Technology Swiss Pty Ltd v AAI Limited trading as Vero Insurance [2021] FCA 95 | Case summary

The facts 3 The facts are not substantially in dispute. The parties agreed on a statement of facts and a bundle of documents in a court book. One affidavit was read on behalf of the respondent: that of Ms Kong, a senior claims advisor of Vero. Ms Kong was not cross-examined. 4 On 29 April 2014, Technology Swiss and Vero entered into a contract of marine insurance, being a combined cargo policy. The policy was a time policy from 24 April 2014 to 24 April 2015 at 4:00pm. The policy provided for a limit of indemnity for exports of $500,000 for any one conveyance or location, the basis of valuation being cost, insurance and freight (CIF) plus 10%, with an excess of $250 each and every loss. There was a suing and labouring clause. On or about 6 December 2014, TS shipped a consignment of fog cannons from Melbourne to Bangkok, the CIF value of which was $770,095.58. The contractual carrier was Famous Pacific Shipping (Vic) Pty Ltd (FP Shipping), a freight forwarder. The ocean carrier was CMA CGM. The goods were carried on board the ship CMA CGM Quartz. 5 During the voyage the goods were damaged. The goods were insured goods under the policy. 6 In late January 2015, TS submitted a claim to Vero. The cause of the loss was said to be the movement of the goods in transit, presumably inadequate stowage. The loss was noticed by a surveyor after delivery. 7 Ms Kong was the claims manager. She considered that the actual value of the fog cannons was not clear, though the claimed CIF value was $770,095.58. 8 On 20 May 2015, Ms Kong on behalf of Vero granted indemnity, subject to quantification of loss. The email advised TS to mitigate its loss: "so you should act as a prudent uninsured in respect of the storage of the goods to avoid any further charges." 9 The initial issue about quantum is reflected in correspondence in late July 2015, from Vero's solicitors (Mills Oakley) to TS' solicitor Ms Litton, then at the firm Belbridge Hague, later at Marquette Legal. There were said to be conflicting invoice values. This correspondence contained a renewed offer of a "good faith payment under the policy" of Euro 127,000 (the equivalent of about $200,000), less the $250 policy deductible, being the assessment of the cost of repairs that Vero had received from a repairer in Thailand. Vero's position (originally and at all times thereafter in the dispute) was that the goods were able to be repaired for this sum and that was the extent of the claim properly made under the policy. 10 This was not satisfactory to TS. It claimed that the fog cannons were a constructive total loss (CTL). On 3 June 2015, TS gave Vero written notice of abandonment of the goods for the purposes of s 68 of the Marine Insurance Act 1909 (Cth). Proceedings were commenced by TS against Vero in this Court on 14 August 2015 (NSD 959/2015) - not the present proceeding. 11 The policy was pleaded in the terms discussed above, together with the provision that provided for air freight of necessary parts from suppliers up to the greater of $50,000 or 10% of the insured value of the damaged goods. 12 The claim for CTL was particularised in the amended statement of claim filed in the earlier Federal Court proceeding. It was stated that the estimated cost of repair would be from Euro 539,974.45 to 756,310.01. The size of this repair estimate arose from the requirement (as asserted by TS) to send the goods to Italy (their place of manufacture) for repair. In the alternative, it was stated that the cost of repair would be greater than the cost estimated by the assessor for Vero and be at least $315,285, plus the cost of removal from bonded storage for repair and plus the cost of transport from the place of repair to the place of delivery. The value of the repaired goods would be less than the combined costs of repair. Further, it was alleged that the buyer refused to accept the goods even if repaired. 13 TS claimed indemnity as a CTL and claimed the full amount under the policy. In the alternative, if the damage was found not to amount to a CTL but rather was a "partial loss" under s 62 of the Marine Insurance Act, TS claimed "such proportion of the limit of indemnity under the Policy, as the difference between the gross sound and damaged values at Bangkok [bore] to the gross sound value". 14 The amended statement of claim also dealt with storage fees. TS pleaded the terms of the policy that required it to [i]mmediately take all reasonable measures to avoid or minimise any further loss or damage to the goods. The reasonable cost in doing this will be reimbursed by [Vero] under Part 2, Section 4 and Part 3, Section 4. 