QBE Insurance Australia Limited v The Grape House Group Pty Ltd

The materials before the Court 13 The parties prepared a statement of agreed facts and issues (the SOAF) and a Court Book of relevant documents (Court Book or CB). The documents in the Court Book were admitted into evidence. In addition, the parties jointly tendered a bundle comprising four documents. The SOAF, the Court Book and the tender bundle comprised the totality of the evidence. There was no witness testimony.

The Policy 14 The Policy comprises the following documents: (a) a document styled "QBE Australia Comprehensive (AP) Trade Credit Insurance Policy Wording" (Policy Wording) prepared on 3 February 2014 (CB 45-54); (b) a Policy Schedule (including endorsements) dated 12 December 2019 (CB 55-70), which was updated on 13 May 2020 (CB 71-86) (the Schedule); (c) any Credit Limit Endorsements (as defined in the Policy Wording) (which are contained in the Schedule); and (d) the Proposal (as defined in the Policy Wording). Consistently with the approach of the parties in their submissions, I will refer only to the updated version of the Schedule. 15 Under the heading "Cover" in the Policy Wording, it is stated that the Policy consists of the Proposal and the following: the Policy Wording; the Schedule and all endorsements; and all Credit Limit Endorsements. Thus it is clear that the Schedule and all endorsements form part of the Policy. The following text then appears, describing the cover provided by the Policy: In consideration of the payment of all premiums and other fees and charges when due and subject to the terms and conditions of this Policy, the Insurer agrees to indemnify the Insured up to the Insured Percentage of the Insured Loss in the event of an Insured Buyer failing by reason of a Claimable Event to pay the Insured an Insured Debt. 16 The next section of the Policy Wording is headed "Conditions". Clause 3 relevantly provides as follows: 3. Credit Management and Consultation … (c) In the event that: (i) at any time to the knowledge of the Insured any circumstances arise which could, in the reasonable opinion of a prudent Insured, give grounds for the belief that an Insured Buyer may not (or may be unable to) perform or comply with its obligations under a contract of sale with the Insured; or … (v) any part of an Insured Debt is not paid in cash or by cheque or bill of exchange available for immediate presentation by the last day of the Maximum Extension Period, then a "Notifiable Event" is deemed to have occurred. 17 Clause 4 is headed "Exclusions" and states that the Policy "does not cover and the Insurer will not be liable (unless otherwise specifically amended by endorsement) in respect of any indebtedness" (relevantly): (b) which relates to sales tax, excise tax, goods and services tax, retention monies, interest charges, penalties, government charges and taxes and any consequential damages or costs; … (f) which is subject to any form of dispute; 18 Clause 9 is the key provision for present purposes. The main relevant part of the clause is cl 9(b)(i)(1) (emphasised below). However, I set out the whole of cl 9 for the sake of context and completeness: 9. Recoveries and Specified Security Proceeds (a) Any Recoveries received by the Insured or the Insurer are to be held on trust for the Insured and the Insurer for their respective interests as specified in paragraph (b) below. (b) Subject to paragraph (g) below, Recoveries are to be divided between the Insured and the Insurer as follows: (i) the Insurer is entitled to: 1. such proportion thereof as the Insured Percentage of the Insured Debt bears to the total indebtedness of the Insured Buyer to the Insured at the date that a Notifiable Event first occurs; plus 2. any other monies owing to the Insurer for arrears of premiums or monies due under this Policy; and 3. any monies required to maintain the impact of any Deductible; and (ii) the Insured is entitled to the balance. (c) The Insured must notify the Insurer in writing immediately it receives any Recoveries. (d) Subject to (e) below the Insurer's proportion of any Recoveries received by the Insured and due to the Insurer (as calculated in accordance with (b) above), is to be remitted to the Insurer within ten (10) days of receipt. (e) If the Insured receives Recoveries prior to the submission or determination of a claim by the Insurer the Insured is not required to pay to the Insurer its proportion of Recoveries. After the submission or determination of a claim, the Insured must notify the Insurer in writing of its receipt of Recoveries and in the event of an admitted claim the Insurer's proportion of the Recoveries is to be deducted by it from its calculation of liability under the Policy. (f) The Insurer is at any time entitled to make any claim or take any legal action in the name of the Insured against: (i) an Insured Buyer; or (ii) any third party that the Insured is entitled to take action against, in respect of any Recoveries; and for this purpose the Insured must provide all assistance and cooperation as requested by the Insurer. (g) In the event the Insurer elects to take legal action against an Insured Buyer or any third party that the Insured is entitled to take action against, the Insurer is entitled to deduct from any Recoveries all of the costs, disbursements and expenses incurred by it, prior to dividing the Recoveries as otherwise set out in paragraph (b) above. (Underlined emphasis added.) 19 The "Definitions" section of the Policy Wording contains the following definitions that are relevant for present purposes: Claimable Event in respect of an Insured Buyer means either Insolvency or any other named Claimable Event in the Schedule that must have occurred before a claim can be submitted. Claimable Event Date means the date on which a Claimable Event occurs and is specified under the definitions of the respective Claimable Event. … Insured Debt means so much of any indebtedness arising out of the trade falling within the description of trade in the Schedule and: 1. is owing by an Insured Buyer to the Insured; and 2. does not exceed the Permitted Credit Limit; and 3. is in respect of the invoice value of goods sold by the Insured and Shipped to an Insured Buyer and/or the invoice value of services that have been sold and rendered to an Insured Buyer; all of which must have occurred within the Policy Period and pursuant to a contract of sale providing for repayment of the debt within the terms of payment specified for the Approved Country of the Insured Buyer in the Approved Countries & Conditions