CIC INSURANCE LTD v BANKSTOWN FOOTBALL CLUB LTD

Court of Appeal (NSW)|1994-03-31|Before: Cole J, Kirby P, Powell JA, Priestley JA, Per Kirby P

KIRBY P, PRIESTLEY and POWELL JJA 29-31 March 1994, 14 December 1994

INSURANCE - cancellation - validity of- solicitor accepts in letter - held: (by Maj) - Cancellation accepted - Binds insured - within ostensible authority - cancellation effective - no statutory policy under s58 Insurance Contracts Act 1984. LEGAL PRACTITIONERS - ostensible authority - cancellation of insurance policy - within authority in disputed claim - estoppel - representations unconscientious to deny - held: (by Maj) Estopped from denying. DAMAGES- insurance contract - non-payment of claim - general damages recoverable.

INSURANCE - cancellation - validity of - letter by insurer to insured's solicitor following fire caused by arson - insurer purports to cancel policy - insured's solicitor requests payment of cheque for balance of premium which is duly repaid - whether solicitor's letter binds insured - whether constitutes abandonment of policy ab initio - whether insured estopped from asserting continuation of policy in face of letter - held: (allowing appeal and reversing Cole J on this point): (per Kirby P and Powell JA, Priestley JA dissenting on this point)

(1) It was not necessary for the insurer to prove the insured's actual authority to its solicitor to write as he did. It was enough that the solicitor acted within the ostensible authority of his retainer.

Geissler v Accro Motors Pty Ltd (1955) 73 WN (NSW) 31 (FC) applied; Freeman and Lockyer v Bathurst Park Properties (Mangal) Ltd [1964] 2 QB 480 (CA) and Crabtree-Vickers Pty Ltd v Australian Advertising and Addressing Co Pty Ltd (1975) 133 CLR 72 applied;

(2) The solicitor's letter in its terms was within the ostensible authority of his retainer and bound his client, the insured;

(3) Neither in the letter nor in other conduct was there abandonment ab initio of the policy of insurance;

(4) The insured was estopped from asserting the continuation of the policy after the letter by its solicitor to the insurer.

The Commonwealth v Verwayen (1990) 170 CLR 394; Silovi Pty Ltd v Barbaro (1988) 13 NSWLR 466 (CA) applied;

(5) Accordingly, because the policy was cancelled or its repudiation accepted, s58 of the Insurance Contracts Act 1984 (Cth) did not arise, there was no statutory policy under that Act and the insurer's liability to the insured was to be ascertained by reference only to the terms of the original policy as issued by it to the insured;

(6) No appealable error arose in the decision of the primary judge to permit the insured belatedly to rely upon s58 of the Act.

Bank of New Zealand v Spedley Securities Ltd (In Liq) (1992) 27 NSWLR 91 (CA) applied.

Although (per Powell JA) leave ought not to have been granted for that purpose.

INSURANCE - cancellation - statutory insurance - Insurance Contracts Act 1984 (Cth), s58 - whether statutory insurance policy came into effect - held: (allowing the appeal): (per Kirby P and Powell JA; Priestley JA contra) As the policy issued by the insurer to the insured was cancelled or repudiated by the insurer and the cancellation or repudiation was

accepted by the insured's solicitor within the ostensible authority of the solicitor acting for the insured, it would be unconscionable for the insured to deny the cancellation or repudiation and it could not rely upon the suggested statutory policy under s58 of the Act but was limited to the obligations imposed upon the insurer by the contract which was cancelled or repudiated, but only prospectively.

ESTOPPEL - representations made on the basis of which insurer deprived of opportunity more security to protect its position in respect of cancellation of insurance policy - whether in the light of the representations it would be unconscientious for the insured to depart from them and to assert the continuing validity of a policy of insurance

held: (Per Kirby P and Powell JA; Priestley JA contra) It would be.

Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; Silovi Pty Ltd v Barbero (1988) 13 NSWLR 466 (CA) applied.

INSURANCE - industrial special risks policy - obligation to reinstate - requirements of obligation - fire causes substantial damage to property during period of insurance - primary judge upholds entitlement to indemnity in respect of such fire - no appeal against such finding - insurer cancels policy, disputes claim and denies obligation to reinstate property - continuing business and other losses occasioned by fire damage - further fires cause greater loss including, eventually, substantial destruction of premises - local authority requires demolition of premises - extent of insured's entitlement to reinstate - held: (by the Court) (allowing the appeal from Cole J on this point) The obligation to reinstate encompasses subsequent stock damage or destruction of the insured property during the period that the obligation to reinstate subsisted and had not been fulfilled. The insured was entitled to a declaration as to its right to reinstatement of its premises.

Smith and Ors v The Colonial Mutual Fire Insurance Co Ltd (1880) 6 VLR 200 (FC) and Government Insurance Office of New South Wales v Atkinson-Leighton Joint Venture (1981) 146 CLR 201 considered.

INSURANCE - reinstatement - duty of insurer - obligations under policy - policy provision imposes obligation but not "until a sum equal to the cost of reinstatement shall have been actually incurred [by the insured]" - upon insurer cancelling policy for fraud and declining liability to indemnify, insured unable to pay for reinstatement - insured subsequently sues insurer successfully - when cost of rebuilding destroyed premises "actually incurred" - held: (by the Court) (reversing Cole J on this point)

(1) The sum equal to the cost of reinstatement was not "actually incurred" until the insured had incurred the obligation to, or agreed to, pay the moneys necessary to reinstate its property - insured entitled to declaration of entitlement to indemnity but not to judgment in a monetary sum until that sum was "actually incurred";

(2) Judgment for the reinstatement sum not yet actually incurred, set aside.

DAMAGES - breach of contract - insurance policy - claim for indemnity denied by insurer - denial subsequently rejected by primary judge and not appealed - entitlement of insured to damages - entitlement under policy to business interruption for one year from loss - whether thereafter entitled to general damages for business interruption by reason of failure of insurer to pay as required under policy - held: (per Kirby P and Priestley JA; Powell JA contra)

(1) The insured may recover general damages such as were reasonably to be supposed to have been in the contemplation of the insurer and the insured ad the time of the making of the insurance policy.

Alexander and Ors v Cambridge Credit Corporation and Anor (1987) 9 NSWLR 310 (CA) applied;

(2) The obligation to pay general damages may arise in cases of breach of contracts of insurance.

Moss and Anor v Sun Alliance Australia Ltd (1990) 6 ANZ Ins Cas para60-967;

(3) In the instant case general damages were payable from a reasonable time after the entitlement under the contract of insurance until the payment.

LEGAL PRACTITIONERS - solicitor - retainer - ostensible authority of - held: (per Kirby P and Powell JA) It was within the ostensible authority of a solicitor retained by an

URJ CIC INSURANCE LTD v BANKSTOWN FOOTBALL CLUB LTD 3

insured in a controversial insurance claim to accept on behalf of the insured the cancellation of the policy by the insurer and the insured's solicitor had so accepted the cancellation by demanding the return of the balance of the premium for the unexpired term of the insurance. Pianta v National Finance and Trustees Ltd (1965) 38 ALJR 232 (HC) applied.

INTEREST - statutory interest - insurance claim - failure to pay - refusal held to be unjustified - business interruption claim - claim for reinstatement or replacement - held:

(1) Interest under s57 of the Insurance Contracts Act 1984 (Cth) was payable in respect of the business interruption claim;

(2) Interest was not payable in respect of reinstatement or replacement of premises contents and stock as the obligation to pay such reinstatement or replacement only arose where the insured had "actually incurred" the costs thereof.