15 TS pleaded that it had incurred and continued to incur monthly storage fees, being at the time of the amended statement of claim $17,212.12. That sum plus "any future storage fees" were claimed. 16 The storage of the goods commenced in January 2015. They remained in storage until 4 May 2018. 17 On 7 July 2015, solicitors for Vero emailed TS' solicitors rejecting the need for repair in Italy with costs of repair as estimated by TS. They stated repair could be effected for Euro 127,000. They offered to pay this together with USD 11,830.77 for storage costs. 18 Vero filed a defence dated 8 July 2015 which admitted its liability to indemnify, but denied that the goods were a CTL and relied on their assessment of repair of Euro 127,500. By its defence Vero admitted its liability for $17,212.12 for storage fees plus future storage fees. Vero also pleaded and relied on the under insurance of TS: the limit of the policy being $500,000 and the CIF value being $711,250. Vero pleaded an entitlement to reduce any claim for total or partial loss rateably by 70.2%:29.8%, relying on s 87 of the Marine Insurance Act and part 3 section 4.2 of the policy. 19 Section 87 is in the following terms: Where the assured is insured for an amount less than the insurable value, or, in the case of a valued policy, for an amount less than the policy valuation, he or she is deemed to be his or her own insurer in respect of the uninsured balance. 20 Part 3, section 4.2 of the policy was in the following terms: Section 4 - How much we will pay … 4.2 Claims under this policy are subject to the application of average or underinsurance. 21 On this basis, in the defence Vero stated that its liability was $351,000 if the goods were a CTL (70.2% of $499,750) or Euro 89,505 (70.2% of Euro 127,500) if a partial loss. As for partial loss, reliance upon s 77(b) and (c) of the Marine Insurance Act was pleaded. Section 77 provides as follows: Where there is a partial loss of goods, merchandise, or other movables, the measure of indemnity, subject to any express provision in the policy, is as follows: (a) Where part of the goods, merchandise, or other movables insured by a valued policy is totally lost, the measure of indemnity is such proportion of the sum fixed by the policy as the insurable value of the part lost bears to the insurable value of the whole, ascertained as in the case of an unvalued policy; (b) Where part of the goods, merchandise, or other movables insured by an unvalued policy is totally lost, the measure of indemnity is the insurable value of the part lost, ascertained as in case of total loss; (c) Where the whole or any part of the goods or merchandise insured has been delivered damaged at its destination, the measure of indemnity is such proportion of the sum fixed by the policy in the case of a valued policy, or of the insurable value in the case of an unvalued policy, as the difference between the gross sound and damaged values at the place of arrival bears to the gross sound value. (d) Gross value means the wholesale price or, if there be no such price, the estimated value, with, in either case, freight, landing charges, and duty paid beforehand; provided that, in the case of goods or merchandise customarily sold in bond, the bonded price is deemed to be the gross value. Gross proceeds means the actual price obtained at a sale where all charges on sale are paid by the sellers. 22 Correspondence followed, including a body of correspondence about storage costs. 23 On 28 August 2015, Vero paid TS Euro 127,500 (agreed to be the equivalent of $200,000) pursuant to the policy of insurance. 24 On 2 November 2015, Vero offered (through an email from its solicitors) another $50,000 inclusive of interest and costs to settle the claim in addition to the Euro 127,500 already paid. This was in addition to storage costs in respect of which the email stated: With respect to the storage costs, our client will indemnify your client for these costs once it can provide evidence that it has paid for these costs. 25 On 8 December 2015, Vero's solicitors quantified storage costs (less the policy excess of $250) at $26,000.03. This was paid. The offer of an additional $50,000 to settle was repeated. The offer of $50,000 was rejected. Further correspondence about counter offers took place. 