Compagnie Francaise D'Assurance Pour le Commerce Exterieur t/as Coface Australia v Sims Group Australia Holdings Ltd

Background 3In June 2008, Sims sold its steel distribution business to another company, 7 Steel Pty Ltd. Sims and 7 Steel entered into an Agreement for Sale of Business on 24 June 2008 (Blue 25). Completion of the sale was due, and took place, on 30 June 2008 (clause 1.1 and Item 2 of Schedule 1). 4The sale included sale of the "Stock", defined in clause 1.1, relevantly, as meaning "the raw materials, work-in-progress and finished stock used or to be used in relation to or as part of the Business whether or not located on the Premises ...". As part of the sale of the business, arrangements were made for 7 Steel to take over the lease of various of the premises then leased by Sims (recital C, clause 6 and Item 4 of Schedule 1). (This is of some relevance in that at least some of the pre-completion purchase orders relating to the dispute nominated delivery to premises then leased by Sims but which, by the time specified for delivery, were occupied by 7 Steel.) 5The contract provided for payment of both a Purchase Price for the business ($2.5 million plus the written down value of the Plant and Equipment, but not including the Stock Price, as specified in Item 6 of Schedule 1) and a Stock Price, defined in clause 1.1 of the agreement as "the sum of money being the value of the Stock calculated in accordance with clause 4". Those amounts were payable in tranches pursuant to clause 7.5. Relevantly, the final tranche (being the balance of the Stock Price after payment of part of that amount in the earlier two tranches) was due pursuant to clause 7.5(b) on or before the date 180 days after completion (i.e., on or before 27 December 2008). 6Pursuant to clause 7.5(d) of the agreement, 7 Steel was required, as security for payment of the amounts referred to in clause 7.5(b) (those being amounts referable solely to payment of the balance of the Stock Price) to grant a first ranking floating charge over the Stock and all future raw materials, work-in-progress and finished stock used or to be used in relation to or as part of the business as conducted by it. The Charge was to be in the form of that annexed to the agreement (Blue 153). 77 Steel duly executed a Deed of Charge on 1 July 2008 (Blue 191), pursuant to clause 2.1 of which 7 Steel charged all of the Charged Property (defined as all of its present and future right title and interest in any Stock) in favour of Sims as security for payment of the Moneys Owing. That term was defined in clause 1.1 as meaning: all moneys and amounts which at any time for whatever reason or circumstance (whether or not within the contemplation of the parties at the date of this charge) [are] owing or remaining unpaid to [Sims] by [7 Steel] under or in connection with the Sale Agreement. (my emphasis) 8The Sale Agreement was defined, not surprisingly, as the agreement for the sale of business entered into on or about the date of the charge (clearly a reference to the agreement dated 24 June 2008 pursuant to which 7 Steel purchased Sims' steel distribution business). The maximum liability secured by the Charge was $50,000,000. 9Prior to the sale of its business, Sims had placed various orders for the delivery of steel from one of its suppliers, ThyssenKrupp Mannex (TKM), the delivery (and payment) dates for which fell due after completion of the sale of the business. In the case of two of the orders, payment was not due until after the date for payment by 7 Steel of the last tranche of the Stock Price. I will refer to such orders as the pre-completion purchase orders. 10It appears that on or before completion of the purchase, 7 Steel notified TKM of its acquisition of the business, because on 30 June 2008 TKM notified 7 Steel that, as it did not have any previous records on the "new owner" (i.e., 7 Steel), "all future deliveries have been put on hold subject to discussion with [TKM's] credit insurer" (Blue 185). In its letter, TKM suggested by way of an alternative that 7 Steel provide it with a third party security such as a bank guarantee, in which case it said it would be able to continue with the deliveries. It also advised that it would start to re-sell the material to alternative customers if it did not hear from 7 Steel by 11 July 2008. Hence, from 7 Steel's part, there was some urgency in resolving the problem with deliveries. 11Rather than taking up the suggestion that it provide third party security for TKM deliveries, 7 Steel asked Sims to assist it to obtain the supply of the pre-completion purchase orders. Sims agreed to do so (Blue 213), seemingly as a gesture of goodwill (and to pre-empt problems arising with payment of the subsequent payments due under the sale agreement) since the view taken within Sims was that there was no contractual obligation (presumably referring to a contractual obligation vis-à-vis 7 Steel, not vis-à-vis TKM) on Sims' part in relation to pre-completion purchase orders (Blue 384). 12The form that the assistance from Sims took was that Sims agreed to take delivery of the steel the subject of the pre-completion purchase orders from TKM and then to on-sell that steel to 7 Steel at cost plus a margin of $50 per tonne or part thereof (Blue 214 records Sims' internal advice to this effect in relation to the July deliveries). This arrangement was replicated for the balance of the TKM deliveries by which time 7 Steel had received legal advice (on 22 July 2008) that strategically it was far better for Sims to be the "enforcing party" in relation to the TKM orders because if 7 Steel became the "Customer" instead of Sims it was arguable that under TKM's Terms and Conditions TKM could terminate the supply arrangements and refuse delivery. Reference was made in that advice to clause 11(1) of those Terms and Conditions which, among other things, gave a right of termination if TKM received notice of circumstances which in its opinion reduced the customer's creditworthiness (Blue 274). 