CONSEQUENTIAL DAMAGES
The case put
484 In addition to its loss represented by the amount of the indemnity due under the policy, Brescia claims the consequential loss it says it suffered by reason of the defendants' failure to acknowledge indemnity either within a reasonable time or at all.
485 It puts this claim on the basis of what is often described as the second limb of the rule in Hadley v Baxendale (1854) 9 Exch 341 at 354. The first limb of the rule is that loss is recoverable if either it may fairly and reasonably be considered as arising naturally, that is according to the usual cause of things from the breach. The second limb is that loss is recoverable if it may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of the breach of it.
486 Relying on the second limb, Brescia says it suffered loss beyond the amount of the indemnity under the Policy in two ways.
487 Firstly, it says that had the defendants acknowledged their obligations it would have rebuilt the building. The building would have been ready to reopen for business by 3 December 2006. Because of the defendants' failure to acknowledge their obligations (which failure continues) Brescia did not reopen by 3 December 2006 and it has still not reopened at Ashfield. It claims the loss of profit it would have made and would now be making as damages.
488 Secondly, it says that after the fire it had the opportunity to purchase new trading premises at unit 4, 476-492 Gardeners Road, Alexandria ("Alexandria") which would have operated whilst the building was being rebuilt. It says it forewent this opportunity because of the defendants' failure to acknowledge liability. Instead it leased smaller less desirable premises at level 1, 265 Parramatta Road, Auburn. It puts that the trading results from Auburn were poorer than they would have been from Alexandria and claims the difference, for so long as the building is not rebuilt, as damages.
489 It was not put in issue that had the building been rebuilt it would have been open for business by 3 December 2006.
490 The evidence also established that Brescia had the resources to buy Alexandria if it wanted to and that its assets and the family resources were such that it could have rebuilt the building. However, Vittorio's evidence was, and I accept, that it would not have been wise to do so not knowing what was happening with this case. He also said that he would have done whatever he could to get the building rebuilt as quickly as possible if the insurers would have paid. I accept this evidence.
491 Vittorio was not challenged on his evidence that Brescia would, but for the non-admission or denial of indemnity, have proceeded with the purchase of Alexandria rather than lease Auburn. Mr Dolman considered it probable that there were reasons other than the uncertainty of the position with respect to insurance which caused Brescia not to proceed with the Alexandria purchase. I accept Vittorio's evidence over Mr Dolman's ex post facto analysis. Even if other factors played a role in Brescia's decision not to proceed with Alexandria, the evidence established that the defendants' conduct clearly played a material causative role: Wardley Australia Limited v State of Western Australia (1992) 175 CLR 514.
492 The evidence also established that the attributes of Alexandria were superior to those of Auburn. They were larger premises and situated directly opposite a Harvey Norman showroom whereas Auburn is in the Auburn Home Mega Mall, one of 40 stores in a three level centre in an area with less advantageous socio-economic status. A submission was made with respect to Vittorio's credit that he had referred in his affidavit evidence to a Harvey Norman Store and corrected it to a MegaMart store in his oral evidence. There was a Harvey Norman Store rather than a Mega Mart store at the time of his affidavit but not in March and April 2005. Vittorio apologised and accepted his error. It seemed to me that this enhanced rather than eroded his credit.
The defence put
493 The defendants resist the consequential damages claim on a number of bases. Firstly, they say that as a matter of legal principle such consequential damages are not available where the claim arises out of the breach by an insurer of an obligation to give indemnity where the insured has not terminated the contract of insurance for breach.
494 Secondly, they say that Brescia's claim does not satisfy the requirements of the second limb in Hadley v Baxendale because the damages claimed are too remote. They cannot, it is put, be reasonably supposed to have been in the contemplation of the parties at the time of the Policy as being the probable results of the breach of it.
495 Thirdly, they say that on the facts here the damages claimed were not caused by their breach but rather by Brescia itself which could have both acquired Alexandria and rebuilt the building out of its own resources but decided not to do so.