26 During 2016, preparation of the litigation and correspondence about settlement continued. In August 2016, Vero's solicitors once again offered $50,000, this time in an Offer to Compromise under the Federal Court Rules 2011 (Cth), inclusive of interest, but plus costs. What had been paid to date was the Euro 127,500 ($200,000) plus storage costs. Two paragraphs of the email dated 16 August 2016 containing the offer set out the commercial justification for the offer (Dr Casey was an expert retained by TS; Simon Bull was an expert retained by Vero; Mobicoat was the repairer whose report substantiated the payment of Euro 127,500): … Your client's appointed expert Dr Robert Casey concedes that the fog cannons can be repaired and that the costs of repairing the fog cannons would be AUD$315,285.00. There is currently no evidence that the resale value of the fog cannons will be less than this amount. Rather, there is only evidence that post repair the fog cannons may have a 30% price reduction. Given that the fog cannons have an invoice value of approximately AUD$711,250, even with a 30% reduction on price following repairs, the fog cannons will be valued at approximately $498,250. This value is greater than the repairs costs and confirms that the fog cannons are not a total constructive loss. … The reports of Simon Bull and Dr Robert Casey support the position that the fog cannons are not a constructive total loss, as alleged by your client, and that they can be repaired. Accordingly, the only issue in the proceedings is the cost of repairs. Our client's position is they are Euro 127,500 for which your client has already been indemnified, and your client asserts they are AUD$315,285b [sic] based on the report of Dr Casey which is unsubstantiated and provided by someone who does not have any expertise in the costs of repairing fog cannons. Dr Robert Casey's evidence will not be accepted and is not an accurate estimate. The Mobicoat quotation will be the repair quotation accepted by the Court because Mobicoat specialises in the types of repairs that the fog cannons require. Based on these quotations, the parties are only approximately AUD$120,000 apart. Our client has already indemnified your client for the maximum amount it will recover should the proceedings run to judgment. However, it makes the further Offer of Compromise attached to this email in an attempt to commercially resolve the proceedings. 27 One can perhaps infer from the terms of this email, from the form of the offer with costs to be paid separately, and from the acceptance by Vero of the obligation under the suing and labouring clause to pay some storage fees to this point that the $50,000 could be characterised as a compromise payment under the policy for damage to the goods, even though Vero's primary position was that the Euro 127,500 previously paid satisfied its obligations under the policy in this regard. 28 The parties undertook a mediation in early 2017, commencing on 12 February. By late February, TS was propounding its claim in writing for the mediation as $736,000 made up of $499,750 indemnity (as a CTL); $43,103 pre-judgment interest; $180,000 costs (as a party/party estimate of actual costs of about $240,000); and a further sum of $33,113.07 in respect of outstanding storage charges. 29 TS also put forward what it referred to as a "probability weighted" value of the claim. This adjusted approach was $249,255 for the indemnity claim (taking account of the Euro 127,500 payment); $21,498 pre-judgment interest; storage costs of $28,050; and legal and expert witness costs of over $200,000. 30 Vero's position at the mediation was based on repair of the goods as a partial loss. It was prepared to accept TS' alternative evidence as to repair. Thus in its mediation position paper Vero put the following in February 2017: … 7. For these reasons the defendant says that the fog cannons can and should have been repaired by the plaintiff. The real question is the assessment of those repair costs in accordance with the Mobicoat quote, on which assumption there is no loss to compensate, or by making allowance for internal damage which has not been proved. 8. In determining the cost of internal damage, and for the purposes of this mediation only the defendant will assume that some units might require mechanical repairs and adopts Dr Casey's repair costs estimate of A$315,285. On that assumption the repair costs are then to be reduced for the prior payment of 127,500 Euros already paid, and accordingly the plaintiff's claim is really only for A$102,785. From that amount there needs to be a deduction for under insurance pursuant to s.87 of the Marine Insurance Act 1909 (Cth). The amount of under insurance was 35% of the invoice value and a reduction by that same proportion is appropriate. That is the effect of the words "deemed to be his or her own insurer in respect of the uninsured balance" in s.87. Thus after allowing for the s.87 defence the plaintiff [sic] claim is really only for $66,810, and that will only be recoverable if the plaintiff can prove there is internal damage. 