Table in the Schedule; and 4. all values of goods and services referred to under 3 above must have been invoiced by the Insured within the Maximum Invoicing Period. … [only part of the definition of "Insured Debt" has been set out] … Insured Loss is the amount of an Insured Debt that is either: 1. admitted to rank against the insolvent estate of the Insured Buyer; or 2. in the case of a Protracted Default only, so much of the Insured Debt as is confirmed to the Insurer by evidence of a valid debt that is satisfactory to the Insurer and is not in dispute between the Insured and the Insured Buyer: each after taking into account the whole of any Recoveries relating thereto. Maximum Extension Period is stated in the Approved Countries and Conditions table in the Schedule and means the maximum number of days by which the Insurer has agreed that the Insured may extend the original due date of an Insured Debt. … Notifiable Event is defined in the condition titled Credit Management and Consultation. … Protracted Default is a Claimable Event and occurs in respect of an Insured Buyer when: (a) the Insured Buyer fails to pay an Insured Debt to the Insured within the Protracted Default Period; and (b) the Insured has, within the Protracted Default Period, fully complied with all of their obligations in accordance with this Policy including, but not limited to, condition 3 of the Policy. The Protracted Default Period is the period referred to in the Schedule and which commences on the original due date for payment of an Insured Debt under the relevant contract of sale or, if that original due date is postponed, such postponed due date. The Protracted Default Period cannot commence or continue to run while an Insolvency of the Insured Buyer exists or while the Insured Buyer: 1. is entitled to or obliged to refuse payment of an Insured Debt under any law or regulation or is obliged to refuse payment by a person exercising powers of government; or 2. claims that it is entitled to withhold payment of any part of an Insured Debt and the Insurer is satisfied that a dispute exists between the Insured and the Insured Buyer which has not been resolved by the parties to the relevant contract or by arbitration, or by legal proceedings. The Claimable Event Date in respect of Protracted Default will be the date of the expiry of the Protracted Default Period. Recoveries is the value of all goods recovered (whether under retention of title or otherwise), all monies (including dividends paid or payable out of an insolvent estate), securities, indemnities, guarantees, rights of action, counter claims, set-offs or other advantages held, received by or due to the Insured or otherwise available for the purpose of reducing the amount of any indebtedness of an Insured Buyer to the Insured (whether in respect of the payment for goods or otherwise) which had not been paid at the earliest Notifiable Event which remains unremedied, excluding any Specified Security Proceeds. (Underlined emphasis added.) Of these definitions, the critical definition for present purposes is the definition of "Recoveries". 20 The Schedule relevantly states that: (a) the Claimable Events are: Insolvency Protracted Default (Protracted Default Period: 120 days) Contract Repudiation Political Risks (b) the Insured Percentage is: 90% (or as varied in the Approved Countries & Conditions Table) 21 The Schedule includes a number of endorsements. One of these is the TradeCollect Endorsement (CB 78-80). Under the heading "The Reimbursement", the endorsement relevantly states: The Reimbursement … B. When the Insured places an Overdue Debt with any ICS [Independent Collection Service] (other than the IACA [Insurer Approved Collection Agency]) or when the Insured Buyer is not domiciled in Australia or New Zealand: 1. within 30 calendar days after the expiry of the MEP: the Insurer's reimbursement will be in respect of both the Debt Collection Fees and Legal Fees and will be limited to a maximum of AUD8,000 (or equivalent in the Policy Currency); 2. later than 30 calendar days after the expiry of the MEP: the Insurer's reimbursement will be in respect of the Legal Fees only and will be limited to a maximum of AUD4,000 (or equivalent in the Policy Currency). 22 The TradeCollect Endorsement includes a section headed "Exclusions", which provides in part: Exclusions Excluded from reimbursement are all expenses: … i. recovered (1) under any other insurance coverage; (2) by order of a Court of Law or administrative tribunal or similar in favour of the Insured; (3) from the Insured Buyer; (4) from the insolvent estate of the Insured Buyer; all of which will be deemed as Recoveries under the Policy. 23 Further, the TradeCollect Endorsement includes a section headed "Disclaimers and other General Conditions", which states in part: Disclaimers and other General Conditions … f. If the Insured accepts a partial payment from the debtor in full and final settlement of an Overdue Debt, subject to the settlement being acceptable to the Insurer by its prior written approval, there will be full reimbursement of the Debt Collection Fees and Legal Fees.

Factual findings 24 On the basis of the SOAF, the documents in the Court Book and the documents in the joint tender bundle, I make the following findings of fact. 25 On 12 December 2019, QBE and the TGH entered into the Policy, being a contract of trade credit insurance for the policy period 1 January 2020 to 31 December 2020. 26 It was an implied term of the Policy that QBE and TGH would act towards each other, in respect of any matter arising under or in relation to the Policy, with the utmost good faith: see Insurance Contracts Act 1984 (Cth), s 13. 27 On or about 12 March 2020, TGH entered into an agreement (the Supply Agreement) to supply grapes to SPT (CB 99-102). 28 Pursuant to the Supply Agreement, Mr Foster: (a) guaranteed the due and punctual payment of all monies due and payable to TGH by SPT under the Supply Agreement (the Guarantee); and (e) provided a charge over his assets from time to time (including any real estate) to secure the performance of his obligations under the Guarantee and agreed that TGH was at liberty to, among other things, lodge a caveat to secure the payment of all monies owing under the Guarantee. 29 Pursuant to the Supply Agreement, TGH supplied grapes to SPT and issued invoices for the grapes (Invoices) as follows: Invoice # Date issued Type of grapes Amount Due date 00001023 23/03/2020 Thompson $57,600 22/04/2020 00001024 23/03/2020 Thompson $57,600 22/04/2020 00001025 23/03/2020 Crimson $57,600 22/04/2020 00001052 29/03/2020 Crimson $57,600 28/04/2020 00001063 31/03/2020 Crimson $57,600 30/04/2020