13It was a condition of Sims' agreement to enter into the on-sale arrangements that a trade credit insurance policy be taken out (at 7 Steel's expense) to cover its risk that 7 Steel would default on payment of amounts due to Sims for the steel the subject of those on-sale arrangements. 14Ultimately, three Product Sales Agreements were entered into between Sims and 7 Steel, setting out the arrangements between them for the on-sale of the steel in question (Blue 246; 288; 292), the first being on 15 July 2008. Those agreements are referred to in the primary judgment as the TKM contracts and, for consistency, I will so refer to them in these reasons. Those agreements expressly provided that, to the extent of any inconsistency, they were to override the 24 June 2008 business sale agreement (clause 6.4 of the respective agreements). 15The trade credit insurance that had been required as a condition of Sims' agreement to assist in relation to the TKM pre-completion purchase orders was duly taken out. On 14 August 2008, Coface issued a trade credit insurance policy dated 11 August 2008 in favour of Sims (Blue 302-312). The policy took effect from 1 July 2008 and covered the period to 30 June 2009. The policy covered a single risk buyer, 7 Steel, and insured against the non-payment by it of debts (defined as the "amount of one or more invoices owed by the buyer under a sales contract and falling within the scope of this agreement"), including non-payment due to insolvency of the buyer. The term "sales contract" was in turn defined as being "[a]ny agreement in any form which is legally binding upon the buyer and the seller and which is for the sale of goods or services against payment of a price". It was not suggested that the TKM contracts did not fall within the definition of "sales contract" in the policy. 16Meanwhile, Sims notified TKM (Blue 269), by letter dated 21 July 2008, that it required performance of the pre-completion purchase orders and sought confirmation that TKM was "proceeding to discharge its obligations under the Sale Contracts in accordance with their terms". 17By late November 2008, 7 Steel considered that there were "some serious issues with regards to amount which may well be owing to Sim's [sic] pursuant to the Asset Sale Agreement and to the various stock transactions which have been carried out subsequently between the Companies relating to TKM and to [other products]" (email dated 24 November 2008 from the chairman of 7 Steel's holding company, Mr Hill Blue 389). In particular, issue was taken by Mr Hill as to the arrangements that had been agreed in the TKM contracts (he apparently seeking to revisit the terms of that agreement). Mr Hill asserted, among other things, that Sims had a duty to pass on the benefit of the forward orders without profit; not to take the benefit of a rebate arrangement with TKM; and was not entitled to demand insurance cover for the transaction noting that there was an indemnity relating to "this specific issue" in clause 4.1(c) of the sale of business agreement. By that last comment, it appears that 7 Steel was taking the position at that stage that the indemnity in clause 4.1(c) covered the cost of steel ordered by Sims under the pre-completion purchase orders and purchased by 7 Steel under the TKM contracts. 187 Steel's position, as then communicated to Sims, was to confirm that it would be making payments "as due" pursuant to the various TKM transactions (i.e., the TKM contracts) but to advise that "the payments are made on account and are without prejudice". The first payment, for the July deliveries, was due on 25 November 2008. 7 Steel advised that there were further amounts due over the coming months from which 7Steel would be seeking deductions. 19Sims rejected the complaints made as to entry into the TKM contracts and made it clear that it considered 7 Steel could not walk away from those contractually binding agreements (Blue 387). 20It was against that background that arrangements were made between Sims and 7 Steel in December 2008 in relation to the forthcoming payment due for the balance of the Stock Price pursuant to clause 7.5(b) of the sale agreement; i.e., the final payment tranche. 7 Steel's lawyers (Turtons) sought confirmation on 12 December 2008 that on the making of that payment an ASIC form for the release of the charge (form 312) and deed of release would be handed over (Blue 404). The lawyers acting for Sims (Dibbs Abbott Stillman) responded by agreeing that at settlement a release of the charge would be handed over (Blue 402). 21Clause 8.5 of the charge provided that: [Sims] will be under no obligation to grant a release of the Charged Property from this Charge unless at the time the release is to be provided, none of the Moneys Owing i.e., including all amounts owing or remaining unpaid by 7 Steel to Sims under or in connection with the Business Sale Agreement is owing (whether actually, contingently, or prospectively) and it is not reasonably foreseeable that there could be any Moneys Owing in the future. 22A query was raised within Sims as to the legal implications of releasing the charge, including any such implications in relation to the TKM debts (Blue 401). The response from Sims' director (Mr Nelson) was that the charge over the stock would be released when the balance of the purchase price was received and that the TKM contracts "run their ordinary course - we're covered by credit insurance and we keep the rebate and the $50 per MT". Coface later pointed to this comment in contending that Sims had breached its obligation to act as a prudent uninsured. 