496 Fourthly, they put quantum in issue.
Availability of consequential damages
497 The defendants placed heavy reliance on the decision in Russell Young Abalone Pty Limited v Traders Prudent Insurance Company Limited (1993) 7 ANZ Ins Cas 61-182, a decision of the Full Court of the Supreme Court of Tasmania, in which Underwood J with whom Green CJ agreed, said the following at 78,039:
"It appears that from the outset, the proceedings were permeated by a failure to come to grips with the fundamental distinction between a claim for indemnity under a contract of insurance and a claim for damages at large consequential upon acceptance of wrongful repudiation. The particulars do not make that distinction. It is not apparent on the pleadings and was obscured in the submissions put to the learned trial judge during the argument on the admissibility of the evidence of loss or rental and diminution of capital value."
498 His Honour also said the following at 78,040:
"If an insured elects to accept the insurer's wrongful repudiation, the damages are measured in accordance with the principles laid down in Hadley v Baxendale (supra). If an insured does not accept the repudiation the contract remains on foot entitling him or her to recover only in accordance with its terms. See Steven Taylor v J Thomas & Son. ; VACC Insurance Co Ltd (Third Party) (supra); Shelbourne & Co v Law Investment & Insurance Corp Ltd [1898] 2AB 626; Maurice v Goldsbrough Mort & Co Ltd [1939] AC 452. The nature of a claim against an insurer who fails to pay but does not repudiate the policy is discussed in F & K Jabbour v Custodian of Israeli Absentee Property [1954] 1 WLR 139 at 143 et seq . Pearson J examined a large number of authorities and concluded that such a claim is one for damages but that the expression has a different meaning in claims for a failure to indemnify under a policy of insurance, for the only wrong has been a failure to pay a sum due under a contract. The method of calculating this sum is usually provided for in the contract itself. This decision is referred to by the editor of McGregor on Damages (15th edn) at 1, where it is said that actions ( inter alia )to recover money under insurance policies are to be distinguished from claims for damages for breach of contract and are outside the scope of the book. However, as I understand it, this does not mean that an insured seeking to recover money under a contract of insurance is denied the right to recover interest for late payment."
499 A similar approach was adopted by Powell JA in CIC Insurance Limited v Bankstown Football Club Limited at 75,596-75,598 and again in Kassem v Colonial Mutual General Insurance Co Ltd [2001] NSWCA 38. It was also taken by Carter J in Judd & Judd v Suncorp Insurance & Finance (1988) 5 ANZ Ins Cas 60-832.
500 This approach was referred to apparently with approval by Campbell J in Green v AMP Life Limited (2005) 13 ANZ Ins Cas 90-124 at 86,632. That case involved a life insurance policy with an obligation on the insurer to make periodical payments while the insured remained totally disabled. At 86,661 His Honour said:
"For so long as the contract remains on foot, that will continue to be AMP's obligation. The only way in which the plaintiff would be entitled to a lump sum for the present value of net future benefits under the contract is if the plaintiff has, and has exercised, a right to terminate the contract for repudiation. "
501 In the Court of Appeal in CIC Insurance Limited v Bankstown Football Club Limited a different view was taken by Kirby P and Priestley JA at 75,565 and 75,571 respectively. The view taken by Kirby P was that whether or not general damages are recoverable for the breach of an insurance contract is to be ascertained by the application of general principles of contract law and His Honour concluded, at 75,566 that:
"A claim for general damages for unreasonably tardy payment arising from or the belated recognition of an entitlement to insurance indemnity is by no means heterodox."
502 Priestley JA said:
"On the basis that the appellant's obligation was to pay the respondent's repair/reinstatement costs when incurred, statements by the appellant that it would not pay such costs, when incurred, which had the practical effect of preventing the respondent getting the benefit of the appellant's promise and obligation, should, in my opinion be treated as breaches of contract, so that any damage that can be proved to flow from them would be payable by the appellant to the respondent."