30 SPT did not make payment of the Invoices on their respective due dates. 31 On 19 May 2020, the solicitors for TGH wrote to SPT demanding payment of the Invoices. 32 On 24 June 2020, the Invoices remained unpaid and QBE commenced the County Court proceeding against SPT and Mr Foster seeking recovery of the Unpaid Debt, interest and costs (CB 115-125). 33 On 21 August 2020, SPT filed a defence in the County Court proceeding disputing liability to pay the Invoices on the basis that the grapes supplied by TGH were not of the agreed standard and quality and sought a set-off accordingly of $314,997 (CB 126-132). 34 On 1 October 2020, TGH lodged with QBE a claim for indemnity under the Policy (the Claim) (CB 133-136), which: (a) stated that TGH was owed a sum of $288,000 by SPT in relation to the supply by TGH of grapes to SPT, for which it had not been paid when the sum fell due (referred to in these reasons as the "Unpaid Debt"); (b) stated that SPT had raised a dispute or complaint in relation to the Supply Agreement; and (c) claimed the sum of $259,200 under the Policy (being 90% of the Unpaid Debt in accordance with the terms of the Policy) (the Claimed Sum). 35 On 27 November 2020, QBE wrote to TGH regarding its potential liability to indemnify TGH in respect of the Claim (CB 137-138). QBE stated that, based on the information provided, the debtor was disputing the debt based on the alleged quality of the goods. QBE referred to the exclusion in cl 4(f) of the Policy, regarding disputed debts. QBE also referred to the definition of Protracted Default, noting that the Protracted Default Period did not commence or continue to run while the Insured Buyer was disputing the debt. 36 On 14, 20 and 23 April 2021, Ms Emily Sun of QBE and Mr Enzo Amato of Arthur J Gallagher Trade Credit & Surety, TGH's broker, exchanged emails about the County Court proceeding. 37 On 22 April 2021, Mathieu Tribut was appointed as liquidator of SPT. This was a Claimable Event within the meaning of the Policy. 38 On 16 June 2021, Justice Archer of the Supreme Court of Western Australia made orders in proceeding CIV/1529/2021 in relation to the caveat lodged by TGH pursuant to the terms of the Supply Agreement (CB 157-158). These orders included an order that Mr Foster pay the costs of and incidental to the proceeding, on a party-party basis to be taxed forthwith if not agreed (referred to in these reasons as the "Costs Order"). It is agreed between the parties to the present proceeding that the amount of these costs is $12,874. Thus, prior to entry into the Deed of Settlement, Mr Foster owed that amount to TGH. 39 On 5 July 2021, Ms Sun of QBE sent an email to Mr Amoto of Arthur J Gallagher Trade Credit & Surety in relation to the Claim (CB 159). The email stated: Thanks for your email. We have reviewed documents and agreed on a provisional payment on condition that the insured continue to pursue a formal Confirmation of Debt and get their Proof of Debt admitted for any dividend distribution in the buyer's insolvent estate. Meanwhile, please ask the insured what they have done to pursue the guarantor to recover the debt since they lodged caveat on the guarantor's asset? 40 On 6 July 2021, QBE paid TGH the sum of $259,200, pursuant to the Policy in respect of the Claim. The covering letter included: We remind you of your continuing obligation under the policy to endeavour to minimise our loss and to assist with the recovery of the debt. You must notify us of every dividend or distribution made from the insolvent estate of the buyer or any other recoveries made directly or indirectly which fall within the definition of Recoveries, and remit to us our proportion within ten days of your receipt of funds, as we calculate and advise you, in accordance with the conditions of the policy. 41 On 11 August 2021, TGH submitted to QBE a claim for reimbursement of its expenses, pursuant to the TradeCollect Endorsement of the Policy (the Expenses Claim). 42 On 13 August 2021: (a) QBE wrote to TGH, via its broker, regarding the Expenses Claim; and (b) QBE paid TGH the sum of $8,000 in respect of the Expenses Claim, being the maximum amount it was required to pay to TGH for Debt Collection Fees and Legal Fees pursuant to the Policy (having regard to the terms of the TradeCollect Endorsement and the fact that the grapes were delivered to South Korea). 43 On 5 November 2021, TGH's solicitors, Goldsmiths Lawyers, wrote to QBE regarding the County Court proceeding, the proceeding in Western Australia relating to the caveat, and attaching relevant documents (CB 164-174). 44 On 9 November 2021, QBE's solicitors, Turks, sent an email to TGH's solicitors, Goldsmiths Lawyers, which included: By virtue of QBE making payment of an insurance claim lodged by your client, the Grape House Group Pty Ltd, in relation to trade debts owed by Southern Produce Traders Pty Ltd (in Liquidation) QBE has been subrogated into the position of Grape House as against Southern Produce and any third parties who have guaranteed the debts. I note you are the solicitor on record in relation to the above mentioned proceeding. To assist me with advising QBE on the merits of the action, and whether or not we should take over conduct of the proceeding, I would appreciate it if you could urgently provide me with: 1) your client file (in particular pleadings); 2) an update on the status of preparation of the matter for trial noting that a timetable was set out in the orders dated 12 May 2021; 3) current status of any negotiations. 45 On 10 November 2021, TGH's solicitors, Goldsmiths Lawyers, sent an email to QBE's solicitors, Turks, in response to their email of 9 November 2021 (CB 177-180). 46 On 2 December 2021, QBE's solicitors, Turks, sent an email to TGH's solicitors, Goldsmiths Lawyers, in relation to the County Court proceeding. This included: We advise that our client has determined not to take any further action in relation to your client's proceeding against Southern Produce Traders Pty Ltd and Mr Karl Jeremy Mears Foster at this time. Notwithstanding, we remind your client that they remain bound by the duty of utmost good faith to our client in their conduct of the proceeding. We also remind your client that they may be required to remit any proceeds of the litigation to our client pursuant to the terms and conditions of the policy[.] Accordingly, please let our client know when the proceeding is resolved or otherwise finalised and report to them on the particulars of any settlement or recovery. (Emphasis added.) 