23The charge was released on 15 December 2008 at the time the balance of the Stock Price was paid. 24During the course of 2009, there were ongoing disputes between 7 Steel and Sims as to set-offs claimed by 7 Steel in relation to the amounts it acknowledged were due under the TKM contracts. It is not disputed that during this period various amounts were paid to Sims that were referable to TKM deliveries, though (as noted above) 7 Steel had indicated that the payments would be made "on account" and "without prejudice" and that it would be seeking deductions therefrom. 25By letter dated 30 January 2009, Turtons wrote to Dibbs Abbott Stillman in connection with the outstanding matters in dispute between their respective clients, including the TKM arrangements. In that letter, Turtons recorded that 7 Steel maintained its entitlement to the sum of $994,476 as set out in the 24 November 2008 email to which I have earlier referred (at [17]) and noted 7 Steel's intention to set off that sum against amounts "owing" for TKM stock as set out in a table of invoices. The invoices listed in that table included four particular invoices (invoices 1063, 1066 and 1072, which were due for payment on 29 January 2009 and invoice 1015, which was due for payment on 8 February 2009). I will refer to them collectively as the four disputed invoices. The first three invoices totalled $259,073.08; invoice 1015 was in the sum of $27,902.93. 26On 10 March 2009, Sims issued a statutory demand in respect of the amounts it claimed were owing in relation to the supply of goods and services to 7 Steel. Of the four disputed invoices, only invoice 1015 (that was due for payment in February) was listed in the schedule of outstanding invoices set out in the affidavit accompanying that statutory demand (Blue 420). That is consistent with the fact that Sims' bank records show the receipt, from 7 Steel, on 29 January 2009 of a sum of $259,073.08 (that amount corresponding precisely to the total of the three invoices that had been payable in January) (Blue 412). The statutory demand also noted that there was a disputed amount of $994,476, referring to the Turtons' letter of 30 January 2009. 27There followed negotiations that led to the payment (without prejudice or admissions) of an amount by 7 Steel if Sims agreed to withdraw the statutory demand (Blue 423-425). On 26 March 2009, a sum of $1,033,854.04 was recorded in Sims' bank statement as having been received from 7 Steel (Blue 426). Relevantly, the remittance advice issued by 7 Steel in respect of that payment listed invoice 1015 as one of the invoices included as paid in the said sum (Blue 427). Subsequent statutory demands issued by Sims omitted reference to the 1015 invoice (Blue 433; Blue 447). 28Ultimately, Sims and 7 Steel resolved their disputes in relation to the TKM contracts by entry into a Deed of Release and Settlement made in around November 2009 (Blue 465). The recitals to that deed included that the "Invoices" (defined as those set out in Schedule 1 in the sum of $994,476.00) remained outstanding (Recital H). Schedule 1 included the four disputed invoices. 29Pursuant to clause 1 of the deed, it was agreed that 7 Steel would pay the sum of $750,000 in four instalments but also that if any instalment or part thereof was not paid within five business days of the due date then the amount claimed in the Invoices (less any amount paid pursuant to the deed) was immediately to become due and payable. 7 Steel made the first three of those payments (totalling $375,000). It failed to make the final payment of $370,000 due in February 2010. 7 Steel went into receivership on 1 March 2010. It was subsequently placed into liquidation on 10 August 2010. 30In May 2010, Sims submitted a claim under its insurance policy with Coface for the insured percentage (90%) of the amount of $619,476 that it claimed was the indebtedness of 7 Steel. An updated version of the claim form as at 18 April 2010 is at Blue 477. The details of the outstanding debt listed 7 invoices, totalling $619,476. Those invoices did not include the four disputed invoices. 31Following the refusal by Coface of Sims' claim under the policy, Sims commenced proceedings in the District Court, claiming (at [15]) that pursuant to the TKM contracts, the "Invoices" listed at [7] (which included the four disputed invoices), and the Deed of Release, 7 Steel was indebted to it in the amount of $619,476. That amount represented the total of the 14 invoices listed at [7] (totalling $994,476 and including the four disputed invoices), less the three payments that had been made by 7 Steel to Sims under the Deed of Release (i.e., the $375,000). 32Coface, by its Amended Defence filed in September 2011, pleaded that it had no liability to Sims under the policy. Among other things, it alleged that Sims had breached its obligation, under clause 2.1 of the General Provisions of the policy, to act as a "prudent uninsured", by releasing the charge over 7 Steel's assets on 15 December 2008 (paras [37]-[39]). It did not deny, but did not admit, that 7 Steel was indebted to Sims in the amount claimed by Sims (para [15] of the Amended Defence). 33In Sims' Reply, relevantly, it contended that 7 Steel's obligation to pay for steel supplied by TKM arose under the TKM contracts and not under the indemnity contained in clause 4.1(c) of the sale agreement ([8(3)]) but that, if it was required under the policy not to release the Charge, Coface's interests had not been prejudiced thereby.

Issues 34Coface contends, first, that the primary judge erred in rejecting its argument that Sims had breached clause 2.1 of the insurance policy by releasing the charge it held over 7 Steel's assets and, second, that, even if the policy did respond to Sims' claim, Coface was not liable to Sims in respect of $286,976.01 of the $619,476 that was claimed by Sims (on the basis that the four disputed invoices had already been paid by 7 Steel). Coface contends that the prejudice it suffered as a consequence of the breach of clause 2.1 was such that Coface had no liability under the policy.

