evasive" and as providing no "legitimate explanation, in Denis Fateev's understanding, for the after-hours opening" of the warehouse. First, the quoted passage at PJ [196] stopped short of the following question and answer: "Q. So I'm going to ask you again, what was the urgency which would warrant opening the premises on a Saturday? A. It was requested by our client, that it was convenient for him." (emphasis added) It also made no reference to a later question and answer on the same topic: "Q. Why take in a little contract on an urgent basis from somebody you didn't know? A. Because that's the service we provided. If the client is willing to pay for it then." (emphasis added)

Strand 9 - absence of further inquiries by Denis

1. The final strand of reasoning attacked on appeal was that contained in PJ [206], which is convenient to reproduce: "I infer that Denis Fateev did not make inquiries of his father concerning the Friday because he did not wish to confirm details of the perpetration of the crimes. Even before Mr Gazzara's affidavit was sworn, throwing up conflict between his account and that of Dmitry Fateev, Dmitry's affidavit was self-evidently deficient for want of explanation of the Friday night and for the absurd story about re-loading tyres and sending them away to be re-packed. An honest innocent person in Denis Fateev's position would have made the further inquiries of his father that counsel suggested in cross-examination and would not have endeavoured to pass off Dmitry Fateev's implausible evidence on the Court, unquestioned."
2. The point has already been made in relation to the previous two strands that it was not the case, on the evidence, that Denis did not make inquiries of his father concerning the fire. That those inquiries did not yield a confession from Dmitry as to his involvement was not to the point. Secondly, it may be that a more diligent or forensically experienced person may have put further questions to his father than did Denis, but a lack of diligence and/or forensic experience does not self-evidently translate to dishonesty and complicity. Moreover, relying on experts and legal representatives to make inquiries may well have been just as, if not more, appropriate as conducting his own inquiries. Much of the reasoning in PJ [206] relates to Dmitry's Affidavit and its deficiencies, but those deficiencies were apparent to the primary judge after reviewing the whole corpus of the evidence before him and would not necessarily have been apparent to Denis, a 27-year-old with no legal or forensic experience. Insofar as the criticism in PJ [206] relates to the events of Friday, 13 April 2018, it has already been pointed out that the fraud as particularised by CGU made no allegations in relation to what had transpired on the Friday night as opposed to the following two-and-a-bit days. The significance of this in the context of the primary judge's criticism of Denis has already been pointed out at [179] above.

Conclusion in relation to finding of knowledge and connivance

1. As the primary judge explained, his conclusion that Denis had knowledge of the theft and arson, and connived in it so as to engage the fraud condition and the fraud exclusion under the ISR Policy was based upon his Honour's reasoning at PJ [186]-[207] and "[t]aking together all of the circumstances considered" in those paragraphs. His Honour's conclusion that Denis "agreed to the execution of the plan [to steal from the warehouse and have the remaining contents destroyed by fire] and that he cooperated in it by absenting himself on a trip to Hong Kong for the critical weekend" was based entirely on circumstantial reasoning, with a number of different strands of argument forming part of that reasoning. For the reasons set out in detail above, and in light of the gravity of the allegations made, in my respectful view, the primary judge's conclusion on the critical question of knowledge and connivance cannot be sustained. This has the consequence that Admiral's entitlement to indemnity from CGU under the ISR Policy was not excluded.
2. It also follows that his Honour's dismissal of Admiral's cross-claim against CGU in the Brightcity proceedings, on the basis that there was no relevant "occurrence" under cl 4.15 of the Liability Policy as the warehouse fire was both expected and intended from Admiral's standpoint (see PJ [277]), similarly cannot be sustained.
3. This conclusion leads to a consideration of whether CGU's obligation to indemnify Admiral for its liability to Brightcity was nonetheless excluded under cl 8.16 of the Liability Policy, relating to the failure to take reasonable precautions: see [25] above.