(i) Upon the proper construction of policy number IS395070 issued by the appellant to the respondent in or about December 1991 ("the Policy") and in the events which have occurred, the appellant is liable to indemnify the respondent in respect of property damage and consequential loss occasioned by fire damage to its premises in Bankstown on or about 8 January 1992; and

(ii) Upon the proper construction of the Policy and in the events which have occurred, the appellant is liable to indemnify the respondent to the extent of the costs of reinstatement once actually incurred in respect of property damage and consequential loss occasioned by a fire on or about 3 March 1993 at its premises in Bankstown;

(iii) In the events which have occurred, the appellant is liable to indemnify the respondent in respect of consequential loss occasioned by fire damage to its premises from 8 January 1992 to 8 January 1993;

(iv) In the events which have occurred, the appellant is liable to pay general damages to the respondent in respect of its breach of contract;

(v) In the events which have occurred, the appellant is liable to pay interest to the respondent pursuant to s57 of the Insurance Contracts Act 1984 (Cth) in respect of the claim for consequential loss, from 9 March 1992 to the date on which the payment of that claim is made;

(vi) In the events which have occurred, the appellant is liable to pay interest to the respondent upon the award of general damages referred to in

(iv) above in accordance with the Supreme Court Rules from 9 January 1992 to the date of judgment;

(i) There be referred to the Commercial Division the ascertainment of the damages to which the respondent is entitled (if any) in accordance with declaration (iv) above and the interest to which the respondent is entitled (if any) in accordance with the declarations (v) and (vi) above;

(ii) There be reserved to the Commercial Division the entry of judgment to which the respondent is entitled, including in respect of any entitlement then established for the costs of reinstatement actually incurred by the respondent, should leave be given to the respondent to claim such sum;

(iii) Any such judgment to take effect from the date ordered by that Division; and

(iv) The respondent give credit to the appellant for sums already paid;

The appellant to pay the respondent's cost before Cole J;

The respondent to pay one third of the appellant's costs of the appeal; but to have in respect thereof, if otherwise so qualified, a certificate under the Suitors' Fund Act 1951; and

Liberty to either party to apply to relist the proceedings for variations of these orders or for further orders or directions, provided such liberty is exercised with 28 days of the publication of the judgment of the Court. Entry of, and execution upon, the final orders of the Court in the meantime to be stayed.

Kirby P This is an appeal from a decision of Cole J in the Commercial Divisionof the Supreme Court. His Honour held that the appellant insurer was liable to indemnify the respondent club pursuant to a contract of insurance for losses suffered by ie respondent when its premises where destroyed by a succession of fires. Cole J quantified the recoverable loss as being in excess of $1.9 million. He ordered that judgment be entered in favour of the respondent in that sum. The appellant challenges the extent of its liability to indemnify the respondent and the relief granted by Cole J.

AN INSURED'S PREMISES ARE DESTROYED BY FIRE CAUSED BY ARSON

Bankstown Football Club Ltd (the club) had its premises in Jacobs Street, Bankstown. The activities of the club were various and unremarkable. They included the conduct of a licensed bar area with gaming machines and other like facilities. Within the club's premises was an independently operated restaurant, specialising in Chinese cuisine. Although, in the past the club's profitability had been questionable, with the benefit of new management, the club had begun to exhibit signs of improved and sustained profitability.

To insure itself against certain losses the club had entered into a "industrial special risks" insurance policy with the appellant on 3 December 1991. That policy was expressed to expire on 30 October 1992. On the night of 8 January 1992, the premises of the club were severely damaged by a fire starting in the kitchen of the restaurant. There is no dispute that the fire was not accidental. It was not disputed that arson was involved. An accelerant (most probably between 4 and 20 litres of petrol or kerosene) was spread over the floor of the restaurant. The damage occasioned by the fire (the first fire) required that the premises be boarded up and that the club's trading activities cease. An appropriate claim form was lodged by the President of the club on the day following the fire, ie 9 January 1992.

On 22 July 1992 the appellant, by its solicitor, wrote to the club's secretary indicating the appellant's refusal to pay the club's claim. By the same letter, the appellant purported to cancel the contract of insurance and other policies not relevant to these proceedings. The appellant's denial of liability at that time proceeded upon the basis that the claim made was fraudulent. The appellant alleged that the arson had been committed by the club President or a casual employee or by conspiracy between them. Later, the appellant would similarly seek to deny its obligations to pay the claim of the respondent upon the basis that the losses claimed by the club were fraudulent.

On the same day (22 July 1992) the solicitor for the club wrote to the appellant's solicitor, presumably by facsimile, requesting a rateable refund of the premium paid by the club to the appellant and indicating that the club intended to pursue its claim against the appellant. On 24 September 1992, the club filed a summons seeking a declaration that the appellant was liable to indemnify the club in respect of property damage and consequential loss occasioned by the fire to the club's premises. The summons also sought damages, interest and costs.

After the time at which the relevant policy was, by its terms, due to expire (30 October 1992) the club's premises were further damaged by a second fire. Minor damage only was occasioned by this fire on 18 December 1992. That damage was

URJ CIC INSURANCE LTD v BANKSTOWN FOOTBALL CLUB LTD (Kirby P) 5

treated as irrelevant for the purposes of these proceedings. On 3 March 1993, a third fire occurred causing a large amount of damage and destruction to the premises and their then contents. Such was the state of the club's premises after the third fire that the local government authority required that the building be demolished. That request was met. Between the boarding up of the premises after the first fire and its demolition as a result of the third fire, the premises had been broken into and vandalised on many occasions. Some contents, particularly the stock of alcohol, were stolen.

THE INSURER'S ATTEMPT TO AVOID LIABILITY IS REJECTED BY THE PRIMARY JUDGE

In a judgment delivered on 4 June 1993 Cole J rejected the appellant's claim that it was not liable to pay the club's claim upon the basis that the club's President and/or a casual employee had committed arson. In reaching that conclusion, his Honour expressed his opinion by reference to his observations of the key witnesses for the club in the witness box. He indicated that he was impressed with the credibility of the club's President and the casual employee accused by the appellant. Upon that basis, his Honour held that the appellant was liable under its contract of insurance to indemnify the club in respect of properly damage and consequential loss resulting in the first fire. The decision of Cole J rejecting the allegation of involvement of the Club officers and employees in the arson is not challenged in this appeal.

The prima facie liability of the appellant having been determined, the quantification of that liability came to be assessed. The club made claims of four types: building damage; contents damaged or destroyed; stock damaged or destroyed; and a business interruption claim. The appellant again sought to deny its liability. It alleged that the quantification of the loss by the club was fraudulent such that it entitled the appellant (pursuant to CL7 of the contract of insurance and/or s56 of the Insurance Contracts Act 1984 (Cth) (the Act)) to avoid entirely its obligation to pay the club for the losses suffered by it.

The club (on 2 December 1993) successfully filed an amended summons, seeking to rely upon, in addition to the grounds stated in the original summons, s58 of the Act. After a further hearing, Cole J delivered judgment on 16 December 1993. His Honour held that:

(1) The allegation of fraud, which had been framed in various ways by the appellant completely failed. There is no challenge to this finding in this appeal;

(2) The appellant's solicitor's letter on 22 July 1992 and the club's solicitor's response did not constitute a repudiation of the original contract, wrongful or otherwise, nor acceptance of that repudiation. There is no challenge to this finding in this appeal;

(3) The appellant's purported cancellation of the policy by the letter of 22 July 1992 was ineffective to terminate prospectively the policy of insurance, the grounds (the allegation of arson by employees of the club) of that purported cancellation being unjustified and not in accordance with the relevant provision of the Act, in this case s60(1)(e);

(4) As the policy was not in law cancelled on 22 July 1992, it remained in force until, by its terms, it expired, ie on 30 October 1992;

(5) The policy being of the type to which s58 of the Act applied, there being no appropriate notice and compliance otherwise with that section, the Act deemed a "statutory policy" to operate on the same terms from 30 October 1992 for a period of twelve months, or until otherwise cancelled in accordance with the Act;

(6) That being the case, the total destruction occasioned by the third fire to the club's premises and its contents was covered by the statutory policy and the insurer was liable for that loss;

(7) The request for a refund of the premium by the club's solicitors neither constituted a waiver of any of the club's rights under the Act nor was it such conduct as to estop the club from relying on its rights under the Act;

(8) The policy did not require that before the club be indemnified by the appellant in respect of any reinstatement and replacement of the building or its contents, the club had actually to incur the sum claimed;

(9) The club's business interruption claim properly included the salary of Mr Potter, Cole J leaving it to the parties to agree to an appropriate figure within a prescribed range; and

(10) The club was entitled in addition to declaratory relief, to general damages for the appellant's breach of contract for not paying, within a reasonable time, the monies properly payable to the club under the insurance policy.