Primary Judgment 35In the proceedings at first instance, Coface submitted that the amounts the subject of Sims' claim against it had been secured by the Deed of Charge dated 1 July 2008 (Blue 191). It made this submission on two bases: first, that the amounts in question were amounts owing by 7 Steel to Sims under clause 4.1(c) of the business sale agreement, for stock which had been ordered by Sims but neither received nor paid for as at the time of completion of the business sale agreement; and, second, that the amounts were owing under the TKM contracts were moneys owing "in connection with" the business sale agreement. 36His Honour rejected those submissions. His Honour held that the TKM contracts created new obligations in, and new risks for, Sims ([110]) and that they were "outside the sale agreement, and not within the scope of clause 4.1(c), and consequently, clause 7.5(b) [of the business sale agreement]" ([111]). His Honour considered that the sums payable under the TKM contracts could not have been part of the purchase price ([112]). An additional reason given by his Honour for the conclusion that clause 4.1(c) of the business sale agreement did not apply to the TKM contracts was that the steel ordered by Sims prior to completion of the business sale agreement was not delivered to (or "accepted by") 7 Steel before the TKM contracts were made and hence was not within the indemnity in clause 4.1(c) (at [113]). 37His Honour concluded that 7 Steel's obligation to take delivery of steel under the pre-completion purchase orders arose from different agreements ([113]) and that "[t]he part of the sale of the business agreement relating to steel pre-ordered by Sims from TKM had proved impossible to perform as between Sims and 7 Steel" ([113]). 38His Honour was also prepared to infer, from the fact that by 15 December 2008 the parties "were in some dispute" and had settled some of their then differences by deed of release, that a suggestion by Sims at that stage that it would not release the charge "would have met with resistance from 7 Steel and either prevented or interfered with Sims' opportunity to receive the substantial sum it was paid on settlement [i.e., the payment in December 2008 of the balance of the Stock Price]" ([114]). His Honour concluded that Sims did not fail to act as a prudent uninsured ([115]). 39His Honour inferred that the view of Mr Nelson (Sims' director at the time the charge was released) at the relevant time was that Sims had no contractual obligation concerning pre-completion purchase orders and that the indemnity given by 7 Steel to Sims under the business sale agreement (in clause 4.1(c)) only applied to stock delivered to 7 Steel but paid for by Sims ([110]). His Honour considered that such a view was a reasonable one and that Mr Nelson was correct to assume that the TKM contracts were outside the sale agreement ([111]). 40As to the quantum of the claim made by Sims, his Honour noted the submission by Coface was that this included four invoices that had already been paid or were noted in a remittance document as having been paid (the four disputed invoices). In setting out the relevant chronology in relation to those invoices, his Honour appeared to accept that invoices 1063, 1066 and 1072 had been paid on 29 January 2009 ([130(a)]) and noted that invoice 1015 was included in a list of payments "apparently made" on 26 March 2009 ([130(c)]). 41His Honour noted that 7 Steel and Sims had, from the date of the 30 January Turtons' letter, "treated the state of accounts between them as though at all times [the sum of $994,476 remained owing to Sims for unpaid invoices]"; that 7 Steel maintained that it had a claim against Sims for that same amount; and that when the 2009 Deed of Release was entered into 7 Steel and Sims had treated the four disputed invoices (that had previously been treated as paid) as unpaid ([130(d)-(e)]). 42At [131], his Honour found that the whole of the sum claimed by Sims was due. His Honour inferred that, when 7 Steel and Sims settled their disagreements in late 2009, they agreed to set aside the earlier "allocations of payment" to outstanding invoices to the extent that they accepted the set off in the Turtons' letter ([131(e)]) and that the net position was that a sum equivalent to the 7 Steel claim was still owing after settlement and the "whole of the sum due under invoices then owing, became due, subject to the staging of payments" ([131(f)]). 43His Honour considered that the agreement shown in the Deed of Release did not reduce 7 Steel's indebtedness for any part of the debt it then owed for the unpaid invoices to the value of $994,338 and that the way the parties on settlement treated the four invoices in question and the previous allocation of payments to them did not change the position that 7 Steel was indebted to Sims for the sum of $994,338 "although the deed created a new debt" ([131(g)]). 44His Honour accepted the submission, for Sims, that it did not sue on the invoices; rather that it sought indemnity for indebtedness of $619,476, arising from the TKM contracts, the Invoices and the deed (referring to [15] of the Statement of Claim) ([132]). His Honour considered that it was the total indebtedness, rather than particular invoices, that was significant. 45Accordingly, his Honour held that Sims was entitled to recover under the policy the whole of the sum it had claimed (namely, the sum claimed for indemnity in respect of an indebtedness in the sum of $619,476). As the insured percentage was 90%, the amount ultimately awarded comprised $557,528.40 (Red 100 at [8]) plus interest of $53,938.95 (Red 102 at [12]), totalling $611,467.35 (Red 105). Costs were ordered on the ordinary basis to 29 June 2011 and thereafter on an indemnity basis, having regard to an Offer of Compromise that had been served by Sims under Rule 20.26 of the Uniform Civil Procedure Rules 2005 (NSW).

Grounds 1 and 2 - liability 46As to the question of liability, Coface contends that his Honour erred: 1. ...in finding (at [109] to [115]) that Sims did not breach clause 2.1 of the policy by releasing its charge over assets of 7 Steel on 15 December 2008. 2. ... in failing to find that Sims: (a) breached clause 2.1 of the policy by releasing the charge over assets of 7 Steel on 15 December 2008; and (b) consequently, caused prejudice to Coface's interests for the purposes of s 54(1) of the Insurance Contracts Act 1984 (Cth) equal in value to the full value of Sim's claim at trial. 47Clause 2.1 of the policy imposed two obligations on the insured: first, to manage all business covered under this contract with at least the same diligence and prudence as the insured would reasonably be expected to exercise were it not insured, and, second, to "use all reasonable endeavours" to preserve its rights against both its buyers and any third parties. Sims does not dispute that it owed those obligations. 48The contention that Sims breached clause 2.1 of the policy by releasing the charge rests on the premise that the charge secured the sums for which Sims later claimed on the policy. If it did not, then there can have been no prejudice to Coface in the release of the charge and there cannot have been a breach of clause 2.1 in Sims so doing. 49As noted earlier, Coface contends that the charge did secure 7 Steel's indebtedness under the TKM contracts: first, on the basis that these were amounts owing "under" the sale contract (by reference to the indemnity in clause 4.1(c)) and, second, on the basis that they were moneys owing "in connection with" the sale contract.