Reasonable precautions

1. The provisions of the Liability Policy relevant to this aspect of the appeal have been set out at [23]ꟷ[26] above.
2. In respect of the "reasonable precautions" issue raised by Admiral's appeal in the Brightcity proceedings, PJ [270]-[272] and [280] should be noted, bearing in mind that PJ [270]-[272] were principally directed to Brightcity's claim against Admiral for breach of bailment, which Admiral did not challenge on appeal: "270 Admiral has failed to disprove that the destruction of Brightcity's goods was the result of negligence on its part. Reasonable steps that could have been taken to protect the contents of the warehouse, and that were not taken from when the premises were last attended by an Admiral employee, Dmitry Fateev, at about 11:00pm on Saturday, 14 April 2018, include the following: (1) Locking the front gates to the warehouse forecourt. (2) Locking the patio bolt of the front office door, with the bolt engaged in the threshold. (3) Closing the electronically latched door from the office into the warehouse and not leaving any readable card key in the vicinity. (4) Arming the alarm. (5) Notifying the alarm monitoring service, Securitas, of one or more persons in Sydney, additional to Denis and Dmitry Fateev, who could be contacted in the event of an alarm signal being received during the absence of those two persons overseas. (6) Maintaining the capability to monitor CCTV within the warehouse remotely and ensuring that that capability was at all times in the hands of someone present in Sydney and nominated to Securitas as a contact. 271 The first three of these measures, alone, would have been capable of preventing the arsonist from gaining access to start the fire by which Brightcity's goods were destroyed. At the least, those three basic steps could have impeded the arsonist to such a degree that he would not persist with trying to force entry for fear of being discovered. The impediment and deterrent would have been further increased by the addition of steps (4), (5) and (6), pursuant to which a patrol car may have been dispatched to the warehouse before entry could have been forced. The failure to take any of these steps has been clearly established and Admiral has not disproved that they were causative of the arsonist gaining entry to ignite the fire. 272 On the findings that I have made, Admiral's failure to take reasonable care to preserve Brightcity's [goods] went well beyond the omissions referred to above. I have found that Dmitry Fateev deliberately left the premises in a state that would permit ready access and that he arranged for and consented to the attendance of the arsonist. Further, I have found that he caused combustible motor tyres to be distributed through the warehouse aisles in order to fuel the fire and promote its destructiveness. … 280 CGU also invoked Condition 8.16 of the Liability policy, pursuant to which Admiral was obliged to 'take all reasonable care to prevent … Property Damage'. Admiral argued that breach of this condition, if proved, does not warrant refusal of indemnity. It relied upon ss 52(1) and 55 of the Insurance Contracts Act. There most certainly was a breach of Condition 8.16, constituted by the aspects of neglect referred to at [270] above and by the deliberate actions identified at [272]. It is unnecessary for me to determine the consequences of the breach of Condition 8.16, pursuant to relevant sections of the Act, because of the more fundamental objections to Admiral's claim for indemnity, arising from its knowing concern in and approval of the arson." (emphasis added)

Admiral's claim for consequential loss under the ISR Policy

1. In its Amended Statement of Claim in the CGU proceedings (ASOC), Admiral brought claims for damages reflecting its alleged consequential losses, in accordance with the terms of the ISR Policy, on two bases. First, it sought damages for breach of contract. Secondly, in the alternative or in addition to the breach of contract claim, it sought damages for breach of CGU's duty of utmost good faith as set out in s 13 of the Insurance Contracts Act.
2. That section relevantly provides that: "(1) A contract of insurance is a contract based on the utmost good faith and there is implied in such a contract a provision requiring each party to it to act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good faith. (2) A failure by a party to a contract of insurance to comply with the provision implied in the contract by subsection (1) is a breach of the requirements of this Act. (2A) An insurer under a contract of insurance contravenes this subsection if the insurer fails to comply with the provision implied in the contract by subsection (1)".
3. In the ASOC, Admiral particularised its pleaded consequential losses as follows: "33 … without the Defendant accepting and paying its claim the Plaintiff has been unable to and will continue to be unable to: a. operate its business; b. return to its pre-fire trading capacity; and c. reach the increased level of trading and profitability it expected to achieve. 34 Had the Defendant accepted the Plaintiff's claim and the claims of the Plaintiff's customers, the Plaintiff: a. Would have continued operating its business; b. Would not have lost its customers; and c. Would have increased its trading and profitability to the level it expected to achieve at the time of the fire. 35 The Plaintiff thereby suffered loss as a result of the Defendant's breach of the Policy. 36 The said losses may fairly and reasonably be considered as arising naturally from the Defendant's breach of the Policy. 37 Further and in the alternative, at the time the Policy was entered into, the Defendant should, or a reasonable insurer in its position would, have realised that such losses were likely to result from its breach of contract in failing to pay under the Policy. 38 The Plaintiff claims its consequential losses arising from the Defendant's wrongful refusal to indemnify."