Cole J also expressed the view, obiter, that, as a matter of construction of the contract of insurance, the damage occasioned by the third fire would not have been covered by the terms of the policy. But it was recoverable under the Act.

On 17 December 1993 Cole J in a third judgment determined an application in respect of interest upon the contents, building, business interruption and general damages claims. His Honour awarded interest in respect of the business interruption claim and in respect of the contents claim arising from the first fire. He made allowance in favour of the appellant for delay of a reasonable time for it to investigate the claim.

The appellant's amended notice of appeal listed some twenty-one grounds of appeal against Cole J's decision awarding $1,913,963.23 to the club. Having regard to the submissions made by the parties, orally and otherwise, the determination of this appeal can be confined to the following issues:

(1) Whether s58 of the Insurance Contracts Act 1984 (Cth) applies and, if it does, its effect (the statutory policy point);

(2) Whether, properly construed, the terms of the contract of insurance require that the cost of reinstatement be actually incurred by the club before the appellant becomes liable to pay that cost (the reinstatement point); and

(3) Whether general damages for the appellant's breach of contract and interest were available to the club in the circumstances (the general damages and interest points).

By way of notice of contention, the club asserted that, upon a proper construction of the contract of insurance, the appellant was liable to indemnify the club in respect of property damage and consequential loss occasioned by the third fire, notwithstanding that the third fire occurred outside the indemnity period specified by the policy.

A CHALLENGE TO THE DISCRETIONARY AMENDMENT OF THE SUMMONS FAILS

A preliminary point needs to be dealt with. It was suggested by the appellant that Cole J had erred in permitting the club to amend its summons to rely upon the provisions of s58 of the Act. The power of a trial judge to permit the amendment of a summons, or any other originating process, is an exercise of that trial judge's discretion. Absent circumstances which establish proper grounds for interference in the exercise of the discretionary power (see, for example, House v The King (1936) 55 CLR 499 at 504-505 per Dixon J), an appellate court will

URJ CIC INSURANCE LTD v BANKSTOWN FOOTBALL CLUB LTD (Kirby P) 7

not interfere. At least it will not do so without clear evidence of a serious miscarriage. This attitude of restraint is even more applicable where, as here, the challenge concerns an exercise of discretion affecting the practice and procedure of the trial judge's court. See, for example, Contender 1 Ltd v LEP International Pty Ltd (1988) 63 ALJR 25 (HC); Southern Cross Exploration NL v Fire and All Risks Insurance Co Ltd [No 2] (1990) 21 NSWLR 200 (CA); Bank of New Zealand v Spedley Securities Ltd (in Liq) (1992) 27 NSWLR 91 (CA). Whilst acknowledging the force of the point made in this regard by Powell JA, I would not disturb Cole J's decision to permit the club, although belatedly, to amend its summons at trial.

I therefore turn to the first of the issues raised by the appeal. It concerns the application and meaning of s58 of the Act.

S58 OF THE INSURANCE CONTRACTS ACT 1984 (CTH) DOES NOT APPLY

"58.(1) In this section, "renewable insurance cover" means insurance cover that:

(a) is provided for a particular period of time; and

(b) is of a kind that it is usual ta renew or for the renewal of which it is usual to negotiate.

(2) Not later than 14 days before the day on which renewable insurance cover provided under a contract of general insurance (in this section called the "original contract") expires, the insurer shall give to the insured or a person acting as agent for the insured a notice in writing informing him of the day on which and the time at which the cover will expire and whether the insurer is prepared to negotiate to renew or extend the cover.

(a) an insurer has failed to comply with subs(2); and

(b) before the original contract expired, the insured had not obtained from some other insurer insurance cover to replace that provided by the original contract; then, by force of this section, there exists between the parties to the original contract a contract of insurance that provides insurance cover as provided by the original contract, except that the cover provided is in respect of the period that:

(d) expires, unless the contract is sooner cancelled, at:

(i) the expiration of a period equal to the period during which insurance cover was provided by the original contract; or

(ii) the time when the insured obtains from some other insurer insurance cover to replace that provided by the original contract; whichever is the earlier."

At a threshold level, s58 of the Act can only apply if the relevant contract of insurance was "in effect" at the time of the alleged failure to comply with its provisions. By the express words of the section, the wrong which it aims to redress is the unnoticed expiration of a renewable insurance cover. See D St L Kelly and ML Ball, Principles of Insurance Law in Australia and New Zealand, Butterworths, 1991, at para9.33 where those authors say: "The purpose of s58 is to protect the insured from the risk of suffering an uninsured loss because of a failure by the insured to warn to the insured of the impending expiry of cover."

Similarly, the context of s58 of the Act tends against the applicability of a statutory policy of insurance where the original contract of insurance has been effectively cancelled. Pt7 of the Act (consisting of s58-s64) deals with the expiration, renewal and cancellation of contracts of insurance. In particular, s59 and s60 of the Act deal the procedure by which an insurer may cancel a contract of insurance and the grounds upon which an insurer may cancel a contract of insurance. Given that context, one would suppose that, had s58 of the Act been intended to apply to renewable contracts of insurance which had been cancelled, the express words of the section would have so provided. It would, I think defy both logic and the ordinary meaning of the words in s58 of the Act to construe that section as applicable where a renewable insurance cover had been effectively cancelled by the insurer.

The test of the application of s58 of the Act is the expiration of the contract of insurance. Within the context of Pt7 of the Act, the words "expires" and "expired" in s58(2) and s58(3) cannot properly be taken to include in their meaning the cancellation of the contract of insurance by the insurer. Though not conclusive, commentators have not suggested that s58 of the Act applies where the contract of insurance has been cancelled. See, for example, CCH, Australian and New Zealand Insurance Reporter, at paral4-310; D St L Kelly and ML Ball, Principles of Insurance Law in Australia and New Zealand, (above), at para9.32 and para9.33; F Marks and A Balla, Guidebook to Insurance Law in Australia (2nd ed), CCH, 1987, at paral003.

It is therefore crucial to determine whether the contract of insurance, issued by the appellant to the club, remained in effect after the events of 22 July 1992. It is my view that it did not. The reasons for this conclusion are:

(a) the club's solicitor's letter represented to the appellant acceptance of the appellant's cancellation (although, wrongful) of the policy of insurance;

(b) the club's solicitor's representation was binding upon the club; and

(c) the representation was such as to estop the club from asserting the continued operation of the contract of insurance or any rights which may derive from it.

There was no contractual ground permitting the appellant effectively to cancel the contract of insurance. Cole J held (on 2 June 1993) that the club had not made a fraudulent claim under the policy of insurance and that the club's President and the casual employee accused by the appellant were not involved in the arson of the club's premises. His Honour held that the wrongful exercise of the power of cancellation by the appellant did not constitute a wrongful repudiation of the contract by the appellant. Cole J said such a "purported, although wrongful, exercise of contractual rights is the antithesis of wrongful repudiatory conduct by the insurer, and acceptance of wrongful repudiatory conduct by the insured." Referring to DTR Nominees Pty Ltd v Mona Homes Pty Ltd and Anor (1978) 138 CLR 423 at 432 and Braidotti v Queensland City Properties Ltd (1991) 65 ALJR 387 (HC) at 397 his Honour said:

"The purported exercise of a contractual power does not normally constitute repudiatory conduct. That is so even if it be found that the factual basis for the purported exercise was not present. The reason why that is so is because the bona fide but wrongful exercise of a power conferred by the contract does not "evince an intention that the party will not perform the contract according to its terms "...

URJ CIC INSURANCE LTD v BANKSTOWN FOOTBALL CLUB LTD (Kirby P) 9

Hence, the club's solicitor's letter did not constitute an acceptance of that wrongful repudiation. These findings are not challenged upon this appeal by either party. Similarly, the appellant submitted that the parties by their conduct had abandoned or abrogated the contract of insurance. For reasons elaborated below, it is my view that they did not.