503 The decision in the High Court was determined on different grounds and the Court did not express a view on the point.
504 In Motor Accident Mutual Insurance Pty Limited v Kelly (1998) 10 ANZ Ins Cas 61-420 at 74,715 and following, Rolfe AJA, with whom Stein JA and Fitzgerald AJA agreed, applied the rule in Hadley v Baxendale without reference to the approach taken in Russell Young Abalone v Traders Prudent Insurance Company Ltd.
505 Also, in Tropicus Orchids Flowers and Foliage Pty Ltd v Territory Insurance Office (1998) 148 FLR 441, at 486 and following, Mildren J, considered the controversy and concluded that if the insurer fails to pay within a reasonable time it is in breach and the insured may sue for the indemnity under the policy, and for damages for breach of contract. His Honour held further that regardless of whether or not the action is for monies due under the policy or for damages for breach, where the policy is still on foot the insured may also claim damages for loss of the use of the money in accordance with the rule in Hadley v Baxendale.
506 In Ferrcom Pty Limited v Commercial Union Assurance Co of Australia Limited (1989) 5 ANZ Ins Cas 60-907, Giles J considered a claim for damages in accordance with Hadley v Baxendale and held that in appropriate circumstances loss due to late payment of a debt might be recoverable if it constituted special damage within the contemplation of the parties under the second limb in that case. There was no suggestion that such a claim was available only if the policy had been terminated for repudiation.
507 In an article written by Stanley Drummond entitled "Damages for Consequential Loss When the Insurer Fails to Pay" (2005) 16 Insurance Law Journal 1, the learned author in a compelling analysis of the authorities describes as a misconception the idea that repudiation and acceptance of repudiation are prerequisites for an award of damages for consequential loss where the insurer either refuses to pay a valid claim or fails to pay it within a reasonable time, in breach of its contractual obligations.
508 The learned author's conclusion is that where an insurer breaches the contract by failing to pay a valid claim, the insured's entitlement of damages is governed by the ordinary rules of contract law which means that damages for consequential loss are available in accordance with the rule in Hadley v Baxendale. He identifies the origin of the asserted misconception and traces its development through a number of authorities.
509 I consider that I am bound by the decision of the majority of the Court of Appeal in CIC Insurance Limited v Bankstown Football Club Limited and by the approach taken in Motor Accident Mutual Insurance Pty Limited v Kelly. Even if I did not consider myself to be so bound, I consider that approach to be correct.
510 The breach by an insurer to meet its obligations to indemnify is no different to a breach by any other citizen of a contract. The general principle remains that when assessing damages for breach of contract the plaintiff should be put in the position that he or she would have been in but for the breach, that is, the position if the contract had been performed; Wenham v Ella (1972) 127 CLR 454.
511 If the contract remains on foot the plaintiff can recover, on ordinary principles, including the rule in Hadley v Baxendale, such amount as is necessary to put him in the position in which he would have been. But his damages must in that case be assessed on the basis that the bargain is still on foot.
512 If the contract is terminated by him accepting the defendants' repudiation, the damages are assessed on the basis that the bargain has been lost: see Ronnoc Finance Limited v Spectrum Network Systems Limited (1997) 45 NSWLR 624 at 628 and following.
513 By way of example, one of the consequences of terminating is that where there is a contractual right to have instalments paid over a period of time, on termination, damages will be assessed by valuing the right that has been lost so that they will be determined on the basis of the net present value of the lost right. If the contract remains on foot the plaintiff does not become entitled to a lump sum for the present value of net future benefits under the contract but will be entitled to damages equivalent to the amount of each instalment which the defendant fails to pay from the time that it is in breach with respect to that instalment plus such further loss which it suffers as a consequence of the failure to pay, determined in accordance with the rule in Hadley v Baxendale.