Growth trend in gross revenue

1. The final issue for determination relates to ground 17 of Admiral's appeal in the CGU proceedings.
2. By this ground, Admiral appeals from the primary judge's finding that "on the balance of probabilities there has [not] been established any trend of growth in [Admiral's] Gross Revenue that should be applied in respect of the indemnity period": PJ [259].
3. The primary judge considered the growth trend of Admiral's gross revenue as an aspect of the contingent inquiry into the quantum of Admiral's claim for business interruption under s 2 of the ISR Policy, titled "Consequential Loss", notwithstanding that his Honour had found that "CGU is entitled to refuse indemnity to Admiral under the [ISR] policy". [68]
4. The indemnity clause in that section provided that, during the "indemnity period": "In the event of any building … used by the Insured at the Premises for the purpose of the Business being physically lost, destroyed or damaged during the period of insurance by any cause or event not hereinafter excluded (loss, destruction or damage so caused being hereinafter termed 'Damage') and the Business carried on by the Insured being in consequence thereof interrupted or interfered with, the Insurer(s) will, subject to the provisions of the Policy including the limitation on the Insurer(s) liability, pay to the Insured the amount of loss resulting from such interruption or interference in accordance with the applicable Basis of Settlement." The "indemnity period" was defined as spanning 12 months, commencing with the occurrence of the Damage, such that it ran from 16 April 2018-15 April 2019.
5. The Basis of Settlement, referred to at the conclusion of the indemnity clause and modified by endorsement GREVNCC4, relevantly provided as follows: "Item No. 1 - Loss of Gross Profit The insurance under this item is limited to actual loss of Gross Profit due to: (a) Reduction in Turnover, and (b) Increase in Cost of Working, and the amount payable as indemnity thereunder shall be: (a) in respect of Reduction in Turnover: The amount by which the Gross Revenue during the Indemnity Period shall, in consequence of the Damage, fall short of the Standard Gross Revenue. (b) in respect of Increase in Cost of Working: The additional expenditure necessarily and reasonably incurred for the sole purpose of avoiding or diminishing the loss of Gross Revenue which, but for that expenditure, would have taken place during the Indemnity Period in consequence of the Damage but not exceeding the amount of the reduction in Gross Revenue thereby avoided, less any sums saved during the Indemnity Period in respect of such charges and expenses of the Business as may cease or be reduced in consequence of the Damage."

The expert evidence

1. Expert forensic accounting reports were tendered by Admiral and CGU respectively. Admiral relied upon three reports of Mr David Bleasdale (Mr Bleasdale), a forensic accountant, dated 1 June 2020, 26 April 2021 and 23 July 2021 respectively. CGU relied upon three reports of Mr Neil McPhee (Mr McPhee), also a forensic accountant, respectively dated 17 September 2020, 13 August 2021 and 16 August 2021. In light of some differences between the experts' calculations, Messrs Bleasdale and McPhee conferred and prepared a "Joint Statement of Experts" dated 2 September 2021. The joint report "significantly reduced the areas of disagreement" between the experts: PJ [242].
2. Nonetheless, there remained some variation in the experts' conclusions as expressed in the joint report, which was summarised by the primary judge as follows, with the material difference as to trend growth emphasised in bold text: [69] Component of calculation Mr Bleasdale (Admiral) Mr McPhee (CGU) 1 Standard Gross Revenue $1,405,385 $1,405,385 2 Trend +19.32% 0% 3 Adjusted Standard Gross Revenue $1,676,665 $1,405,385 4 Actual Gross Revenue during indemnity period $486,615 $486,615 5 Reduction in Gross Revenue $1,190,250 $925,274 6 Rate of gross profit 66.99% 62.28% 7 Loss of gross profit $797,348 $576,353 8 Increased Cost of Working $65,555 $65,555 9 Saved costs $222,147 $222,147 10 Claim preparation costs $22,816 $22,816 11 Total consequential losses $663,572 $437,569