(a) THE SOLICITOR'S LETTER REPRESENTED ACCEPTANCE OF THE APPELLANT'S CANCELLATION

On 22 July 1992 the appellant's solicitor wrote to the club at the address of its solicitor. That letter advised of the appellant's refusal to pay the claim in respect of the first fire. It also purported to cancel the contract of insurance. The appellant claimed to do so upon the basis of conditions 5(b)(v) and 5(c) of the contract of insurance. Those provisions provided: "5. Cancellation

(b) The Company [ie, the appellant] may also cancel this policy giving the insured [ie, the club] written notice to that effect where...

(v) the Insured has made a fraudulent claim under this policy or any other policy of insurance (whether with the Company or some other insurer) that provided insurance cover during any part of the period during which the Policy provides insurance cover;

(i) The time when another policy of insurance between the Insured and the Company or some other insurer, being a policy that is intended by the Insured to replace this policy,is entered into; or

(ii) 4.00pm on the 30th business day after the date on which notice was given to the Insured. In the event that the Company cancels this policy, the Company will repay to the Insured a rateable proportion of the Premium for the unexpired Period of Insurance from the date of cancellation."

On the same day the club's solicitor replied by letter to the appellant's solicitors. That letter said:

"We refer to the above matter and note that your client has cancelled those insurance policies referred to in your letter of today's date. Could you accordingly arrange for a cheque for the balance of the premium to be forwarded to our office by return. We note our instructions that in any event we intend to pursue your client pursuant to the policy."

Looking at the letter by itself, I should have thought that, prima facie, it conveyed acceptance of the appellant's wrongful cancellation of the policy of insurance. The reasons for this prima facie conclusion are threefold. First, the letter notes the cancellation of the policies; it does not seek to dispute the validity or effect of the appellant's cancellation in respect of the appellant's future obligations. Secondly, it seeks a return of the balance of the premium: a contractual right clearly exercisable only upon the acceptance of the effectiveness (even if not the justifiability) of the cancellation of the policy in question. Thirdly, it indicates an intention to pursue the appellant pursuant to the policy. But that pursuit is not expressed as being relevant to the appellant's future obligations to the club under the policy. That policy was accepted to be at an end.

Of course that prima facie meaning of that letter might be displaced by matters which indicate the contrary. Ordinarily, one would have thought that an insured faced with circumstances similar to those faced by the club, would, if the insured desired the continued operation of the policy, have asserted the continuance of

the policy of insurance in more express and direct terms. In such a case, prudence would suggest that the insured should deny the effectiveness of the purported cancellation; inform the insurer that the insured continued to treat the insurer as on risk and to hold the insurer liable; decline to seek a rateable refund of the premium; and refuse to accept any rateable refund of the premium if offered by the insurer. However, in this case the letter was written by the club's solicitor. Whether that prima facie meaning is attached to, or otherwise binds, the club is a matter which must be considered.

(b) THE REPRESENTATION OF THE CLUB'S SOLICITOR ARE BINDING UPON THE CLUB Whether or not the club could accept, or make representations concerning its acceptance of, the appellant's purported cancellation of the policy is a question different from whether the club's solicitor could so act or represent. Here, it is the conduct and representations made by the club's solicitor which the appellant seeks to attribute to the club. The club submitted, and Cole J accepted, that while an insured's solicitor may have authority to seek a rateable return of the premium where an insurer has purported to cancel the contract of insurance, it was not within the authority, ostensible or otherwise, of an insured's solicitor to cancel a policy of insurance by representation or otherwise. The club contended that such cancellation would require actual authority.

There was no evidence of the club's solicitor having actual authority to accept or make representations concerning the cancellation of the club's contract of insurance. However, the solicitor's conduct will bind the club if the solicitor had ostensible authority in respect of that conduct. Whether an agent acts with ostensible authority is a question of fact to be determined in each particular case. See Geissler v Accro Motors Pty Ltd (1955) 73 WN(NSW) 31 (FC) at 32. That question of fact, in the case of ostensible authority, depends upon the inferences drawn by the tribunal of fact. An inference may be drawn having regard to the reasonable perceptions of the third party as to the principal's holding out of the authority of the agent. In Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 (CA) at 503-504 Diplock LJ said (at 503-504):

"An "apparent" or "ostensible" authority... is a legal relationship between the principal and the contractor created by a representation, made by the principal to the contractor, intended to be and in fact acted upon by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the "apparent" authority, so as to render the principal liable to perform any obligations imposed upon him by such contract. To the relationship so created the agent is a stranger. He need not be (although he generally is) aware of the existence of the representation but he must not purport to make the agreement as principal himself The representation, when acted upon by the contractor by entering into a contract with the agent, operates as an estoppel, preventing the principal from asserting that he is not bound by the contract. It is irrelevant whether the agent had actual authority to enter into the contract.

In ordinary business dealings the contractor at the time of entering into the contract can in the nature of things hardly ever rely on the "actual " authority of the agent. His information as to the authority must be derived either from the principal or from the agent or both, for they alone know what the agent's actual authority is. All that the contractor can know is what they tell him, which may or

URJ CIC INSURANCE LTD v BANKSTOWN FOOTBALL CLUB LTD (Kirby P) 11

may not be true. In the ultimate analysis he relies either upon the representation of the principal, that is, apparent authority, or upon the representation of the agent, that is warranty of authority.

The representation which creates "apparent" authority may take a variety of forms of which the commonest is representation by conduct, that is, by permitting the agent to act in some way in the conduct of the principal's business with other persons. By doing so the principal represents to anyone who becomes aware that the agent is so acting that the agent has authority to enter on behalf of the principal into contracts with other persons of the kind which an agent so acting in the conduct of his principal's business has actually "actual" authority to enter into."

The foregoing principles were applied by the High Court of Australia in Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising and Addressing Co Pty Ltd (1975) 133 CLR 72. They should be taken as stating the applicable rules of the common law.

For present purposes, it is necessary to consider whether the club's general instruction to, and retainer of, its solicitor to act in respect of its claim upon the appellant constituted a sufficient representation to the appellant so as to give rise to the solicitor's ostensible authority to do what he did in writing his letter of 22 July 1992. Generally, whether or not a solicitor has actual or express authority to do a particular act or make particular representations will depend upon the nature and extent of the solicitor's retainer. See Cordery on Solicitors, (Sth ed), at 99-100; Chitty on Contracts (25th ed), Vol 2, para2209. However, absent express authority by retainer, a client may be estopped from denying the binding effect of his or her solicitor's conduct with the scope of purported action pursuant to the solicitor's ostensible or implied authority. See Cordery on Solicitors (above), at 113. See also Magripilis v Baird (1926) QSR 89 (HC); R v Towner (1896) 7 QLJ 139 (FC). If it turns out that the solicitor exercised a purported authority which the solicitor did not in fact have, it is not the third party dealing in good faith through the solicitor who should suffer if it acted upon the basis of the solicitor's purported authority. Then the client will have to pursue its remedies against the solicitor for going beyond the retainer which it provided.

In this case, the appropriate inference to be drawn is that the club's solicitor had ostensible authority to act or to make representations in respect of the continued operation of the contract of insurance. It is not unreasonable for the appellant to view the conduct of the club, in apparently instructing its solicitor to pursue the subject insurance claim, as including all necessary authority to give effect to those instructions. Incidental to those instructions, it can be inferred, was the power to deal with the issue of the purported cancellation of the contract. Indeed, I should have thought that the instruction of a solicitor to pursue a matter such as a controversial insurance claim would leave a third party dealing with the solicitor with the impression that that solicitor, having been retained for his or her legal expertise, would have all necessary authority to deal with all issues which reasonably and forseeably arose in the pursuit of that claim. It is not a situation akin to the instruction of a solicitor to pursue non-litigious business where the nature and extent of the solicitor's authority is not so easily inferred to be so widely encompassing. See, for example, Marriot v Webb (1895) 11 WN(NSW) 131; Hogan v Hogan (1869) 8 SCR(NSW) Eq 96 (FC); Pianta v National Finance and Trustees Ltd (1965) 38 ALJR 232 (HC) at 234.