31 This approach involved a compromise as to a higher repair cost assessment (based on TS' witness, Dr Casey), but a proportionate reduction by the operation of s 87 of the Marine Insurance Act. It can be seen that Vero was approaching the matter directing its attention to a proper sum for the damaged goods. 32 The matter settled on 1 June 2017 by a payment of $425,000. The evidence before me did not seek to traverse any negotiations between 1 March 2017 and 1 June 2017. The settlement was documented by a deed of settlement entitled "Deed of Release". The recitals to the deed set out the agreed position at the time: A. On 24 April 2014, Vero issued to Technology Swiss a combined cargo policy with policy number MTO107078461 for the period 24 April 2014 to 24 April 2015 providing marine cargo insurance cover for goods shipped at or from ports and or places in Australia to ports and/or places in the World (the Policy). B. On or about 6 December 2014, Technology Swiss shipped a consignment of Fog Cannons (Fog Cannons) comprising 6 FC30SS model fog cannons, 3 FT30SS model fog tubes and 5 FC408033 fog cannon models (the Consignment) from Melbourne, Australia to Bangkok, Thailand (the Carriage). C. During the Carriage the Consignment was damaged and on 29 January 2015, Technology Swiss made a claim under the Policy for $500,000 (the Insurance Claim). D. Vero accepted liability to indemnify Technology Swiss but denied liability for the quantum of the Claim (the Denial). E. Following the Insurance Claim, Technology Swiss made a claim against Vero from Vero [sic] for monthly storage costs of the Consignment in Thailand (the Storage Costs Claim). F. On or about 28 August 2015, and on a without prejudice basis, Vero indemnified Technology Swiss for Euro 127,500 (the Indemnity Payment). G. On various dates from on or about 28 August 2015 to the date of this deed, Vero has on a without prejudice basis made payments to Technology Swiss of monthly storage costs for the Consignment in Thailand. H. On 3 September 2015, following the Denial and the Indemnity Payment, Technology Swiss commenced proceedings against Vero in the Federal Court of Australia pursuant to proceedings numbered NSD959/2015 (the Proceedings). I. Vero Deny liability for the Insurance Claim and in the Proceedings except to the extent of the Indemnity Payment (the Dispute). J. The parties have agreed to settle the Dispute as more fully set out in this Deed. 33 The settlement moneys were set out in cl 2 under the heading "Payment and Release". Clause 2(a) provided: (a) Technology Swiss agrees to accept $425,000 (the Settlement Monies) from Vero in full and final settlement of the Insurance Claim, the Storage Costs Claim, the Proceedings and the Dispute. 34 This sum did not include further storage costs from 1 March 2017 up to 1 June 2017, cl 2(c) providing: (c) Vero agrees to make payment to Technology Swiss of the storage costs it incurred for the Consignment in Bangkok, Thailand from 1 March 2017 until the date of the execution of this Deed by Vero (Storage Costs Settlement Monies). 35 TS gave Vero a full release in cl 2(e) as follows: (e) Technology Swiss hereby releases, forever discharges and holds harmless Vero its servants, agents, and officers from and against all actions, claims, suits, causes of action, and demands of every kind which it now has or may at any time have, or which, but for the execution of this Deed it would or might have had against Vero arising from the circumstances recited in this Deed, the Carriage, the Insurance Claim, the Storage Costs Claim, the Proceedings, and the Dispute. 36 In cl 2(f) (dealing with confidentiality) the deed anticipated the possible prosecution of the cargo claim against the carrier: (f) The parties agree to keep the terms of the settlement, the circumstances recited in this Deed, and the Deed confidential, subject to the rights of disclosure: … (3) If reasonably necessary pursuant to the prosecution of a claim by either party in relation to the carriage of, or damage to, the Fog Cannons. 37 The deed provided for discontinuance under cl 3, as follows: 3. Discontinuance Within 7 days of receipt of the Settlement Monies and the Storage Costs Settlement Monies, Technology Swiss will prepare and file a Notice of Discontinuance, discontinuing the proceedings on the basis that each party bear their own costs. 