1. In his first report, under the heading "trend", Mr Bleasdale opined that, on the basis of Admiral's monthly profit and loss statements from March 2017-March 2018: "8.1 The weighted average trend for the Insured is calculated at 6.5% … 8.2 The trend percentage used to assess the claim represents the trend for the 9 months prior to the loss. 8.3 The annual trend for the year prior to the month the loss occurred is lower at -0.24%. However, the 3-month and 6-month trend percentages show strong double-digit growth at 38% and 22%. This reflects growth in the business through sales development work that had been occurring over a lengthy period of time. 8.4 Furthermore, at the time of the fire the owners had been in negotiations to commence contracts with new overseas customers wishing to employ an Australian importer for their products. If the fire had not disrupted the ability for Admiral International to serve new customers, these new business opportunities would have further grown the future turnover for the business. 8.5 Accordingly, we believe that a trend of 6.5% is conservative and reasonable considering the trend for the business in the nine months preceding the fire, and in view of likely new business opportunities." The "new overseas customers" referred to by Mr Bleasdale were Pegasus Supply Solutions Pty Ltd and Juhao respectively. [70]
2. Mr McPhee did not accept Mr Bleasdale's opinion as to the growth trend of Admiral's gross revenue, nor his methodology, which calculated the trend "based on the actual growth achieved in the 9 months before the date of the loss", adjusted to take account of a "one-off unusually large revenue transaction" in the March 2018 quarter, notwithstanding that "Mr Bleasdale acknowledged that for the full 12 months to March 2018 Admiral's Gross Revenue showed no growth relative to the previous 12 month period". [71]
3. Mr Bleasdale adopted this methodology on the basis that a comparison with the 12-month period from March 2017-March 2018 did not provide a holistically accurate account of the improvement in Admiral's financial performance up to the "indemnity period", in circumstances where "[t]he historic growth rate in turnover for 6 months before the fire was 12.5% and for the 3 months before the fire was 19%", which "show a clear trend of significant and rising rate of growth in Admiral's business".
4. The methodology adopted by Mr McPhee to conclude that it was not appropriate to apply a growth trend (i.e. applying a growth trend of 0%) to calculate Admiral's expected turnover corresponded to that which was eschewed by Mr Bleasdale, namely, "highlighting that the twelve months prior to the loss show a growth percentage close to zero". The following data informed that conclusion: 12 months ending 31 March Average yearly change 2017 2018 2019 (expected) Adjusted turnover $1,396,517 $1,349,169 $1,405,385 $8,868 0.63% Average turnover per month $116,376 $112,431 $117,115 $739 0.63% Rate of gross profit 67% 62% 62.29% 0.29%

As noted at [255] above, and recorded by the primary judge at PJ [252], Mr Bleasdale accepted the foregoing analysis of the 12 months prior to the fire, albeit that he did not consider it to provide a fair representation of Admiral's financial performance, in light of a more recent upturn in gross revenue to March 2018.

1. Mr McPhee provided further justification for his longer-term methodology in the joint report, stating he considered it "more appropriate to use the actual historical annual turnover achieved by the Plaintiff when considering whether to apply a trend, because the Plaintiff's historical monthly turnover during the 24 months prior to the Incident fluctuates … from around $193,000 in September 2016 through to $69,000 in June 2017".
2. In the joint report, Mr Bleasdale revised his initial calculation of a 6.5% growth trend in Admiral's gross revenue, increasing the applicable figure to 19.32%, in order to "reflect the growth shown by Admiral in the three months before the fire (38%) and for the six months before the fire (22%) as well as the expectations communicated to me by Mr Denis Fateev of sales growth opportunities" (emphasis added). Mr Bleasdale had previously described those "opportunities for growth in turnover" in his second report, dated 26 April 2021, as follows: "2.10 Since submitting our report dated 1 June 2020, we have given further consideration to the statements made in the affidavit of Mr Denis Fateev dated 5 June 2020 … In doing so it is appropriate that we revisit the growth rate used in our previous report. We now consider that growth rate was understated and a higher rate of 15% from May 2018 to October 2018, and 20% from November 2018 to 15 April 2019 is justified and is supported by the results of the business in the nine months prior to the fire and by its future plans. 2.11 The expected growth advised by Mr Denis Fateev was a key reason for Admiral's decision to move to larger premises at Lidcombe. The move to Lidcombe would have provided twice the amount of storage space for customers goods. 2.12 The expected growth is also supported by two new business opportunities being negotiated by Denis Fateev at the time of the fire. 2.13 The first of these was with an existing customer, Pegasus Supply, whom Admiral provided bond storage to as well as deliveries to cruise ships in Sydney. This customer was planning to increase their business volume with Admiral and significantly increase the bonded warehouse storage they required. 2.14 A second opportunity arose whereby Admiral was in negotiations with a Chinese manufacturer to handle the importation of their products to Australia and New Zealand and to manage the distribution of the manufacturer's products once the goods were in Australia/New Zealand. Mr Denis Fateev was in Hong Kong at the time of the fire for the purpose of continuing these negotiations. 2.15 Taking the recent high growth rates and the new growth opportunities into account we consider that a reasonable forecast for growth in turnover, had the fire not occurred, would be 15% during the first 6 months after the fire, and 20% for the second six months".