47 On 18 January 2022, TGH's solicitors, Goldsmiths Lawyers, sent a letter to QBE's solicitors, Turks, regarding the County Court proceeding. The letter is headed "without prejudice" but the parties have waived without prejudice privilege and jointly tendered the letter. The same applies to the next two emails referred to below. The letter stated: Please find enclosed a without prejudice offer we have received from the second defendant [Mr Foster] to settle the proceeding. Our client is considering the offer, but before they do, they wish to have certainty that your client will not make any claim upon the funds. We note that pursuant to s 67(3) and s 67(8) of the Insurance Contracts Act 1984 (Cth) your client is not entitled to any of the amounts unless there is a surplus remaining after paying out our client's claim in excess of the amount your client paid, costs and interest. Can you please seek urgent instructions from your client and confirm the same, noting that the offer is only open till 12pm on 19 January 2022? Subject to your confirmation that our client will not be required to pay anything to your client, our client will put a counteroffer for the sum of $200,000 (the amount is still less than our client's loss including costs and interest). (Emphasis in original.) I note that, although the letter referred to ss 67(3) and 67(8) of the Insurance Contracts Act, neither party to the present proceeding now relies on those sections. 48 Later on the same day, Goldsmiths Lawyers sent a follow-up email to Turks seeking confirmation that if TGH settled the proceeding for a sum of $200,000 or less QBE would not make a claim upon those funds. 49 Later on the same day, QBE's solicitors, Turks, sent an email to TGH's solicitors, Goldsmiths Lawyers. The email stated: My client is unable to provide the requested confirmation, particularly as we note you have informed me that your client's legal costs to date are approximately $85,000. The proceeds of any settlement must be distributed in accordance with the terms and conditions of the policy and the Insurance Contracts Act 1984. Please update us if a settlement is concluded. 50 On 24 January 2022, TGH entered into the Deed of Settlement (CB 183-189). The parties to the deed are TGH, Mr Foster and Ms Foster. The Recitals state: RECITALS A. On or about 12 March 2020, Southern Produce Traders Pty Ltd (ABN 98 112 015 424) (In Liquidation) ("SPT") entered into a credit trading application with TGH for the supply of Grapes ("the Credit Application"). B. The Credit Application contained a personal guarantee provided by Karl for payment of all monies due. C. TGH alleges that pursuant to the Credit Application the sum of $288,000, together with interest in the sum of $111,600 to date (calculated in accordance with the Credit Application) and costs incurred in relation to recovery of this debt is outstanding. D. Pursuant to the Credit Application, TGH has lodged a caveat over the ownership share of Karl in the property situated and known as 946 Anketell Road, Anketell, WA 6167 more particularly described in Volume 2147 Folio 264 ("Property") ("Caveat"). E. On 24 June 2020, the TGH filed a claim against SPT and Karl in the County Court of Victoria under proceeding Cl-20-02833 ("the Proceeding"). SPT and Karl filed a defence to the Proceeding claiming loss and damage in the sum of $319,997.18. F. In the Supreme Court of WA proceeding CIV-1529-2021 the Honourable Justice Archer made an order inter-alia that Karl pay to TGH the costs of those proceedings ("the Costs Order"). G. Oakbridge Lawyers is holding in their trust account the sum of $12,874.16 ('the Trust Monies"). H. Rebecca is not liable for any of the claims under the Proceeding or the Costs Order but is a joint owner of the Property and wishes to assist Karl and have the Caveat removed. I. In order to avoid the uncertainty, cost, expense and inconvenience of legal proceedings, the parties have agreed to settle the Proceeding and all outstanding claims in the manner and on the terms and conditions set out in this deed of settlement ("Deed"). 51 Clause 2.1 provides: 2. Terms of Settlement 2.1 Subject to clause 2.2, Rebecca will pay to TGH the sum of $200,000 inclusive of GST (if any GST is payable by TGH in relation to the payment or this Deed) ("Settlement Sum") in full and final settlement of the Proceeding and the Costs Order as follows: a. Oakbridge Lawyers will cause the Trust Monies to be paid forthwith on signing in part payment of the Settlement Sum; and b. the balance of the Settlement Sum is to be paid on or before 22 February 2022. 52 Clause 4 provides: 4. Releases 4.1 Upon TGH receiving the Settlement Sum in full, TGH releases Karl and Rebecca from all actions, suits, causes of action, demands, claims, costs, losses and expenses of every description whatsoever arising out of or accruing from or in any way incidental or connected to the Credit Application, the Proceeding and/or the Costs Order, to fullest extent permitted by law; 4.2 On and from the date of release specified in clause 4.1, Karl and Rebecca forever discharge and release TGH and its officers, employees or agents from all actions, suits, causes of action, demands, claims, costs, losses and expenses of every description whatsoever arising out of or accruing from or in any way incidental or connected to the Credit Application, the Proceeding and/or the Costs Order to the fullest extent permitted by law. 53 TGH claims that, as at the date of the Deed of Settlement, it had incurred costs of the County Court proceeding totalling $110,051. It is not agreed that TGH in fact incurred such costs. 54 On 28 January 2022, a Judicial Registrar of the County Court of Victoria made orders in the County Court proceeding: (a) dismissing the proceeding as between TGH and SPT; and (b) dismissing the proceeding as between TGH and Mr Foster with a right of reinstatement to enforce the Deed of Settlement. 55 On 16 February 2022, pursuant to the Deed of Settlement, Ms Foster paid the Settlement Sum to TGH's solicitors' trust account. 56 On 16 February 2022, TGH's solicitors, Goldsmiths Lawyers, wrote to QBE's solicitors, Turks, advising QBE of the settlement reached in the County Court proceeding and attaching a copy of the Deed of Settlement (CB 192-204). The letter contended that the $200,000 received from Ms Foster "would not appear to be caught by the definition of 'Recoveries'" in the Policy. 57 On 17 March 2022, on instructions from TGH, TGH's solicitors remitted the Settlement Sum (less legal costs) to TGH.