Were the TKM invoice amounts owing "under" the contract? 50Clause 4.1 is not felicitously drafted, in the sense that its intended function (having regard to the definition of "Stock Price" in clause 1.1) seems to have been to provide a methodology for the calculation of the value of the Stock (a function seemingly performed by sub-clauses (a) and (b)), but then it goes on in sub-clause (c) to impose an obligation on 7 Steel to indemnify Sims "in relation to acceptance of, and payment for" the stock identified in that sub-clause. 51Clause 4.1(c), on which the present dispute turns, provided as follows: 4.1 Stock Price The vendor agrees to sell to the Purchaser, and the Purchaser agrees to buy from the Vendor, the Stock on Completion for a sum calculated in accordance with the following terms: ... (c) In relation to Stock which has been ordered by the Vendor but not yet received by the Vendor, nor paid for, on Completion the Purchaser indemnifies the Vendor in relation to acceptance of, and payment for that Stock inclusive of agreed terms of payment. 52It was contended by Coface that clause 4.1(c) obliged 7 Steel both to accept delivery of pre-completion stock and to indemnify Sims for the cost of that stock; and that this cost then formed part of the "Stock Price" under the contract. Hence, it was said, the amounts due under the TKM contracts were amounts payable under clause 4.1(c) and secured by the Charge. 53Coface contended that the obligation under clause 4.1(c) was not confined to circumstances in which pre-completion stock had actually been delivered to and accepted by 7 Steel. Sims, to the contrary, contended that there was an obvious ellipsis in clause 4.1(c) as to the identity of the party by whom there was to be acceptance of Stock under the pre-completion purchase orders and maintained that this was to be filled by construing clause 4.1(c) to apply only to Stock the subject of pre-completion purchase orders placed by Sims that resulted in deliveries to and accepted by 7 Steel after completion. As noted, his Honour accepted the construction of clause 4.1(c) for which Sims contended. 54Counsel for Sims, Mr Mehigan, maintains that the logical construction to be placed on the clause is that it only applies to steel accepted by 7 Steel, on the basis that it was 7 Steel that had the interest in accepting the Stock and that the indemnity was intended to cover the situation where Sims had paid for Stock accepted by 7 Steel after completion because those payments would not form part of the adjustment of the purchase price under sub-clauses 4.1(a) and (b). His Honour accepted that contention and concluded that since TKM had refused to make deliveries to 7 Steel after the transfer of the business there was no acceptance of Stock by 7 Steel under the purchase orders within the scope of clause 4.1(c). 55One difficulty with that construction is that it would leave Sims exposed to the commercial risk that 7 Steel might (for whatever reason) refuse to accept a delivery of pre-completion purchase ordered steel in circumstances where Sims would still have obligations to TKM under the contracts constituted by the pre-completion purchase orders and Sims would be out of pocket if TKM sought to enforce Sims' obligation to purchase the orders. 56A scenario under which 7 Steel, which had no express obligation under the Sale Agreement to accept the steel in question (unless the indemnity "in relation to acceptance" imposed an obligation on it, in effect, to do so), could simply refuse to accept steel, and hence leave Sims exposed to the cost of the steel, seems commercially unlikely. I note in passing that, though this is not relevant when construing the objective meaning of the clause, that was not the understanding that 7 Steel expressed as to the operation of the indemnity. 57I am not persuaded that the proper construction of clause 4.1(c) is as contended for by Mr Mehigan. To give a commercial operation to the clause, I would have construed the indemnity "in relation to acceptance" as imposing an obligation on 7 Steel to accept steel delivered in accordance with the pre-completion purchase orders (as it seems the relevant steel was - in that it went to premises nominated on the orders, albeit those premises then being occupied by 7 Steel) and the indemnity in relation to payment of that Stock as imposing an obligation on to 7 Steel to make Sims good for the cost of the stock (either by reimbursing Sims if it had paid the TKM invoices or by paying TKM directly itself). In that regard, the comma after "acceptance of" may be read as indicating that the indemnity was to have a twofold operation, i.e., to apply both to an "acceptance of" the steel and to the payment for the steel. On this construction it would not be necessary to read any words into clause 4.1(c). 58Nevertheless, that construction does not lead me to conclude that as at the time the charge was released the TKM amounts were owing by 7 Steel to Sims "under" the sale of business agreement. That is because in my opinion the TKM contracts relevantly superseded the earlier arrangements under the sale contract in respect of steel the subject of the pre-completion purchase orders. 59Senior Counsel for Coface (Mr Henry SC) maintains that there was no inconsistency between the TKM contracts and the business sale agreement and hence that the relevant amounts remained owing by 7 Steel under the indemnity in clause 4.1(c) (even though there were new contractual arrangements in place under the TKM contracts). I disagree. 60What was contemplated under the TKM contracts was a completely new regime in relation to the pre-completion purchase orders. It was unclear as to whether the business sale agreement obliged Sims, as between it and 7 Steel, to enforce its agreements with TKM under which TKM was to supply steel after the date the business sale agreement had been completed. The TKM contracts explicitly required Sims to honour its contracts with TKM and then to on-sell the steel to 7 Steel. Importantly, the TKM contracts also imposed new obligations on 7 Steel going beyond any that would have arisen under the indemnity (such as the obligation to pay an additional amount to Sims for the steel over and above the TKM invoiced price for the steel). 61Furthermore, the indemnity for which cl 4.1(c) of the business sale agreement provided did not require payment by 7 Steel in advance of Sims incurring a liability to pay TKM in respect of the purchase of stock. By contrast, the TKM contracts required 7 Steel to make full payment for the relevant product three days before the date Sims was required to pay TKM for the product under the terms of the purchase orders. 62Each TKM contract provided that to the extent of any inconsistency, the TKM contract was to override the business sale agreement. There were clearly inconsistencies between the TKM contracts and the business sale agreement. And had Sims sued 7 Steel for the amounts due for that steel, it would surely have done so under the TKM contracts not the clause 4.1(c) indemnity. 63In my opinion his Honour did not err in finding that the TKM contracts created new obligations and risks for Sims and that the amounts due from 7 Steel for the pre-completion purchase orders were not amounts owing under the sale of business contract.