In any event, the conduct of the club following its solicitor's letter of 22 July 1992 involved an adoption, by way of ratification or otherwise, of the solicitor's actions and representations. The evidence of the club's insurance broker shows that the club's Secretary had contacted the broker on 22 July 1992 or shortly thereafter. He informed him that the policy had been cancelled by the appellant. The broker had not been instructed to dispute the purported cancellation in any manner nor to refuse to accept any rateable return of the premium. In due course, the broker received the return of the premium. While the club did not immediately take possession of the returned premium, at this stage there is little doubt that the club knew of that return and had acknowledged its entitlement to it. The broker had asked the club whether it wanted the money paid to it at that time. The club instructed the broker to hold the money. Similarly, the club declined to obtain further insurance for its premises upon the basis that it could not afford it. The club did not decline upon the basis that it treated itself as remaining covered by the policy which the appellant had purported to cancel. In other words, the conduct of the club immediately following the solicitor's letter of 22 July 1992 did nothing to dispel the inference that it accepted the acts and representations of the solicitor and thus accepted the cancellation of the policy of insurance by the appellant.

Upon this basis, the acts and representations of the club's solicitor, whatever their ultimate effect, were binding upon the club.

The appellant submitted that the club, by its representations and conduct of 22 July 1992, or the representations and conduct of its solicitor binding upon the club, was estopped from asserting the continued operation of the contract of insurance and any rights, statutory or otherwise, which might flow from it. Similar submissions were made upon the basis of acquiescence and waiver. Such submissions are, in substance, identical to the submission based upon estoppel. I shall therefore deal only with the submission based upon estoppel for no relevant point of distinction arises in this case.

The concept of estoppel is used in different senses in the law. There is, at present, no agreement as to the doctrinal significance of the varieties of estoppel or as to the relationship between the various concepts of estoppel. See Meagher, Gummow and Lehane, Equity - Doctrines and Remedies (3rd ed), Butterworths, 1992, paral701. Some of the well known species of estoppel are set out by Jordan CJ in Discount and Finance v Gehrig's New South Wales Wines Ltd (1940) 40 SR(NSW) 598 (FC) at 602-603. See also Legione v Hately (1983) 152 CLR 406 at 430.

The appellant referred the Court to the Deane J's well known formulation of "estoppel by conduct" in The Commonwealth v Verwayen (1990) 170 CLR 394 at 444 445. From that passage a number of points relevant to the present case can be extracted:

(1) The central principle of the doctrine of estoppel by conduct is that the law will not permit an unconscionable (or "unconscientious") departure from the subject matter of an assumption which has been adopted by the other party as the basis of some relationship, course of conduct, act or omission which would operate to that other party's detriment if the assumption were not adhered to;

(2) Whether or not the party so relying has suffered significant disadvantage necessitates the examination of the relevant belief, actions and position of that party; and

URJ CIC INSURANCE LTD v BANKSTOWN FOOTBALL CLUB LTD (Kirby P) 13

(3) Whether such a departure is unconscionable (or "unconscientious") depends upon the conduct of the advantaged party in all the circumstances. Those circumstances must show that any departure from the assumption, the adoption of which or persistence in which the advantaged party played a part, must be such that the advantaged party can properly be considered guilty of unjust and oppressive conduct. Circumstances where the advantaged party will be held to have been unconscionable or unconscientious will include:

(i) where he or she has induced the assumption by express or implied representation; (ii) where he or she has entered in contractual or other material relations with the other party on the conventional basis of the assumption shared by each;

(iii) where he or she has exercised against the other party rights which would exist only if the shared assumption were correct;

(iv) where he or she knew that the other party laboured under the assumption and refrained from correcting him or her when it was a person's duty in conscience to do so. However, against all the circumstances relevant to the determination of whether the advantaged party was relevantly unconscionable or unconscientious must be weighed (i) the reasonableness of the conduct of the disadvantaged party in acting upon the assumption and (ii) the nature and extent of the detriment which the disadvantaged party would sustain if departure from the assumption were permitted.

Priestley JA, in an extrajudicial work ("Estoppel: Liability and Remedy?" in D Waters (ed), Equity, Fiduciaries and Trusts - 1993, Carswell, 1993, at 273 at 287) says that Deane J

"saw the central principle of the doctrine [of estoppel] as being that the law would not permit an unconscionable departure by one party from the subject matter of an assumption adopted by the other party as the basis of some relationship, course of conduct, act or omission which would operate to the other party's detriment were the assumption not adhered to for the purposes of the litigation."

As a matter of precedent, the formulation of estoppel which binds this Court in this case is that to be found in the High Court's decision in Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387. See LJ Priestley, "Estoppel: Liability and Remedy" (above), at 289-290. The holding of the High Court in Waltons is conveniently summarised by Priestley JA in Silovi Pty Ltd v Barbaro (1988) 13 NSWLR 466 (CA) at 472. See also LJ Priestley, "Estoppel: Liability and Remedy" (above), at 284. However, for the purposes of this case, the same result derives from the application of Deane J's formulation to which the appellant referred and the formulation to be ascertained from the decision in Waltons. In business dealings, at least between properly advised contestants, the courts will exhibit restraint in substituting the perceived dictates of judicial consciences for the legal rights and obligations of the parties. See Austotel Pty Ltd and Anor v Franklins Selfserve Pty Ltd (1989) 16 NSWLR 582 (CA) at 585.

In this case the application of the principles referred to in Waltons and Silovi results in the conclusion that the club is estopped from asserting the continued operation of the contract of insurance after 22 July 1992. The representations made by the club's solicitor, and the club's immediate conduct thereafter, far from disputing the solicitor's letter confirmed to the appellant the prima facie meaning that is to be attributed to the letter of 22 July 1992, ie, that the purported cancellation was accepted and the contract of insurance had ceased to be effective. The solicitor plainly had ostensible authority to make those

representations. In any event, the conduct of the club after the letter was written was adoptive, by way of ratification or otherwise, of the solicitor's representations and conduct. The appellant then reasonably relied upon the representations by the club and its solicitor. As there had been reasonable reliance by the appellant upon the representations made by the club and its solicitors, the circumstances of the case are such that any departure from those representations by the club would be unconscionable. Had the club sought to dispel the prima facie meaning of the letter and subsequent conduct, the appellant would doubtless have sought to protect its own position. Thus, if it had been put on notice by the club that the club disputed the effective cancellation of the policy, the appellant could, and by the evidence would, have issued a notice pursuant to s58 of the Act. Such a notice would have avoided any issue as to the application of a statutory policy under s58(3) of the Act. In reliance upon the apparent acceptance both by the solicitor and the club of the cancellation of the insurance, the appellant did not do this. The club took no steps whatever to dispel this assumption on the part of the appellant.

A similar conclusion is reached by the application of the principles expressed by Deane J in The Commonwealth v Verwayen. The assumption created in the appellant by the club's representations and conduct was that the club accepted the appellant's purported cancellation of the insurance policy. Departure from that assumption by the club would be unconscionable (or "unconscientious"). Upon notice of the club's dispute as to the effectiveness of the appellant's cancellation of the policy, the appellant could have moved more securely to protect its own position. Similarly, the club having made the representation it did, exercised against the appellant the right to demand a rateable return of the premium. That was a right only capable of exercise in the event that the contract of insurance was cancelled. Therefore, it was an exercise of a right by the club which would exist only if the shared assumption of the cancellation of the contract were correct. The appellant's reliance upon the assumption was, having regard to all the circumstances, reasonable. The nature of the detriment which the appellant may suffer if the departure from the assumption were permitted might be very great.

The club submitted that estoppel could not lie against the provisions of the Act. S52 of the Act providing that there can be no contracting out of the Act, it was argued that there could not be any equitable equivalent of contracting out; in particular there could be no waiver. The Court was referred to Equitable Life Assurance of the United States v Bogie (1905) 3 CLR 878; Considine v Citicorp Australia Ltd [1981] 1 NSWLR 657; Spencer Bower and Turner, The Law Relating to Estoppel by Representation (3rd ed), Butterworths, 1977, at 139 et seq.