38 The deed provided for subrogation in cl 11, as follows: 11. Subrogation Vero's rights (and Technology Swiss' obligations) arising under the "Subrogation Clause" in Section 5 of the Policy and the general law of subrogation, are preserved. 39 Section 5 of part 1 of the policy (part 1 containing sections applicable to both part 2 concerning transit within Australia and part 3 concerning import and export) contained general conditions. There was a subrogation clause in the following terms: Subrogation clause You agree to comply with the requirements set out in Part 1, Section 10 - Claims Procedures. When we settle a claim, we may endeavour to pursue recovery rights against the carrier or any other third party who caused loss or damage to the goods. You authorise us to act in your name in such recovery action, and undertake to give us reasonable assistance in such actions. 40 As to storage costs the statement of agreed facts in this proceeding records the following in para 10: The total cost of the Storage up until the Deed of Settlement (executed on 1 June 2017) was $99,252.77, of which $59,604.05 was indemnified by Vero and $39,648.72 was not indemnified by Vero. As to the unindemnified amount of $39,648.7: a. Pursuant to clause 2(c) of the Deed of Release (referred to in paragraph 13 below), Vero agreed "to make payment to Technology Swiss of the storage costs it incurred for the Consignment in Bangkok, Thailand, from 1 March 2017 until the date of the execution of this Deed [being 1 June 2017]"; b. The storage costs it incurred from 1 March 2017 until 1 June 2017 were $8,679.28; c. Technology Swiss has not pressed for, and Vero has not paid, the sum of $8,679.28 pursuant to clause 2(c) of the Deed of Release. This is not the subject of any claim in these proceedings. 41 It is agreed that TS incurred legal costs in connection with the claim in the earlier Federal Court proceeding of $277,260.16 up to the date of the deed of settlement. 42 After settlement, the parties sought, through their solicitors, to negotiate a costs sharing arrangement in relation to the commencement and conduct of joint proceedings against the contractual carrier FP Shipping. Some of that correspondence is in evidence. The parties were unable to agree. The position in the respective correspondence explained the lack of agreement and presaged many of the arguments in this proceeding. 43 For instance, in a draft agreement sent by TS' solicitors to Vero's solicitors, the following recitals appeared: 1.10. Vero has paid Technology Swiss a total of A$621,153.85 (€127,500 plus A$425,000). 1.11. Technology Swiss incurred storage costs in the total amount of $93,527.86 up to the time of settlement, in respect of the damaged Fog Cannons by way of mitigation of the damage, in respect of which Technology Swiss claimed that Vero was liable under the Policy. As at the time of settlement, Vero had reimbursed Technology Swiss in the amount of $59,604.05, and the balance of $33,923.81 had not been reimbursed. 1.12. As at the time of settlement, Technology Swiss had incurred legal costs in the total amount of $272,818.36, comprising: 1.12.1. Solicitor costs in the amount of $220,747.49 in respect of the Proceedings; and 1.12.2. Expert costs in the amount of $52,070.87. 1.13. Technology Swiss had elected to appropriate the sum paid under the Deed firstly to the payment of the legal costs referred to in clause 1.12 above, and outstanding storage costs referred to in clause 1.11 above, such that the total amount of (A$621,153.85) has been appropriated by Technology Swiss in the following manner: 1.13.1. Legal costs, expert costs and storage costs: $272,818.36; 1.13.2. Outstanding storage costs in the amount of $33,923.81; and 1.13.3 Indemnity under the policy for damage to the Fog Cannons: $314,411.68. 1.14. The total damages suffered by Technology Swiss by reason of damage to the Fog Cannons is $884,675.73 ("Damages"), comprising: 1.14.1 invoice value of the Fog Cannons: A$739,077; 1.14.2. storage costs in respect of the damaged Fog Cannons: $93,527.86; 1.14.3 expert costs to assess the damaged Fog Cannons: $52,070.87. 1.15. The Damages for which Technology Swiss has not been indemnified under the Policy are $424,665.32 (being $844,675.73, less: 1.15.1. Direct payments in respect of Storage costs (see clause 1.11 above): $59,604.05 1.15.2. Indemnity in relation to storage costs (see clause 1.13.2 above): $33,923.81; 1.15.3 Indemnity in relation to damage to the Fog Cannons (see clause 1.13.3 above): $314,411.68; 1.15.4 Indemnity in relation to expert costs to assess the damaged Fog Cannons (see clause 1.12.2 above): $52,070.87. 