Were the TKM amounts due "in connection with" the contracts? 64Mr Henry submits that, even if the TKM contracts in effect superseded clause 4.1(c) of the business sale agreement, they were nevertheless entered into "in connection with" the business sale agreement and money owing thereunder was therefore still secured by the charge. Reliance is placed by Mr Henry in this regard on the breadth of the expression "in connection with" (Brown v Rezitis (1970) 127 CLR 157 at 165 and Tana v Baxter (1986) 160 CLR 572 at 579). 65The requisite connection is said to be found in the fact that the TKM contracts expressly refer both to the sale of Sims' business and to the business sale agreement and that they provide particular arrangements for the fulfilment of a subset of the pre-completion purchase orders. Mr Henry referred to clause 3.1(a) of the TKM contracts in this regard. 66Mr Mehigan does not dispute that the phrase "in connection with" is of wide import but submits that it must be understood in the specific context of the documents being construed (Minister for Immigration v Singh (2000) 98 FCR 469 at 477). 67As at the time the TKM contracts were entered into, the position was as follows:

• Sims had placed pre-completion purchase orders with TKM for delivery of steel on various future dates and payment for at least some of those orders was to fall due after the date for final payment of the Stock Price under Sims' business sales agreement with 7 Steel;
• it was not disputed that, as between TKM and Sims, TKM was bound to supply the steel to Sims (by delivery to the designated delivery address(es)) and Sims was bound to accept and pay for that steel (assuming the steel complied with the specifications in the orders);
• at least some of the designated addresses for delivery of the steel were the subject of leases taken over by 7 Steel;
• there was no novation of the contracts constituted by TKM's acceptance of the pre-completion purchase orders; therefore 7 Steel had no obligation, vis-à-vis TKM, to accept the steel; and
• there was no express obligation under the business sale agreement for Sims to honour the pre-completion purchase contracts after the completion of the sale of the business nor (unless, as I consider it did, the indemnity in clause 4.1(c) imposed such an obligation) was there an obligation on the part of 7 Steel to "accept" any steel delivered by TKM to it in relation to the pre-completion purchase orders. 68It was in those circumstances that Sims, maintaining that it was not obliged to do so, entered into the TKM contracts and 7 Steel (though later complaining that it had been forced or misled into so doing) assumed direct obligations to Sims in relation to the on-sale of the steel. As I have explained, the TKM contracts incorporated terms inconsistent with the provisions of the business sale agreement and effectively superseded that agreement. Any moneys owing by 7 Steel to Sims were due under the TKM contracts. Those contracts were entirely self-contained and imposed obligations on 7 Steel that were quite independent of its obligations under the business sale agreement. 69It is also significant that the business sale agreement (clause 7.5(d)) required 7 Steel to grant Sims a duly executed charge, in the form annexed to the agreement. Clause 7.5(d) stated that the charge was "[a]s security for payments of the amounts referred to in clause 7.5(b)": that is, the balance of the Stock Price. It is true that the definition of "Moneys Owing" in clause 1.1 of the Charge is not confined to moneys due under clause 7.5(b) of the business sale agreement. But the express purpose for which the Charge was to be executed indicates that the expression "in connection with" in clause 1.1 of the Charge should not be given the widest possible meaning. 70For these reasons, the fact that Sims entered into the TKM contracts in order to assist 7 Steel in relation to difficulties it was experiencing with TKM as a supplier in relation to pre-completion purchase orders does not in my opinion warrant the conclusion that the amounts due under the TKM contracts were due "in connection with" that agreement. I do not accept that the new payment regime was one entered into, relevantly, "in connection with" the business sale agreement. 71In my opinion his Honour did not err in the conclusion he reached on that issue.

Other complaints made of his Honour's reasons in relation to liability 72This makes it strictly unnecessary to consider the further complaints made by Coface as to the primary judge's findings as to the reasonableness of Mr Nelson's understanding of the scope of clause 4.1(c) (namely the view that 4.1(c) was not applicable in the context of the transaction with TKM, because TKM refused to supply the stock) or as to the prejudice suffered by Coface as a reason of the release of the charge. 73Briefly, Coface notes that the test of what is required for a prudent uninsured is an objective one and submits that Mr Nelson's view as to the applicability of the charge was therefore irrelevant. Mr Mehigan accepts that the test is an objective one but submits that the reasonable belief of an insured is relevant in determining objectively whether that insured was in breach of the relevant obligation (Centennial Coal Co Ltd v Xstrata Coal Pty Ltd [2009] NSWCA 341; (2009) 76 NSWLR 129). 