Consideration regarding the growth trend in gross revenue

1. In the course of oral argument in this Court, Mr Sullivan attempted to identify evidence that better particularised the "two new business opportunities" presented to Admiral by Pegasus and Juhao respectively, with specific reference to the primary judge's finding that Admiral had a "concrete prospect" of increasing its gross revenue by "handling food products to be imported from Juhao" (emphasis added). [72] To that end, Mr Sullivan drew the Court's attention to the following matters deposed to by Denis in his Affidavit in the CGU proceedings, dated 28 June 2021: "At least one aspects of Admiral's new business venture (importing products from China/Hong Kong) did not require a bonded warehouse and otherwise we do not have any evidence as to whether and to what extent Admiral's business after the fire requires a bonded warehouse 30 While it is correct that the new business venture in relation to the importation of food products from China and Hong Kong would not require a bonded warehouse, I disagree with this insofar as it attempts to infer that Admiral's business could have operated without the requisite licences. … Lost Business Opportunities 64 As a result of CGU's failure to indemnify Admiral, Admiral has lost business opportunities which had the potential to substantially increase Admiral's business operations. 65 One such business opportunity which Admiral lost was with a company known as Pegasus Supply. 66 For many years prior to the fire, Pegasus Supply used Admiral for provision of transport services. Pegasus Supply was interested in using Admiral to handle its bonded goods, however the Alexandria premises were unsuitable due to its size. 67 Prior to the fire, I had completed negotiations with Pegasus Supply, and Pegasus Supply had agreed for Admiral, to commence providing bonded warehousing services shortly after Admiral began occupying the Lidcombe Warehouse. 68 Those services involved the storage, distribution and logistics of the entirety of the bonded goods being handled by Pegasus Supply. 69 I expected that the agreement with Pegasus Supply, in addition to Admiral's existing customers, would enable Admiral to operate the Lidcombe warehouse at its full capacity. 70 I expect that based upon that agreement alone, had CGU indemnified Admiral in respect of its claim, Admiral could have operated the Lidcombe Warehouse at its full capacity: a) Realistically, by October 2018; or b) Conservatively, by April 2019. 71 In December 2018, Pegasus Supply opened its own bonded warehouse and, as such, Admiral has lost the opportunity to provide those services to Pegasus Supply and to operate the Lidcombe Warehouse at full capacity." (emphasis added)

Conclusion and orders

1. It follows that the appeal in the CGU proceedings must be allowed in part and the appeal in the Brightcity proceedings should also be allowed in part.
2. The parties should bring in short minutes of order to reflect these reasons by 27 January 2023, together with any submissions (of not more than three pages) as to costs and any dispute as to orders by that same date, to be determined by the Court on the papers.
3. WARD P: I agree with Bell CJ.
4. MACFARLAN JA: I agree with Bell CJ.

Endnotes

1. PJ [24].
2. PJ [4].
3. PJ [2].
4. PJ [10].
5. PJ [9].
6. PJ [212].
7. PJ [5], [233], [273].
8. PJ [217].
9. PJ [4], [234].
10. PJ [15]-[16].
11. PJ [88].
12. PJ [111].
13. See, for example, PJ [109].
14. PJ [110].
15. PJ [179].
16. PJ [68].
17. PJ [73].
18. PJ [48].
19. PJ [49].
20. PJ [76].
21. PJ [76]-[78].
22. PJ [50].
23. PJ [50].
24. PJ [57].
25. PJ [58].
26. PJ [2].
27. PJ [185].
28. PJ [89].
29. PJ [181(7)].
30. PJ [9].
31. PJ [10]-[11].
32. PJ [178].
33. PJ [181].
34. PJ [175]-[177].
35. PJ [177].
36. PJ [11].
37. PJ [169].
38. Briginshaw at 361-362.
39. Briginshaw at 368-369.
40. Akhil at 285; see, also, 290 per Brennan J, 295 per Dawson J and 301-302 per Toohey J.
41. See, also, Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 at 573; [1995] HCA 68; Minister Administering the Crown Lands (Consolidation) Act and Western Lands Act v Tweed Byron Aboriginal Land Council (1990) 71 LGRA 201 at 203-204; Fairfax Digital Australia & New Zealand Pty Ltd v Kazal (2018) 97 NSWLR 547; [2018] NSWCA 77 at [185]; Almona Pty Ltd v Parklea Corporation Pty Ltd (2021) 392 ALR 457; [2021] NSWCA 171 at [53].
42. Nadinic at [109], [114]-[116].
43. (1951) 217 ALR 1 at 5 per Dixon, Williams, Webb, Fullagar and Kitto JJ.
44. PJ [207].
45. PJ [189].
46. PJ [189].
47. PJ [189].
48. PJ [188].
49. See [31]-[32] above.
50. PJ [256].
51. PJ [187].
52. Zappia at [37].
53. Zappia at [37].
54. Zappia at [41].