514 Whether the contract is on foot or not plays no role in whether or not Hadley v Baxendale applies to a particular breach. It seems to me that the Court in Russell Young Abalone Pty Limited v Traders Prudent Insurance Company Limited mistook the requirement for termination as a prerequisite for loss of bargain damages to be a prerequisite for the application of Hadley v Baxendale to breach of a contract of insurance. There is no principle from which such a distinction is to be derived.
515 I agree with the conclusion reached by Campbell J in Green v AMP Life Limited at 86,661 but for the reason that the contract there remained on foot and the claim was for damages to be assessed on the basis of a lump sum for the present value of net future benefits under the contract. On those facts on ordinary principles the plaintiff was not so entitled, but not because the breach of an insurance contract is to be treated according to some principle different to that which applies to any other contract. The plaintiff was not so entitled because he had not terminated. Damages were accordingly not to be assessed on the basis that his future instalment benefits were to be notionally accelerated and valued now.
516 I accordingly reject the defendants' submission that consequential damages are not available here as a matter of principle.
Contemplation of the parties and causation
517 Clearly, the actual contemplation of the parties extended to the facts that the building was used by Brescia to trade and that occurrence of the peril might cause consequential loss of profits. A premium was paid for consequential loss of profits insurance. It is accordingly, not difficult to suppose that at the time of the Policy the parties had in their contemplation that if the defendants unjustifiably delayed the acknowledgement of their liability to indemnify Brescia in respect of its losses it would inevitably suffer loss of trading profits as a consequence: cf Kirby P in CIC Insurance Limited v Bankstown Football Club Limited at 75,566.
518 The defendants placed reliance on the decision in Ferrcom Pty Limited v Commercial Union Assurance Co of Australia Limited in which Giles J declined to award consequential damages. The plaintiff had sought to recover damages for the costs of repairing and salvaging a mobile crane which overturned while lifting a load at Darling Harbour in Sydney and was damaged. It also claimed an amount for lost profits resulting from the inability to hire out the crane. The Court awarded as damages the cost of salvage and repairs. It held that, however, the plaintiff had not brought itself within the second limb of Hadley v Baxendale because it did not show that the insurer knew or ought to have known that if it did not provide indemnity the crane would be out of operation beyond the normal repair period because the insured could not afford to pay for the repairs or for some other reason or that it was foreseeable, necessarily within the contemplation of the parties, that that would be so. There was no claim by the insurer for the cost to it for funding the repairs to the crane or the cost of funding its business with borrow money as result of the loss of money paid by it for the repairs.
519 In my view, the decision in Ferrcom Pty Limited v Commercial Union Assurance Co of Australia Limited turns on its own facts and is distinguishable from the present case. Here the Policy expressly contemplates loss of profits from business interruption caused by damage to property and it contemplates a regime for reinstatement of a building which houses a profit generating business. The terms of the policy in Ferrcom Pty Limited v Commercial Union Assurance Co of Australia Limited concerned one piece of equipment and there was no consequential loss of profits cover. What may reasonably be supposed to have been within the contemplation of the parties there does not assist with the equivalent exercise here.
520 The defendants do not plead any failure by Brescia to mitigate its damages, in respect of which the onus would have been on them: TCN Channel 9 Pty Limited v Hayden Enterprises Pty Limited (1989) 16 NSWLR 130 at 158 per Hope JA.
521 It was not unreasonable for Brescia not to reinstate in the face of the position taken by the defendants firstly in not indemnifying and then in refusing to. The Policy contemplates payment of indemnity value initially and then when a sum equal to reinstatement value has actually been incurred, payment to the insured of reinstatement value.
522 It could not fairly be said, in my view, that acting reasonably in the ordinary course of its business Brescia should, in the circumstances, have proceeded to reinstate to reduce the loss of profits it would have made if the insurance contract had been honoured: see TCN Channel 9 Pty Limited v Hayden Enterprises Pty Limited at 158 per Hope JA and 161-162 per Priestley JA.