The parties' submissions 58 In its outline of submissions, QBE sets out some general principles regarding the doctrine of subrogation. There is no dispute between the parties as regards these general principles, which are as follows: (a) The doctrine of subrogation is founded upon equitable principles calculated to prevent an insured making a double recovery: once from the insurer and once from a third party in circumstances where the insurer has undertaken to indemnify the insured against a financial loss. It does that by giving two rights to the insurer: (a) it gives to the insurer the right to require the insured to pursue any remedy available against a third party for the benefit of the insurer; and (b) it gives to the insurer the right to recover from the insured any benefit received by the insured in diminution or extinction of the loss against which the insured has been indemnified: Insurance Commission of Western Australia v Kightly (2005) 225 ALR 380 (Kightly) at [26], [48]; Speno Rail Maintenance Australia Pty Ltd v Metals & Minerals Insurance Pte Ltd (2009) 253 ALR 364 (Speno) at [197]-[200]. (b) One consequence of the role of subrogation is to permit the insurer to proceed against the insured for taking any action which prejudices the insurer's rights against the third party: Enright & Merkin, Sutton on Insurance Law (4th ed, LawBook Co, 2015) (Sutton), vol 2, [18.30]. This principle of subrogation has led to the acceptance of the principle that an insured must not release, diminish, compromise or divert the benefit of any right to which the insurer is or will be entitled to succeed and enjoy under its right of subrogation: Kightly at [48], citing State Government Insurance Office (Qld) v Brisbane Stevedoring Pty Ltd (1969) 123 CLR 228 (Brisbane Stevedoring) at 241. If an insured does so prejudice the rights of the insurer (for example, by entering into a settlement without due regard for the interests of the insurer), they will be liable to the insurer in damages, or possibly, on some occasions for money had and received: Brisbane Stevedoring at 241. A recovery which is held by an insured and which reduces the loss paid by the insurer is held on trust for the insurer (although it has also been considered sufficient to impose an equitable lien): Kightly at [50]. 59 QBE submits that: the Insured Debt was the sum of $288,000 (i.e. the Unpaid Debt); the Insured Percentage was 90%; although TGH made a claim on the Policy in October 2020, a Claimable Event only occurred on 22 April 2021 on the appointment of a liquidator to SPT; having thereafter indemnified TGH in accordance with the terms, and up to the limits, of the Policy, QBE was subrogated to TGH's rights in respect of that debt. 60 QBE submits that: an insurer's right of subrogation, whether as a contractual term implied by law or a right that arises in equity as a necessary incident of an indemnity contract, may be expanded, modified or excluded either expressly or impliedly by the terms of the contract; here, QBE's right of subrogation is governed by the terms of the Policy; cl 9(a) of the Policy provides that,"[a]ny Recoveries received by [TGH] or [QBE] are to be held on trust for [TGH] and [QBE] for their respective interests as specified in paragraph (b) below"; "Recoveries" are defined broadly. 61 QBE submits that: TGH issued the County Court proceeding (including against the guarantor, Mr Foster), seeking to recover the Unpaid Debt as a debt owing, together with interest and costs and lodged a caveat in respect of the Unpaid Debt; in the County Court proceeding, TGH claimed that SPT (and therefore the guarantor) was indebted to it in the sum of $288,000 plus interest; TGH settled the proceeding on terms, among other things, that it received the sum of $200,000 and released Mr Foster (the guarantor) and Ms Foster from the claims the subject of the proceeding; the terms record that Ms Foster (who was a joint owner of the property over which the caveat had been lodged) was not liable herself but wished to assist Mr Foster and to have the caveat removed; the settlement terms make no allocation between the Unpaid Debt, interest and costs; such a step was required of TGH if it were to give due consideration to QBE's interests; while there was correspondence between TGH and QBE before the Deed of Settlement was entered into, TGH did not seek or obtain QBE's consent to the terms of the Deed of Settlement. 62 QBE submits that: TGH's failure to apportion the sum received does not alter its character as constituting the value of all monies, guarantees, rights of action or other advantage held or received by TGH or otherwise available for the purpose of reducing the amount of any indebtedness of an Insured Buyer to TGH (see the definition of "Recoveries"); the obligation to indemnify under the Policy is secondary to the Guarantee; the fact it was received from Ms Foster (who paid the funds on behalf of Mr Foster to extinguish his debt and have the caveat removed) or that TGH also claimed interest and costs does not alter that conclusion; accordingly, cl 9(b) applies such that the sum of $200,000 recovered by TGH is to be divided between QBE and TGH as follows: (a) QBE is entitled to such proportion of the $200,000 as the Insured Percentage of the Insured Debt (that is, $259,200, being 90% of $288,000) bears to the total indebtedness of the Insured Buyer to the Insured at the date that a Notifiable Event first occurs; (plus any other monies owing to the Insurer under the Policy or required to maintain the impact of any Deductible, of which neither are alleged to be owing or required); and (b) TGH is entitled to the balance. 63 QBE submits that the effect of cl 9(b) is that the sum is to be calculated at the date that a Notifiable Event first occurs; a "Notifiable Event" is deemed to have occurred, among other things, when: (a) at any time to the knowledge of TGH any circumstances arise which could, in the reasonable opinion of a prudent Insured, give grounds for the belief that an Insured Buyer may not (or may be unable to) perform or comply with its obligations under a contract of sale with TGH (see cl 3(c)(i)); or (b) any part of an Insured Debt is not paid in cash or by cheque or bill of exchange available for immediate presentation by the last day of the Maximum Extension Period (see cl 3(c)(v)). 64 QBE submits that: the "Maximum Extension Period" is 30 days (see the definition of "Maximum Extension Period" and the entry for South Korea in table headed "Approved Countries & Conditions Table" at CB 73); accordingly, a Notifiable Event will be deemed to have first occurred either: (a) by 19 May 2020, or shortly thereafter, when the Invoices remained unpaid after their due dates and TGH engaged solicitors to demand payment (indicating that circumstances had arisen which, in the reasonable opinion of a prudent Insured, gave grounds for a belief that SPT may not perform its obligations); or alternatively, (b) by 22 May 2020, when the Insured Debt remained unpaid beyond the last day of the Maximum Extension Period. 65 QBE submits that, accordingly, as at the earliest Notifiable Event, the total indebtedness of SPT to TGH was, at most, $301,728, being $288,000 plus any interest to 22 May 2020 (approximately $13,728, at a rate of 2.5% per month from the date of each invoice: see cl 2.1 at CB 101). 66 QBE submits that, accordingly, the relevant proportion for the purpose of cl 9(b) is 85.9% of $200,000, or $171,810, calculated as follows: $259,200 (Insured Percentage of the Insured Debt) = 85.9% x $200,000 = $171,810 $301,728 (total indebtedness at earliest Notifiable Event)