I do not doubt that a party cannot, by the application of the doctrine of estoppel, be prevented from relying upon rights ordinarily granted to it by legislative enactment. At least it cannot do so where the activity, the subject of the claimed estoppel, is within the purpose of ie legislative enactment. Many cases make this point. They are collected in The Australian Digest (3rd Ed), Title 32 - Estoppel, para[35]. However, the question of the operation of an aspect of a particular transaction, where the operation of that aspect is protected by a relevant statute, is distinct from the question of the operation of the transaction itself. Here the estoppel with which the Court is concerned involves the operation of a contract of insurance. It does not deal with the manner of the operation of the contract of insurance. The manner of operation of the contract of insurance

URJ CIC INSURANCE LTD v BANKSTOWN FOOTBALL CLUB LTD (Kirby P) 15

is a matter against which estoppel would not lie. But estoppel will lie as against the operation of the contract itself. Thus in The Commonwealth v Verwayen (1990) 170 CLR 394 the High Court denied, by application of the doctrine of estoppel, that the Commonwealth could rely upon the operation of Limitations of Actions Act 1958 (Vic). The Act continued to apply. But the party could not invoke it as applicable to its cause for it would be unconscionable (or "unconscientious") for it to do so in the circumstances. So here.

THE PARTIES DID NOT BY THEIR CONDUCT ABANDON OR ABROGATE THE CONTRACT

But did the parties abandon or abrogate the contract of insurance ab initio? The applicable principle is stated in these terms: "Whatever the terms of a contract may be, it is possible for the parties so to conduct themselves as mutually to abandon or abrogate it": Summers v The Commonwealth (1918) 25 CLR 114 at 152 per Isaacs J. See also DIR Nominees Pty Ltd vy Mona Homes Pty Ltd and Anor (1978) 138 CLR 423 at 434. Whether there is abandonment or abrogation of a contract is a matter of fact to be inferred from the conduct of the parties. See, for example, Fitzgerald and Anor v Masters (1956) 95 CLR 420 at 432. That finding of fact may be inferred from the conduct of duly authorised agents of the parties. See Air Great Lakes Pty Ltd and Ors v KS Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 (CA) at 325.

Whether an abandonment of the contract ought to be inferred from the conduct of the parties requires consideration of whether the parties have, by their conduct, evinced an agreement to dispense with further performance of the contract. I take the principle to be accurately stated in DW Greig and JRL Davis, The Law of Contract, LBC, 1977, at 1188-1189: "When it is alleged that a contract has been terminated by abandonment, the task of the court is to consider all the circumstances, to see whether the fact of an agreement can be inferred from the conduct (or inaction) of both parties, viewed objectively."

As a matter of legal doctrine, where a contract is held to have been "abandoned" it is ordinarily abandoned ab initio. To the contrary, where a contract has been performed in part and rights and obligations have accrued from it, any abandonment of future performance of the contract is ordinarily the concern of the doctrine of repudiation. If one accepts that abandonment of contract operates ab initio then, as a matter of law, the appellant's reliance upon the doctrine of abandonment to avoid the future operation of the contract of insurance, whilst acknowledging the accrued obligation in respect of the first fire, would be unsustainable. However, the exact operation of the doctrine of abandonment in this respect remains unclear; one can postulate that ordinarily abandonment operates ab initio but at the same time one cannot exclude the possibility of abandonment in futuro: see, for example, Australian Stratacore Holdings Ltd (in Liq) v Sanwa Australia Securities Ltd (Court of Appeal, unreported, 27 May 1994).

Accepting that abandonment operates, at least normally, ab initio, the focus of the court being upon the mutual, as distinct from unilateral, intention of the parties objectively discovered, it could not be said that the club, or its solicitor, intended to its abandon accrued entitlements in respect of the first fire. So much is made plain by the terms of the solicitor's letter holding the appellant to its liability for that fire. This matter is also adverted to by Greig and Davis (above), at 1189-1190. They say: "In the above decisions of the High Court [Summers (above) and DTR Nominees (above)], the respective contracts were still executory at the time of abandonment... In such a situation, the lapse of time and

inactivity were strong evidence of abandonment. Where, on the other hand, one party has partly performed his obligations, but that performance has not been reciprocated by anything done by the other, it will be very difficult to prove that the mere passage of time and inaction is sufficient to justify a finding of the necessary agreement to abandon the contract. "

If abandonment does operate in futuro, then the conduct of the club in asserting the continued operation of the contact of insurance was a sufficient indication of contrary intention so as to prevent the inference being drawn that the parties mutually intended to abandon the contract ab initio.

For these reasons the conduct of the parties was not such as to constitute an abandonment of the contract of insurance after 22 July 1992.

CONCLUSION - S58 OF THE INSURANCE CONTRACTS ACT DOES NOT APPLY

For the purposes of s58 of the Act, the contract of insurance issued by the appellant to the club ceased to operate on 22 July 1992 or shortly thereafter. Certainly, the contract ceased to be operative at a time 14 days prior to its otherwise expiry date, 30 October 1992. Notwithstanding the absence of a contractual right in the appellant to cancel the policy of insurance, the club's solicitor's letter represented to the appellant that the club had accepted the appellant's purported cancellation. That representation was binding upon the club. The conduct of the club at that time, and thereafter, was such as to prevent it from asserting the continued existence of the contract of insurance. Because the contract ceased to be operative, this meant that the issue of the application of s58 of the Act, and any derivative rights which may flow to the club, did not arise. Cole J erred in reaching the opposite conclusion. In this respect, the appellant's appeal must succeed.

With every respect to Priestley JA's opinion, I cannot make the solicitor's letter mean what his Honour takes it to have meant to the recipient. The question is not, in my opinion, what the solicitor really meant to say. It is not even what he understood the meaning of his letter to be. Parties will be held to the consequences of such a letter. If the solicitor erred in writing as he did, the club may have a remedy against him. The first paragraph, as I read it, notes and accepts the cancellation. The second asks for the return of the balance of the premium. These sentences can only mean - and be taken in their context to convey the meaning - that the cancellation was acknowledged and accepted. In any case, what he wrote was thereafter confirmed. The appellant relied upon it to its detriment. In my respectful view, the contrary conclusion is unsustainable whatever sympathy one might have for the solicitor, or the club, or both.

PROPERLY CONSTRUED THE CONTRACT OF INSURANCE EXTENDS TO COVER THE THIRD FIRE

Having reached the conclusion stated above, it is necessary to consider the club's notice of contention. By that notice, the club asserted that, properly construed, the terms of the contract of insurance extended to indemnify the club in respect of property damage and consequential loss occasioned by the third fire, notwithstanding that the third fire occurred outside the period of indemnity specified in the contract of insurance. Such a submission was rejected by Cole J, in obiter remarks.

The liability of an insurer is governed by the relevant terms of the contract of insurance. It therefore depends upon the construction and interpretation to be accorded to those contractual terms. See Government Insurance Office of New South Wales v Atkinson-Leighton Joint Venture (1981) 146 CLR 206 at 242. The

URJ CIC INSURANCE LTD v BANKSTOWN FOOTBALL CLUB LTD (Kirby P) 17

issue before the Court is whether the reinstatement promised by the original contract extended to include the repair of additional damage incurred outside the period of cover. Resolution of that issue can be approached upon at least two different bases.