74What is required of a prudent uninsured, to meet obligations such as those in clause 2.1 of the policy, must be determined objectively by reference to what was or was not done in the circumstances that existed. Insofar as weight is placed by his Honour on the reasonableness of Mr Nelson's view or belief, it must be noted that there was no suggestion that Mr Nelson had sought any legal advice as to the legal implications of releasing the charge before he gave instructions to do so. The email communications within Sims would permit an inference that Mr Nelson simply assumed that the charge could be released without prejudice to Sims' position (without regard to the prejudice this might cause its insurer if, indeed, the charge covered the amounts due under the TKM contracts). Therefore, I have some difficulty in seeing how it could be said that Sims was acting as a prudent uninsured in acting on the basis of no more than an assumption of the application of the charge. 75Had it been necessary to determine this issue, I would have been inclined to the view that his Honour had applied a subjective standard to the test and had erred in holding that Sims had acted as a prudent uninsured in acting on the basis of Mr Nelson's belief as to the applicability of the charge to the amounts owing under the TKM contracts. 76Nor is it necessary to consider the further complaint by Coface that there was no evidence to support the inference (at [114] of the judgment) that 7 Steel would not have made the settlement payment under the business sale agreement in December 2008 had Sims not released the charge. Mr Mehigan submits that the inference that a refusal to release the charge in December 2008 would have met with resistance from 7 Steel was open on the evidence, referring to the position adopted by 7 Steel's Chairman, Mr Hill, in November 2008 in relation to the alleged set off as evidence Mr Hill was prepared vigorously to pursue 7 Steel's interests. The difficulty with drawing such an inference is that the position was never tested by Sims. Rather, the respective lawyers appear simply to have assumed that the charge would be released and Mr Nelson assumed that Sims' position was covered by the insurance policy that was in place. 77That said, I accept Mr Mehigan's submission that the drawing of this inference was not essential in his Honour's reasoning that Sims had not failed to act as a prudent uninsured in releasing the charge. 78As to the effect of s 54(1) of the Insurance Contracts Act 1984 (Cth) had a breach of clause 2.1 of the policy been established, Coface maintains that effect of s 54(1) is that its liability in respect of the claim is reduced to zero because the prejudice to Coface's Interests as a result of Sims releasing the charge was equal in value to the full value of Sims' claim. This argument is put on the basis that, had the charge not been released, there would be no loss of Sims for Coface to indemnify. 79In Moltoni Corporation Pty Ltd v QBE Insurance Ltd [2001] HCA 73; (2001) 205 CLR 149 (at [16]), the High Court noted that, where s 54(1) of the Insurance Contracts Act applies, the relevant sum to be quantified is the amount that fairly represents the extent to which the insurer's interests were prejudiced as a result of that act and that this "invites attention to, and requires identification of, the amount of damage which the insurer suffered as a result of the act or omission in question". The amount of which s 54(1) speaks was said to be the actual financial damage that has been or will be sustained as a result of the relevant act or omission. 80At [18], their Honours said: If, as was the case in Ferrcom, it can be shown that, had the relevant act or omission not occurred, the insurer would have gone off risk altogether, the amount that fairly represents the prejudice suffered is the whole of the amount claimed. By contrast, if the insurer would not have gone off risk (as was the case in the present matter) the relevant prejudice suffered is to be measured by reference to what would have happened (as distinct from what could or might have happened) if the act or omission had not occurred. noting, at [19], that in the latter kind of case, what must be identified is what would have happened if the act or omission had not occurred and that it was not enough to point to some right that the insurer might have exercised, without inquiring whether the right would have been exercised. 81Mr Mehigan submits that Coface's argument assumes that 7 Steel would have paid the final instalment under the business sale agreement without requiring the release of the charge. Mr Mehigan further submits that if (contrary to Sims' position) the charge secured both the final payment under the business sale agreement and the balance payable under the TKM contracts, it was nevertheless necessary for Coface to demonstrate that, on the insolvency of 7 Steel, the assets secured by the charge would have been sufficient to meet all the amounts due to Sims and that no attempt was made by Coface to demonstrate what the likely value of the charge would have been on the insolvency of 7 Steel in that situation. 82Mr Henry points to the fact that the charge was a first priority security over stock valued during January to March 2009 as in excess of $50 million (Blue 410) and valued between June 2009 and February 2010 in excess of $30 million (Blue 502). At the time the charge was released Sims had issued invoices to 7 Steel totalling in excess of $1,252,000, which fell due for payment between January and June 2009 (Blue 447). 83Had it been necessary to determine this issue, I would have concluded that the evidence before his Honour as to 7 Steel's financial position at the relevant time enabled a conclusion that, had the charge not been released, it would have secured assets sufficient to meet both the final payment under the business sale agreement and the TKM amounts, and that Coface's prejudice was the loss of its ability to maintain the security for the full amount outstanding under the TKM contracts (quantified by reference to the amount it would have been able to realise by enforcing the charge as at December 2008). 84Grounds 1 and 2 of the appeal have not been made out.