67 QBE submits that QBE is therefore entitled to that sum, while TGH may retain the balance of $28,190. 68 In the alternative, QBE submits that, by failing to allocate and retain a proportion of the Settlement Sum for the benefit of QBE, TGH breached its duty to act with the utmost good faith. In support of its submission on this point, QBE relies, in particular, on Lord Napier and Ettrick v Hunter [1993] 1 All ER 385 at 393-395, 397, 405-406; Arthur Barnett Ltd v National Insurance Company of New Zealand Ltd [1965] NZLR 874 (Arthur Barnett) at 882-883, 885; and Kightly at [50]-[52]. 69 In response, TGH submits that, in this case, there are uninsured losses for which the insured (TGH) is its own insurer. TGH submit that, in such cases, the insured is entitled to claim the full amount insured, and if that is insufficient to compensate it, the insured can retain whatever it recovers from third parties and need only hand over any excess to the insurer: Birds, Lynch and Paul, MacGillivray on Insurance Law (14th ed, Sweet & Maxwell, 2018) (MacGillivray) at [24-072]; Driscoll v Driscoll (1918) 1 IR 152; Globe & Rutgers Fire Insurance Co v Truedell [1927] 2 DLR 659; Sutton at [18.70], [18.150]. 70 TGH submits that, on the facts of this case, the only sum insured was the $288,000; the Policy does not insure for either interest or legal costs that exceed $8,000; in respect of both these two matters, the insured is its own insurer (see the exclusion in cl 4(b) and cl 6, dealing with co-insurance). 71 TGH submits that QBE's reliance on cl 9 of the Policy produces the surprising outcome that TGH, having been only partly indemnified for its loss by QBE, and then suing the guarantor (Mr Foster) of the buyer for its uninsured loss, and compromising those proceedings with the guarantor and his wife (who made the payment without any liability to do so) for a payment of $200,000, must now share that money with QBE. 72 TGH submits that cl 9(a) of the Policy does not confer the right of subrogation; rather, it proceeds on the basis that the right exists. TGH submits that cl 9(a) is a machinery provision: see Arthur Barnett. 73 TGH submits that, that being the case, the general principles as to uninsured losses apply, namely that an insured shall be fully indemnified, but shall never be more than fully indemnified, and that an insured is not fully indemnified in respect of loss or liability if required to account for benefits not touching that loss or liability: Transport Accident Commission v CMT Construction of Metropolitan Tunnels (1988) 165 CLR 436 at 442; Bupa Australia Pty Ltd v Shaw (2014) 18 ANZ Ins Cas ¶61-989; [2013] VSC 507 at [64]. 74 Although TGH's pleading contains an estoppel contention, TGH states in its outline of submissions that it does not press that contention.

Consideration 75 The issues raised by this proceeding turn largely on the construction of the terms of the Policy, in particular cl 9 and the definition of "Recoveries". It is sufficient for present purposes to refer to the recent summary of the general principles applicable to construction of policies of insurance in Star Entertainment Group Limited v Chubb Insurance Australia Ltd (2022) 400 ALR 25 at [8]-[14]. 76 It is convenient to start with consideration of TGH's contention that the amount recovered under the Deed of Settlement (i.e. the Settlement Sum) represents a recovery in respect of an uninsured loss and that it therefore falls outside the apportionment regime in cl 9 of the Policy. 77 Subject to my consideration, below, of the treatment of amounts received by TGH on account of legal expenses, in my view on the true construction of cl 9 and the definition of "Recoveries", they cover amounts recovered in respect of both insured and uninsured losses. For ease of reference, I set out again the relevant part of cl 9 and the definition of "Recoveries": 9. Recoveries and Specified Security Proceeds (a) Any Recoveries received by the Insured or the Insurer are to be held on trust for the Insured and the Insurer for their respective interests as specified in paragraph (b) below. (b) Subject to paragraph (g) below, Recoveries are to be divided between the Insured and the Insurer as follows: (i) the Insurer is entitled to: 1. such proportion thereof as the Insured Percentage of the Insured Debt bears to the total indebtedness of the Insured Buyer to the Insured at the date that a Notifiable Event first occurs; plus … … Recoveries is the value of all goods recovered (whether under retention of title or otherwise), all monies (including dividends paid or payable out of an insolvent estate), securities, indemnities, guarantees, rights of action, counter claims, set-offs or other advantages held, received by or due to the Insured or otherwise available for the purpose of reducing the amount of any indebtedness of an Insured Buyer to the Insured (whether in respect of the payment for goods or otherwise) which had not been paid at the earliest Notifiable Event which remains unremedied, excluding any Specified Security Proceeds. (Underlined emphasis added.) 78 In my view, in general, an amount recovered in respect of an uninsured loss falls within the ordinary meaning of the words used in the definition of "Recoveries", namely "all monies … received by … the Insured … for the purpose of reducing the amount of any indebtedness of an Insured Buyer to the Insured". Importantly, the definition refers to "any indebtedness" of an Insured Buyer to the Insured. These words are apt to cover uninsured as well as insured indebtedness. Had the parties intended (objectively) to cover only insured indebtedness, it would have been easy enough to have said so. This is reinforced by a consideration of the terms of cl 9(b)(i)(1), which refers to the "total indebtedness" of the Insured Buyer. This expression is to be contrasted with the use, in the same clause, of the expression "Insured Debt". It is therefore clear, in my view, that in cl 9(b) the words "total indebtedness" cover both insured and uninsured indebtedness. Given that the definition of "Recoveries" and cl 9 work together, this supports the view that the words "any indebtedness" in the definition of "Recoveries" cover both insured and uninsured indebtedness. 79 The construction outlined above produces commercially sensible results, as the following example illustrates. Assume TGH was owed $288,000 by SPT and this debt was insured (as to 90%) under the Policy (as was the case). Assume that TGH was also owed a further $288,000 by SPT, but this debt was not insured under the Policy. Assume that QBE paid TGH $259,200 under the Policy in respect of the insured debt (as in fact occurred). Assume that TGH commenced a proceeding against SPT for both debts. Assume that TGH enters into a settlement with SPT and recovers both debts in full (i.e. $576,000). Assume that no amount is received for interest or costs. Applying the above construction of cl 9 and the definition of "Recoveries", the portion of the settlement sum payable to QBE would be as follows: $259,200 (Insured Percentage of the Insured Debt) = 45% x $576,000 = $259,200 $576,000 (total indebtedness at earliest Notifiable Event)