On the one hand, it can be said that the obligation to reinstate, having been incurred by the insurer, only actual reinstatement would fulfil that obligation. That is, an obligation to reinstate the insured property to a condition, for example, equal to but not better than new cannot be discharged by a notional reinstatement which takes the property to the position short of the reinstatement of the damage incurred outside the period of insurance. In such a situation, the insured simply has not received that which it had bargained for, viz, the actual reinstatement of the property to a conditional equal to but not better than new. Actual rather than notional reinstatement is, I think, at the heart of the following passage of Barwick CJ's dissenting judgment in Atkinson-Leighton at 219:

"Suppose an insurer against damage by fire has become bound to reinstate the damaged property, a fire having damaged the property during the currency of the policy. Suppose the term of the policy expires whilst the promise to reinstate is still not fully performed. Then suppose some event to occur which renders the reinstatement more costly, ie to occur after the term of the policy has expired and before the reinstatement to the pre-damaged condition is complete. None the less, in my opinion, the insurer would be bound to reinstate. It would be no answer for him to say that the added cost was due to an uninsured risk. THE TRUE ANALYSIS IS THAT THE OBLIGATION TO REINSTATE HAVING ATTACHED DURING THE CURRENCY OF THE POLICY, ITS PERFORMANCE IS REQUIRED WHATEVER IT COSTS AND HOWEVER THE COST IS INCREASED BY EVENTS WHICH COULD NOT IN THEMSELVES HAVE GIVEN RISE TO A CLAIM UNDER THE POLICY. The decision of the Supreme Court of Victoria in SMITH v COLONIAL MUTUAL FIRE INSURANCE CO LTD [(1880) 6 VLR 200 (FC)] (which, in my opinion, was correctly decided) is illustrative of this principle " (emphasis added) Similarly, in Lumley General Insurance Ltd v Vintix Pty Ltd (1991) 24 NSWLR 652 (CA) the Court of Appeal had occasion to consider whether the reinstatement of a building damaged by an earthquake included the substantial additional cost required to make the building comply with an "earthquake code" introduced by the relevant local authority. Giving the leading judgment of the Court, Meagher JA said at 657:

"Since the insurer's duty is to indemnify the insured, and since it is conceded that that duty is to pay the cost of reinstatement, THE AMOUNT PAYABLE TO SATISFY THE DUTY MUST BE THE AMOUNT WHICH IT COSTS TO EFFECT AN ACTUAL, NOT A NOTIONAL REINSTATEMENT. IF NO ACTUAL REINSTATEMENT CAN BE EFFECTED WITHOUT COMPLIANCE WITH A NEW STATUTORY CODE, THE AMOUNT PAYABLE INCLUDES WHATEVER AMOUNT IS NECESSITATED BY SUCH COMPLIANCE (subject always, of course, to the principle of betterment). " (emphasis added) See also at 654-655 per Mahoney JA. Acknowledging that the comments in Lumley concerned damage to property incurred within the period of insurance, it is my view that the general principle that an obligation undertaken to reinstate can only be discharged by actual, as opposed to notional, reinstatement is equally applicable to the issue at hand where the additional cost of reinstatement is incurred by an event outside the period of insurance. To hold otherwise would (subject, of course, to the operation

of the precise words of the particular policy in question) deny the insured that which it bargained for, viz, the actual reinstatement of the property to a functional state.

On the other hand, the issue of whether an obligation to reinstate extends to the reinstatement of damage incurred by events outside the period of insurance may be viewed as an issue of causation. In Lumley, heavy rainfall caused extensive additional damage to the remaining portions of a building which had been damaged in an earthquake. In determining whether the additional cost of the rainfall damage was properly within the obligation to reinstate, Meagher JA approached the issue as one of causation. His Honour said at 658:

"This is a problem of a kind which frequently arises, particularly in insurance law which commonly, if not invariably, involves a promise of an insurer to indemnify his insured for loss or damage "caused by" the happening of a particular event. "

Meagher JA referred to the applicable authorities. Applying the appropriate test of causation, he concluded that the ordinary person "would have little difficulty in the present case of concluding that the cause of the additional damage was the heavy rains and not the earthquake" (at 659). Upon such a causal analysis, the essential inquiry is whether the further damage is severable from the event giving rise to the initial damage.

However, the analysis provided by Meagher JA was not the holding of the Court in Lumley relating to that issue. Ultimately, that issue fell to be determined upon the express provisions of the contract of insurance which provided for damage caused by rainfall and required that the damaged be "directly" caused by earthquake. Mahoney JA (at 655) suggested that there was an "arguable case for the conclusion that the earthquake was the cause of the latter as well as former loss", but preferred to decide the issue upon the express provision of the policy. Clarke JA expressed similar reservations (at 656).

In Atkinson-Leighton the majority of the High Court (Stephen, Mason, Murphy and Wilson JJ) held that occurrences of additional storm damage to an embankment which had been originally damaged by two severe storms, but before repair work had been completed, were to be considered as separate instances of damage. That is, the obligation of the insurer to repair the embankment after the initial damage did not include the latter damage. The latter instances of damage were independent occurrence giving rise to independent liability. In this respect the majority of the High Court adopted an approach easily classified as one of causation. To this effect, Mason J said, at 243-244:

"[Memo 2] measures the extent of the appellant's liability by reference to the cost of "repairs necessary to restore " the property and, in so doing, it assumes that there is a liability to pay or make good the damage which is physically caused by the particular occurrence arising from a non-excluded cause. The example given by Mahoney JA in his dissenting judgment of damage done to work of restoration by an excluded clause, namely fire, is a telling one. It can scarcely have been intended by the parties that the appellant would be liable for damage done by a totally excluded clause constituting a separate occurrence merely because the damage was done to restoration work undertaken by way of repair in respect of damage arising from a non-excluded cause."

In that case the policy was one of indemnity only and not reinstatement. See Atkinson-Leighton at 232 and 242.

URJ CIC INSURANCE LTD v BANKSTOWN FOOTBALL CLUB LTD (Kirby P) 19

In the present case, the applicable principles are twofold. First, the obligation of the appellant is to determined primarily by the express terms of the contract of insurance and the proper construction to be given to those terms. Secondly, the obligation of the appellant, properly considered, being that of "reinstatement", as opposed to indemnity alone, the Court ought to give full effect to that obligation for that is what the insurer exceptionally promised. Failure by the Court to give effect to that obligation of "reinstatement" will leave the club with substantially less than that which the club bargained for. In my view, an approached based upon concepts of causation is inappropriate in this case where the insurer has undertaken to "reinstate" the property of the insured. Such an approach may not render the insurer liable to fulfil the obligation in the terms which it undertook it. Just as the additional costs of compliance with the intervening earthquake code in Lumley were held to be within the insurer's obligation of "reinstatement", a permissible analogy is that the additional costs of compliance with the intervening local authority's order of demolition, following the third fire, was within the insurer's obligation of "reinstatement" here.

One final comment needs to be made. The club did not proceed to incur any amount for the reinstatement of the property after the first fire. As a matter of practicality, it could not do so. The insurer denied its liability to pay. Without the insurer's acknowledgment of its liability to pay, it was impracticable for the club, in its parlous financial position, with no effective income and large debts, to embark upon the process of reinstatement for itself. The club may have then found itself liable, contractually or otherwise, to those whom it had engaged to reinstate the premises. The insurer had refused indemnity to the club. Realising its predicament, the club sought a declaration from the Court. In my opinion, it would be unrealistic for the Court now to determine that the club, having not actually incurred any costs of reinstatement after the first fire, ought not be entitled to any indemnity in respect of the total destruction as a result of the third fire. However, this particular issue need not be decided in this case. Ultimately, the club's submissions on this point, bearing the above principles in mind, are to be answered by consideration of the relevant terms of the contract of insurance. It is to them that I now turn.

The appellant's "industrial special risks insurance policy" recites that, upon payment or agreement to pay the premium, subject to the "terms, conditions, exclusions, memoranda, warranties, limitations, and other provisions" the appellant "agrees to indemnify the [club] as specified herein against loss occurring during the Period of Insurance stated in the Schedule or any renewal thereof." Prima facie the obligations of the appellant were therefore expressly limited to the period of insurance, ie from 3 December 1991 to 30 October 1992 or any renewal thereof. The question arises whether this prima facie meaning may be displaced by the other terms of the contract or otherwise.

The appellant's liability to indemnify the club was governed by s1 of the policy. That section provides that "in the event of any physical loss, destruction or damage" not otherwise excluded, the appellant will, subject to the terms of the policy, "indemnify the [club] in accordance with the applicable Basis of Settlement." For the purposes of s1, "damage" is taken to refer to "any physical loss, destruction or damage" with "damaged" having a corresponding meaning. In respect of "buildings, machinery, plant and all other property and contents" (other than specified) the basis of settlement is "the cost of reinstatement, replacement or repair in accordance with the provisions of the Reinstatement and Replacement and Extra Cost of Reinstatement Memorandum". That same basis

of settlement allows the club to elect to claim "the indemnity value of any damaged property", such value to be "the value... at the time of the happening of the damage". The appellant retains the option to "reinstate, replace or repair such property or any part thereof." Here, the club did not elect to claim the indemnity value of its losses.