Grounds 3 and 4 - quantum 85As to the question of quantum, Coface contends that his Honour erred: 3. ...in finding (at [131] to [133]) that the whole of the sum claimed by Sims at trial is due. 4. ... in failing to find that Coface is not liable for $286,976.01 (being the total of invoices 1072, 1066, 1063 and 1015) of the sum claimed by Sims at trial. 86There is no doubt that there was evidence to support the conclusion that the four disputed invoices had been paid (in January and March respectively). Apart from the documentary evidence to which I have already referred, Mr Shields, Sims' Chief Financial Officer, acknowledged in cross-examination that the four invoices had been paid (at Black 157T-158C). Mr Shield's evidence was that Sims did not reallocate to different invoices amounts previously received by it from 7 Steel in respect of the invoices in issue (at Black 132N-0). 87Mr Henry refers to Dwyer v Craft Printing Pty Ltd [2009] NSWCA 405 where Young JA, as his Honour then was, said at [88]: The basic rule is that a debtor has the option of electing to which debt its payment is to be placed. If the debtor fails to make the election, the creditor may so elect. If neither have done so, then, if, and only if, there is a running account, the presumption is that the oldest debt is satisfied first. 88His Honour there noted that an election made by a debtor or creditor that is communicated to the other party is irreversible ([92]). 89In Mita Copiers Australia Pty Ltd v Condor OA Pty Ltd, NSWSC, unreported, 10 October 1994, Hunter J said: Plainly, in the absence of any other circumstance, payment corresponding to the precise price of goods supplied on or prior to delivery of those goods carries a clear statement of intention that the payment is for those goods and would preclude any other appropriation of the payment by the supplier of the goods. "Where there is nothing to show the animus solventis the payment may certainly be applied by the party who receives the money. The payment of the exact amount of goods previously supplied is irrefragable evidence to show that the sum was intended in payment of those goods, and the payment of sums within the time allowed for discount, and on which discount has been allowed, affords a strong inference, in the absence of proof to the contrary, that it was made in relief of the surety." (per Lord Ellenborough in Marryatts v White 1817 (1927) 171 ER 586 at 586-587) 90The effect of the evidence before his Honour was that 7 Steel itself had elected to allocate payment in March 2009 to the fourth invoice (by its remittance advice) and that 7 Steel had paid an amount in January 2009 corresponding precisely to the amount of the first three disputed invoices. It should be inferred that Sims had allocated the January payment to the first three disputed invoices (assuming that 7 Steel had not already done so at the time of payment), when Sims chose not to include those invoices in the list of outstanding invoices for the purposes of the first statutory demand. 91Mr Henry submits that Sims cannot rely upon the Deed to "revive" extinguished debts for the purpose of claiming payment of the same debts from Coface under the policy. There is much to commend that submission. If it were otherwise, it would arguably be open to an insured, by arrangement with its debtor, artificially to impose liability on the insurer that would not otherwise have arisen. Indeed, though this was not argued, the reallocation or revival of extinguished debts has the flavour of conduct that might be said to have been in breach of clause 2.1 of the insurance policy as prejudicing the interests of the insurer. 92Mr Henry emphasises that the policy insures the risk of non-payment of "debts" and submits that since, on payment of the invoices, there ceased to be any amounts owing by 7 Steel to Sims in respect of those invoices and hence, those amounts were no longer "debts" within the meaning of the policy. 93Mr Mehigan submits that the effect of the Deed of Release was to set aside the earlier allocations of payments to outstanding invoices and that this was not a matter of inference (as his Honour had considered at [131(e)]). He submits that the recitals to the deed created an estoppel as between 7 Steel and Sims in relation to that matter (referring to Handley, Estoppel by Conduct and Election, Thomson Sweet & Maxwell at [7-002]-[7-004] and the explanation of estoppel by deed given by Lindsay J in Labracon Pty Limited v Cuturich & Anor [2013] NSWSC 97 (at [105]). Hence it is submitted that the question of prior allocation of payments is irrelevant. 94In Estoppel by Conduct and Election, the learned author notes that such an estoppel only has effect between the parties and their privies in proceedings on the deed (citing as Parke B in Carpenter v Buller (1841) 8 M & W 209, 212; as approved in Ex parte Morgan (1876) 2 Ch D 72 CA, 89). The Hon K R Handley then goes on to note that the estoppel is not available in other proceedings between the parties (i.e. proceedings other than an action upon the deed), and also that the recital is only available as an admission (citing McCathie v McCathie [1971] NZLR 58 at 70). 95In the present case, the insurance policy covered the non-payment of "debts", being amounts defined by reference to amounts of one or more invoices "owed" by 7 Steel. His Honour accepted that 7 Steel had paid the debts the subject of the four disputed invoices. What the parties then did, by the Deed of Release, was in effect to agree between themselves that certain debts that had been paid (or treated as paid) should now be treated as not having been paid for the purposes of agreeing partially to set off those amounts against amounts claimed by 7 Steel as "deductions". 96True it is that after entry into the Deed of Release 7 Steel would not, as against Sims on an action in relation to the subject matter of the deed, be able to deny that the four disputed invoices were "outstanding" (at least without seeking rectification of the deed for, say, common mistake - Brooke v Haymes (1868) LR 6 Eq 25; Greer v Kettle [1938] AC 156,171; Wilson v Wilson [1969] 1 WLR 1470; McCathie v McCathie [1971] NZLR 58 CA, 70-1; or otherwise seeking some form of equitable relief). However, such an estoppel does not bind Coface. 97In those circumstances, the fact that Sims and 7 Steel have agreed between themselves to reallocate earlier payments does not assist Sims to maintain its claim against Coface under the policy for those amounts in respect of which the debt was extinguished in 2009. 98Grounds 3 and 4 are therefore made good.

Interest and Costs 99Coface sought an order in the event that the appeal was successful, for its costs of the proceedings in the Court below up to 7 June 2011 on an ordinary basis and thereafter on an indemnity basis based on Coface's offer of compromise dated 7 June 2011 made under r 20.26 of the Uniform Civil Procedure Rules 2005. That offer of compromise (Blue 526-528) was in the sum of $150,000. 100In circumstances where the appeal on grounds 1 and 2 has not succeeded, the amount of the offer of compromise still remains less favourable than the judgment obtained by Sims. Therefore, there is no basis for any change to the costs orders made below. 101As to the costs of the appeal, while the appellant has succeeded in reducing the amount of the judgment, it remains liable for a substantial proportion of the judgment debt. In my opinion the costs of the appeal should be borne by the appellant.

Conclusion 102For the reasons set out above, I consider that the challenge to his Honour's findings on liability has not been made good but that his Honour did err in the calculation of the quantum for which Coface was liable under the policy. Accordingly, I propose the following orders:

1. Appeal allowed in part.
2. Set aside the orders made by Walmsley DCJ and in lieu thereof order that the defendant pay to the plaintiff $299,250 (being 90% of the sum obtained by subtracting $286,976.01 from $619,476) plus interest on that sum.
3. Direct parties to bring short minutes of order quantifying the amount plus interest in accordance with the judgment.
4. Appellant to pay respondent's costs of the appeal. 103SACKVILLE AJA: I agree with Ward JA.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 20 May 2020