1.16. Pursuant to a Deed of Release signed on 1 June 2017 and the general law of subrogation, Vero is entitled to recover, against FPS and/or FPL, the amounts paid by it to Technology Swiss pursuant to their rights of subrogation. 1.17. Technology Swiss and Ecology have made a claim against FPS and/or FPL for losses arising out of the Carriage. 1.18. The total claim against FPS and/or FPL is $884,675.73, comprising: 1.18.1. Invoice value of Fog Cannons: A$739,077; 1.18.2. Storage costs: A$93,527.86; 1.18.3. Expert costs: A$52,070.87 1.19. The Damages for which Technology Swiss has not been indemnified under the Policy ($424,665.32) comprises 48% of the total claim against FPS 44 A regime towards a joint approach to the litigation was suggested. It was suggested by TS that costs be shared 52% by Vero and 48% by TS. 45 Vero amended various paragraphs of the recitals to and clauses of the draft agreement, in particular paras 1.12 - 1.19 and cl 2.3 as follows: 1.12. As at the time of settlement, Technology Swiss had incurred legal costs in the total amount of $272,818.36, comprising: 1.12.1. Solicitor costs in the amount of $220,747.49 in respect of the Proceedings; and 1.12.2. Expert costs in the amount of $52,070.87. 1.13. Technology Swiss has elected to appropriate the sum paid under the Deed firstly to the payment of the legal costs referred to in clause 1.12 above, and outstanding storage costs referred to in clause 1.11 above, such that the total amount of (A$621, 153.85) has been appropriated by Technology Swiss in the following manner: 1.13.1. Legal costs, expert costs and storage costs: $272,818.36; 1.13.2. Outstanding storage costs in the amount of $33,923.81; and 1.13.3. Indemnity under the policy for damage to the Fog Cannons: $314,411.68. 1.14. 1.12 The total damages suffered by Technology Swiss by reason of damage to the Fog Cannons is $884,675.73 ("Damages"), comprising: 1.14.1. 1.12.1. invoice value of the Fog Cannons: A$739,077; 1.14.2. 1.12.2. storage costs in respect of the damaged Fog Cannons: $93,527.86; 1.14.3. 1.12.3. expert costs to assess the damaged Fog Cannons: $52,070.87. 1.13. The Damages for which Technology Swiss has not been indemnified under the Policy are $263,521.88 ("Uninsured Losses"). These Uninsured Losses represent 29.79% of the total claim against FPS and/or FPL. 1.15. 424,665.32 (being $884,675.73, less: 1.15.1. Direct payments in respect of Storage costs (see clause 1.11 above):$59,604 .05; 1.15.2. Indemnity in relation to storage costs (see clause 1.13.2 above): $33,923.81; 1.15.3. Indemnity in relation to damage to the Fog Cannons (see clause above): $314,411 .68; 1.15.4. Indemnity in relation to expert costs to assess the damaged Fog Cannons (see clause 1.12.2 above): $52,070.87. 1.16. 1.14. Pursuant to a Deed of Release signed on 1 June 2017 and the general law of subrogation, Vero is entitled to recover, against FPS and/or FPL, the amounts paid by it to Technology Swiss pursuant to their rights of subrogation. 1.17. 1.15. Technology Swiss and Ecology have made a claim against FPS and/or FPL for losses arising out of the Carriage. 1.18. The total claim against FPS and/or FPL is $884,675.73, comprising: 1.18.1. Invoice value of Fog Cannons: A$739,077; 1.18.2. Storage costs: A$93,527.86; 1.18.3. Expert costs: A$52,070.87 1.19. The Damages for which Technology Swiss has not been indemnified under the Policy ($424,665.32) comprises 48% of the total claim against FPS … 2.3. Vero and Technology Swiss severally agree to pay the costs and disbursements of Mills Oakley, and share in any amounts recovered, on a pro rata basis as follows: 2.3.1. Vero: 70.2152% 2.3.2. Technology Swiss and Ecology: 29.7948% 46 These changes reflected a disagreement as to the share of the costs of the proceeding, but more relevantly, the share of any recovery moneys. Vero wanted 70.21%. TS was prepared to give it 52%. The position of Vero was that the whole of the $425,000 (added to the $200,000) went to reduce all claims except legal costs. It took cl 3 of the deed of release to mean that the parties had agreed to pay their own costs of the earlier dispute and that all other amounts were referable to a reduction of the damages suffered by TS by reason of the damage to the goods, leaving only $263,521.88 not indemnified, which was to be recovered by TS from any proceeds of the claim against the carrier by TS' share of such contingent success of 29.79%. The position of TS was that it could appropriate the $425,000 (first) to legal, including expert, costs, (secondly) to storage costs under the suing and labouring clause, and (thirdly) to the indemnity in respect of which s 87 applied. The essence of the disagreement was expressed by