80 This produces a sensible result, because the amount payable to QBE equals the amount that it paid out under the Policy, in circumstances where there has been full recovery of the insured debt and full recovery of the uninsured debt. Likewise, if there were a partial recovery of both debts in the example, applying a percentage of 45% to the total amount recovered would produce a commercially sensible result. This analysis supports the construction outlined above. 81 Without setting out an example involving interest, I am satisfied that the provision also works sensibly in a case where a settlement sum is received that is referable both to the unpaid debt and to interest on the unpaid debt. It is appropriate that the percentage determined in accordance with cl 9(b)(i)(1) apply to the recovery comprising both the unpaid debt and the interest in such a case. 82 It follows that I reject TGH's submissions based on general principles of insurance law regarding uninsured losses. Those principles are displaced by the terms of the contract, namely cl 9 of the Policy. I do not accept that cl 9 is a mere "machinery provision" as submitted by TGH; in my view, it sets out the agreed basis upon which "Recoveries" are to be apportioned as between the Insurer and the Insured. 83 There is a further difficulty with TGH's contention. TGH's contention is premised on the whole of the Settlement Sum being an amount received in respect of an uninsured loss. However, I do not accept that that is the case. The Deed of Settlement does not apportion the Settlement Sum as between TGH's claims for: (a) the Unpaid Debt; (b) interest; (c) costs; and (d) the sum of $12,874 due under the Costs Order. Although the money was paid by Ms Foster (who was not legally liable), in substance the Settlement Sum was paid and received in respect of the claims for the Unpaid Debt, interest, costs and the sum of $12,874 due under the Costs Order. This is apparent from the context (the County Court proceeding and the Cost Order) and the releases contained in the Deed of Settlement. Given that the Unpaid Debt was an insured loss, and the Settlement Sum was, at least in part, paid and received in settlement of the claim for that debt, I do not accept that the whole of the Settlement Sum was an amount received in respect of an uninsured loss. 84 I therefore reject TGH's contention that the whole of the Settlement Sum falls outside cl 9 and the definition of "Recoveries". 85 However, that is not the end of the matter. In the course of the hearing, I raised with the parties whether, on the correct construction of cl 9 and the definition of "Recoveries", they cover amounts received by the Insured on account of legal expenses incurred for the purposes of recovering an unpaid debt. Counsel for QBE submitted that the provisions do apply to an amount received on account of such legal expenses. Counsel for TGH submitted, effectively as a fall-back argument, that the provisions do not apply to amounts received on account of such legal expenses. For the reasons that follow, I have concluded that, on the true construction of cl 9 and the definition of "Recoveries", they do not cover amounts received by the Insured on account of such legal expenses. 86 First, the definition of "Recoveries" refers to monies received etc. for indebtedness "which had not been paid at the earliest Notifiable Event which remains unremedied". It is implicit that the indebtedness existed at the date of the earliest Notifiable Event. However, subject to deeming (see below), this would not cover indebtedness for legal expenses incurred by the Insured after the date of the earliest Notifiable Event. 87 Secondly, and relatedly, the proportion referred to in cl 9(b)(i)(1) is to be calculated "at the date that a Notifiable Event first occurs". In other words, it is at that date that one calculates the proportion that "the Insured Percentage of the Insured Debt" bears to "the total indebtedness of the Insured Buyer to the Insured". The proportion thus arrived at is then applied to the Recoveries to determine the portion to which the Insurer is entitled. That mechanism does not appear to be apposite for amounts received by the Insured on account of legal expenses it incurred for the purpose of recovering the unpaid debts. That is because, the percentage is determined as at a time when little in the way of legal expenses will have been incurred. The point may be illustrated by the following example. Assume TGH was owed $288,000 by SPT and this debt was insured (as to 90%) under the Policy (as was the case). Assume that QBE paid TGH $259,200 under the Policy in respect of the insured debt (as in fact occurred). Assume that TGH commenced a proceeding against SPT (as in fact occurred). Assume that TGH enters into a settlement with SPT and recovers the debt in full (i.e. $288,000), and $100,000 on account of its legal expenses, that is, a total of $388,000. Assume that no amount is recovered for interest. If cl 9 and the definition of "Recoveries" cover the amount received for legal expenses, the calculation would be as follows: $259,200 (Insured Percentage of the Insured Debt) = 90% x $388,000 = $349,200 $288,000 (total indebtedness at earliest Notifiable Event)

88 The above calculation would produce an anomalous result in that the amount to which QBE would be entitled would be more than it paid TGH under the Policy. In response to this example, which was raised by the Court with counsel for QBE during the course of the hearing, counsel submitted that, as a matter of general principle, the insurer could not recover a greater amount than it had paid out under the Policy. That may be accepted. However, the fact that the formula in cl 9 produces that result raises a question about the inclusion of legal expenses within cl 9. Further, if one posits an example where the recovery is of half the debt plus the sum of $50,000 on account of legal expenses, it is difficult to see why the Insurer should be entitled to 90% of the $50,000, when the legal expenses were incurred wholly by the Insured. 89 It is true that, in the TradeCollect Endorsement, in paragraph (i) of the exclusions, it is stated that excluded from reimbursement are (among other things) expenses recovered by order of a Court of Law "which will be deemed as Recoveries under the Policy". Although not applicable in the present circumstances, the existence of this provision tends to cut across the construction outlined above. However, on balance, in light of the matters referred to above, at least in the circumstances of this case, I consider that an amount received on account of legal expenses incurred by the Insured is not subject to the apportionment regime in cl 9. 90 It is also true that paragraph (f) of the "Disclaimers and General Conditions" in the TradeCollect Endorsement provides that, if the Insurer accepts a partial payment from the debtor in full settlement of an Overdue Debt, and has obtained the prior written approval of the Insurer, the Insured will receive full reimbursement of its Debt Collection Fees and Legal Fees. However, I do not consider that provision to be inconsistent with the construction outlined above. It merely provides a particular basis upon which the Insured may receive reimbursement of its legal expenses in certain circumstances. 