The reinstatement and replacement memoranda (applicable to "buildings, machinery, plant and all other property and contents" other than those specified in items (b) to (i) of the basis of settlement) provides that the amount payable by the appellant "shall be the cost of reinstatement of the damaged property insured at the time of its reinstatement". Where the property is "lost or destroyed" "reinstatement" means "in the case of a building, the rebuilding thereof or in the case of property other than a building, the replacement thereof by similar property, in either case in a condition equal to, but not better or more extensive than, its condition when new. Similarly, where the property is "damaged", "reinstatement" means "the repair of the damage and the restoration of the damaged portion of the property to a condition substantially the same as, but not better or more extensive that, its condition when new."

With respect to those of the contrary view, the natural meaning of the terms of the policy is to require the appellant to indemnify the club in respect of the reinstatement of its premises and otherwise. That liability includes the further damage occasioned by the events leading up to and including the third fire arising out of the first fire and its consequences. The reinstatement and replacement memorandum requires "reinstatement" to bring, by various means, the property in question to a condition equal to, but not better than, "its condition when new". That being the case, the liability to reinstate having been incurred, it will involve the remedying of any subsequent damage. The appellant cannot properly be said to have met its obligations to "reinstate" the club's property by effecting a notional reinstatement and by reinstating only that damage it claims was incurred by the first fire. True it is (as I have found) that the third fire occurred at a time when the policy had been cancelled and was not in operation. However, the obligation to reinstate is, in my view, a continuing one.

The appellant could have moved to protect itself against any risks associated with this continuing obligation. For example, it could have acknowledged its now established liability for the first fire. This would have allowed the club to proceed with the processes of reinstatement. It chose not to do so. It could have drafted its contract of insurance expressly to exclude any liability to reinstate beyond the period of cover. It did not do so. It could, for example, have limited its obligation to reinstate only to the damage incurred in the period of insurance cover only. This may have made its reinstatement cover notional and rather unattractive commercially. It is pointless to explore whether this would have been feasible. Put simply, it is not what the appellant's policy promised the club. The policy promised "reinstatement" of the insured premises to a condition equal to, but not better than, "its condition when new." Reinstatement of the damage incurred only by the first fire within the period of cover (when the appellant had the means to effect reinstatement by acknowledging its liability) would not give effect to that promise. Such a result would not give to the club premises equal to, but not in better condition than, ie condition of the premises when new.

The continuing effect of the obligation to "reinstate" is reinforced by proviso (ii) to the reinstatement and replacement memoranda. That proviso provides that, where property is "damaged in part only" the appellant's liability is limited to that which the appellant "could have been called upon to pay for reinstatement

URJ CIC INSURANCE LTD v BANKSTOWN FOOTBALL CLUB LTD (Kirby P) 21

if such property had been wholly destroyed." Similarly, the need for prompt action in reinstating the damaged property is recognised by proviso (i) to the reinstatement and replacement memoranda. That proviso provides, in effect, that if the reinstatement process is unreasonably delayed by the club, the appellant is liable only to the indemnity value of the "damaged property at the time of the happening of the damage." Of course, the conduct of the appellant is such that it could not now seek to rely upon that proviso. However the logic underlying that proviso appears to accept that further damage may result from the property remaining unreinstated and in a state of disrepair. As is well known, that possibility is a significant risk in property insurance, given the contemporary vulnerability of damaged property to further damage, burglary, vandalism etc. That being so, proviso (i) tacitly acknowledges the existence of a continuing obligation in the appellant. It seeks to limit that continuing obligation by making an unreasonable delay on the part of the insured (ie the club) a form of disentitling conduct with respect to full and proper reinstatement.

The club's claims were of four types: (a) building damage; (b) contents damaged or destroyed; (c) stock damaged or destroyed; and (d) a business interruption claim. The above reasoning in application to claims (a) and (b) needs no explanation. In respect of claim (c) the basis of settlement is "the replacement cost at the time and the place of replacement or, if such property is not replaced, the value thereof at the time and place of the damage'. That replacement obligation looks to the actual time of the replacement. As such, it is also a continuing obligation and necessarily encompasses any subsequent stock damage or destruction of the insured property up to and including that caused by the third fire. In respect of claim (d) the contract of insurance provides coverage for a period of twelve months from the "occurrence of the Damage", here from 8 January 1992 to 8 January 1993.

Assuming I am wrong in the foregoing opinion concerning the meaning of the terms of the policy, would the application of the principles of causation to the appellant's established liability for the first fire produce the same result? I believe it would.

As a general rule, an insurer will be liable only for damage or loss caused by the happening of an insured event. At least in this regard, what loss or damage is recoverable is determined by general notions of causation. Causation in law is a complex concept involving sometimes disputable line drawing. A useful example of the complexity is the Lumley case in which Mahoney JA (at 655) and Clarke JA (at 656) expressed some degree of difference with the conclusion of Meagher JA that the additional damage was "caused" by the later heavy rainfalls and not by the original earthquake. Meagher JA preferred an analysis suggesting that in the context of insurance law, "one direct or dominant cause" must be determined (at 658). Ultimately, the issue in Lumley was resolved upon the express provisions of the contract pertaining to "rainwater" damage. However, in Lumley the words of the contract directed at causality were: "damage directly caused by". Meagher JA found support in those words for the application of a test of direct or dominant cause (at 659).

In this particular case, the contract of insurance does not use words of causality. The contract provides:

"THE INDEMNITY In the event of any physical loss, destruction or damage... not otherwise excluded happening at the Situation to the Property Insured in s1 the Company will, subject to the provisions of this Policy including the limitation on the Company's liability, indemnify the Insured in accordance with the applicable basis of Settlement."

Hence the liability to indemnify arises upon the event of physical loss, destruction or damage. There are no words in the foregoing provision, nor others, which narrow the test of causality applicable. That being ie case, applying the general concept of causality as a question of fact, it is to be answered in this case by reference to common sense and experience including considerations of policy and value judgments: March v E and MH Stramare Pty Ltd (1991) 171 CLR 506. Upon that footing the total destruction occasioned by demolition upon order by the local authority followed with sufficient directness and foreseeability the first fire. The third fire was causally related to the first fire. The unreinstated state of disrepair occasioned by the first fire was the direct cause of the vulnerability and opportunity which gave rise to the third fire.

UNDER THE POLICY THE CLUB MUST FIRST ACTUALLY INCUR THE COSTS OF REINSTATEMENT

The appellant submitted that upon the proper construction of its liability to pay the costs of reinstatement, before it became liable to pay any such cost those costs had to be actually incurred by the club. Cole J rejected this submission. He held that "not only is the [club] entitled to a declaration regarding the obligation of the insurer to indemnify, but is also entitled to a monetary judgment for the "cost of rebuilding the destroyed building" and in the case of contents, the cost of the "replacement thereof by similar property".

There was some argument as to whether the appellant ought be entitled to put this submission. It was not pleaded specifically. However, it is appropriate, as Cole J in fact did, to consider the substance of the appellant's submission. The answer to the submission is to be found in the terms of the contract of insurance.

By the terms of the contract of insurance, the appellant's obligation to reinstate or replace damaged property is substantially governed by the terms of the reinstatement and replacement memoranda. Proviso (iv) to the appellant's obligation to reinstate (as discussed above) is in the following terms:

"No payment beyond the amount which would have been payable under this Policy if this memorandum had not been incorporated herein shall be made UNTIL A SUM EQUAL TO THE COST OF REINSTATEMENT SHALL HAVE BEEN ACTUALLY INCURRED; provided that where the Insured reinstates or replaces any lost or destroyed property at a cost which is less than the cost of reinstatement (as defined) but greater than the value of such property at the time of the happening of its loss or destruction, then the cost so incurred shall be deemed to be the cost of the reinstatement." (emphasis added)

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