the solicitors for Vero in correspondence on 11 December 2017: 1. The Deed of Settlement settled the dispute between the parties, including clause 3 which provided that each party was to bear its own costs. Clause 1.13 of your proposed draft seeks to appropriate your client's legal costs into the settlement sum, which is contrary to and in breach of the Deed between the parties. In effect, Technology Swiss is attempting to claw back its legal costs from Vero but these differences have already been settled through the Deed. 2. Simply put, Vero paid $621,153.85 to your client and is entitled to claim this amount from FPL/FPS. Technology Swiss has outstanding uninsured losses of $263,521.88 which it is entitled to claim against FPL/FPS. Neither Vero nor Technology Swiss is entitled to claim costs incurred in relation to the indemnity dispute against FPL/FPS. 47 The differences in approach would lead to significant differences in both the share of the cost of underwriting the action and also the share of the recovery moneys. The parties were in the position of having substantially prepared the claim. Clause 11 and the settlement deed gave Vero the advantage of all the evidence collected by TS if the parties agreed on a combined approach. TS was probably dominus litis, though that question may have depended upon who was right about the deed of settlement and its construction and interpretation: Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd [2008] NSWCA 243; 15 ANZ Insurance Cases 61-780 at [306]-[307] and the cases there cited. Each of the freight forwarder and ocean carrier was likely to have cargo insurance, whichever was sued. The cargo had moved in transit. There must have been real prospects of success of an improper stowage claim, certainly at least against the freight forwarder, depending upon who was responsible for the relevant aspect of stowage. The approach of Vero to the draft cost sharing agreement left any recovery above $263,521.88 to Vero's account. On this basis, if a full recovery were made against the carrier (contractual or ocean) TS would still have unpaid the legal costs of the earlier proceeding, as would Vero, if it treated its share of the recoveries as referable to its indemnity responsibilities of $500,000. The approach of TS to the draft cost sharing agreement saw itself free to restore its legal costs of the earlier proceeding, and put itself in the position that Vero had been wrong to have put it to such legal expenses in the earlier proceeding. On this approach TS was fully indemnified for the loss and for the earlier proceeding; and Vero was partially recouped for its payments and bore its own costs for the earlier proceeding. 48 It is to be noted that TS viewed part of the $425,000 as referable to indemnity for the damaged goods. It reached this by a process of appropriation; nevertheless as a matter of approach it reflected a recognition that some of the payment was to be treated as representing an indemnity for damage to the goods. 49 On 18 January 2018, TS' solicitors sent an email to Vero's solicitors stating that they were instructed to cease negotiating a cost sharing agreement because of an inability to reach an agreement about the distribution of any proceeds of the proposed action. The email set out various complaints, but concluded with a recognition of its obligations to assist with recovery as follows: Our client acknowledges their ongoing obligations to assist with respect to the recovery of the insured amount. However, this obligation does not extend to the recovery of any amount above the insured amount. 50 Vero's solicitors responded the same day (the TT Club was the Protection and Indemnity Club (P & I Club) of FP Shipping: its insurer): We are disappointed that your client is unwilling to negotiate the cost sharing agreement. As you are aware, the insurance policy requires Technology Swiss to give Vero reasonable assistance in recovery against FPS. TT Club has represented that any offers made have to be accepted by all cargo interests represented by our firm and your firm signing a release - it is apparent that the TT Club will not make any further offer if there appear to be two competing claimants for the same loss. In circumstances where your firm rejected an offer made by the TT Club without prior consultation with us, your client is in breach of its obligations under the insurance policy and has not provided reasonable assistance in the recovery action. Putting aside the breach of the terms of the insurance policy represented by your response below, in practical terms, TT Club's understandable requirement that it deals