91 Accordingly, I conclude that, on the true construction of cl 9 and the definition of "Recoveries", they do not cover amounts received by the Insured on account of legal expenses it incurred for the purpose of recovery of unpaid debts. 92 Applying the above conclusions to the Settlement Sum received by TGH pursuant to the Deed of Settlement, I consider that TGH is entitled to retain, as a matter of first priority, its costs of the County Court proceeding on a standard basis (as agreed between the parties to this proceeding or taxed) and the sum of $12,874 that was due under the Costs Order. These are amounts received by TGH on account of legal expenses it incurred for the purpose of recovering the Unpaid Debt. It is appropriate, in principle, for these amounts to be treated as the first priority from the Settlement Sum because they represent the reimbursement of legal expenses that TGH incurred for the purpose of recovering the Unpaid Debt (for the benefit of both QBE and itself). 93 Insofar as QBE contends that the Settlement Sum as a whole, being of global amount that is not apportioned (as between the claims for the Unpaid Debt, interest, costs and the sum of $12,874 due under the Costs Order), falls within the definition of "Recoveries", I do not accept that submission. I infer that a portion of the Settlement Sum is referable to TGH's costs of the County Court proceeding and that $12,874 of the Settlement Sum is referable to the amount due under the Costs Order. 94 I consider it appropriate to limit TGH's costs of the County Court proceeding to the "standard basis" (as referred to in the County Court Civil Procedure Rules 2018 (Vic)). I infer that that is the extent to which the Settlement Sum comprises an amount on account of TGH's costs, this being the usual basis upon which costs are awarded to a successful party if the matter goes to judgment. If the parties to this proceeding are unable to agree on the amount, the costs can be taxed (as suggested by counsel for TGH in the course of the hearing). 95 In relation to the balance of the Settlement Sum, for the reasons set out above, I consider that this amount falls within the definition of "Recoveries" and is to be apportioned under cl 9(b)(i)(1) of the Policy. I accept the calculation set out in QBE's outline of submissions, namely that QBE is entitled to 85.9% and TGH is entitled to the remainder. This percentage is calculated as follows: (a) I accept QBE's submission that the earliest Notifiable Event occurred on either 19 May 2020 or 22 May 2020, for the reasons given in QBE's submissions (summarised above). It is not necessary to decide between these two dates because it does not make a material difference to the calculation. To the extent that TGH submits that the date of the earliest Notifiable Event is different based on the terms of payment and definitions set out at CB 82, I do not accept that submission. The special terms at CB 82 are permissive (the Insured "may use" the following terms). However, in the circumstances of this case, TGH did not use those terms of payment. In any event, TGH's submission on this point do not appear to make a material difference to the calculation. (b) Accordingly, as at the earliest Notifiable Event, the total indebtedness of SPT to TGH was $301,728 (being $288,000 plus interest to 22 May 2020 (approximately $13,728, calculated at a rate of 2.5% per month from the date of each invoice)). (c) Accordingly, the relevant proportion for the purposes of cl 9(b)(i)(1) is 85.9% (being $259,200 (Insured Percentage of the Insured Debt) ÷ $301,728 (total indebtedness at earliest Notifiable Event)). 96 I turn now to consider QBE's alternative case based on breach of the duty of utmost good faith. QBE's contention, in summary, is that TGH breached its duty of utmost good faith by not seeking to negotiate terms of settlement that apportioned the Settlement Sum as between TGH's claims for the Unpaid Debt, interest, costs and the sum of $12,874 due under the Costs Order. It is submitted that, by failing to do so, TGH compromised QBE's rights and interests and is required to pay damages. 97 The principles regarding the duty of utmost good faith have recently been considered by the High Court in Allianz Australia Insurance Limited v Delor Vue Apartments CTS 39788 [2022] HCA 38 at [92]-[96] per Kiefel CJ, Edelman, Steward and Gleeson JJ; see also [169]-[177] per Gageler J (dissenting). 98 In my view, while TGH was under a duty to act with the utmost good faith to QBE in TGH's negotiation of the Deed of Settlement, the duty did not require TGH to seek to negotiate terms that apportioned the Settlement Sum as between TGH's claims for the Unpaid Debt, interest, costs and the sum of $12,874 due under the Costs Order. This is because, on the construction of the Policy that I have adopted above, it was not necessary for the terms of settlement to apportion the Settlement Sum in order for the relevant provisions of the Policy to operate properly and give each of the Insured and the Insurer their appropriate share of the Settlement Sum. In these circumstances, QBE's rights and interests were not compromised by any failure by TGH to seek to negotiate terms of settlement that apportioned the Settlement Sum. For these reasons, I reject QBE's contention that TGH breached its duty of utmost good faith.

Conclusion 99 Subject to hearing further from the parties on the form of the declaration and orders, I consider it appropriate to make a declaration and orders along the following lines: THE COURT DECLARES THAT: 1. In relation to the sum of $200,000 (the Settlement Sum) received by The Grape House Group Pty Ltd (TGH) under the deed of settlement dated 24 January 2022: (a) TGH is entitled to retain, as a matter of first priority, the following amounts: (i) TGH's costs of proceeding CI-20-02833 in the County Court of Victoria on a standard basis, as agreed between the parties to this proceeding or taxed; and (ii) the sum of $12,874. (b) In relation to the balance of the Settlement Sum, QBE Insurance (Australia) Ltd (QBE) is entitled to 85.9% and TGH is entitled to the remainder. THE COURT ORDERS THAT: 2. The parties forthwith seek to agree an amount for the costs referred to in paragraph 1(a)(i) above. 3. If the parties have not agreed an amount within 30 days, TGH is forthwith to have the costs taxed pursuant to the County Court Civil Procedure Rules 2018 (Vic). 4. Within seven days of reaching agreement under paragraph 2 or the completion of taxation under paragraph 3, TGH is to pay to QBE the portion of the Settlement Sum to which QBE is entitled (calculated in accordance with paragraph 1 above). 100 I propose to reserve liberty to apply in case there are any issues regarding the taxation of the costs of the County Court proceeding or otherwise in relation to the implementation of the orders. 101 I will hear from the parties on issues of interest and costs. I certify that the preceding one hundred and one (101) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Moshinsky.