with only one party, not two parties, means that our respective clients have no choice but to come to an arrangement for the recovery with both parties participating. We note your comments, and respond as follows: … 2. Putting aside the fact that the timing of the resolution of the dispute between our respective clients regarding whether the goods were a CTL is utterly irrelevant to the claim against FPS, as have explained in our email on 20 November 2017 that a demand was made against FPS for EUR 480,400.01. Vero would be entitled to recover a maximum EUR 127,500 plus A$425,000, with any excess to be paid to Technology Swiss. This is a trite principle of insurance law and is evident in the cost sharing agreement. Further, the insured was unable to provide evidence of constructive total loss until a month before mediation. 3. You have not identified how the amendments go beyond what is reasonable, but we would be happy to address your concerns if they are identified. Vero remains entitled to recovery of the monies it has paid (EUR 127,500 plus A$425,000) and your client is entitled to recovery of any uninsured losses. 51 TS commenced proceedings on or about 20 June 2018 in the County Court of Victoria. On 13 November 2019, judgment was ordered in favour of TS for $863,758.70. The parties agree that the sum was comprised of: (a) Invoice value $738,615.40 (b) Freight $16,526.94 (c) Interest $108,616.36 No sum for storage costs was awarded. 52 TS received costs on a standard basis until 15 July 2019, and thereafter on an indemnity basis. 53 This sum was paid to TS' solicitors on 26 November 2019. 54 This proceeding was begun in May 2020 in the Insurance List to ascertain the entitlements to this sum and any interest thereon.

Consideration and disposition 69 The arguments put forward by the parties at times had a degree of complexity about them. That complexity was, in part, brought about by attempts to apply rigid rules to the working out of the equitable right of recoupment based on the cognate equity of subrogation. Both are based, at least in the context of subrogation and recoupment in insurance law, on the indemnity principle: An insured whose loss is covered by a policy of indemnity insurance (such as the marine cargo policy here) is not entitled to be more than fully indemnified for its loss: Simpson and Co v Thomson (1877) 3 App Cas 279 at 284 (Lord Cairns LC); Burnand v Rodocanachi Sons & Co (1882) 7 App Cas 333 at 339 (Lord Blackburn); Castellain v Preston (1883) 11 QBD 380 at 386 (Brett LJ). 70 The right of recoupment and the principle of indemnity on which it is based are related to the principle of subrogation. The principle or doctrine of subrogation can be seen as the foundation for rights in equity: to pursue, in the name of the insured, a wrongdoer to recover the loss for which the insured has been indemnified. That right gives rise to questions of the proper destination of moneys recovered in a subrogated action: that is, an action brought in the name of the insured by the insurer or by the insurer and insured jointly. Related to that, and recognising the indemnity principle as the foundation of the rights of subrogation, are questions of the proper destination of moneys recovered in an action brought by the insured without the assistance of the insurer, when the insurer has to some extent indemnified the insured. 71 In working out the rights of TS and Vero to the moneys held by TS' solicitors after the successful recovery action against FP Shipping, a number of matters need to be borne in mind to avoid error. 72 First, no one asks the Court to decide which of Vero or TS was correct in its stand taken in the earlier Federal Court proceeding. TS claimed a CTL and the full indemnity, acting as its own insurer above $500,000 under s 87. Vero claimed that it would fully comply with its obligations under the policy by paying for repair of the goods by the payment of the Euro 127,500 ($200,000) payment. TS recovered damages from the carrier on a total loss basis. That success does not transform Vero's position, as against its insured, TS, into a wrongful failure to indemnify. Rather, each party had a bona fide position which was resolved by the settlement. 73 For this reason I would reject TS' approach of refusing to recognise Vero's right to, at least, a full recoupment of the $200,000 (the Euro 127,500) by the valuation downwards of Vero's putative 59% share under s 87 because of a so-called "indemnity shortfall". Vero said there was no shortfall. The parties settled. The Court is not in this proceeding called upon to resolve whether, as between TS and Vero, the latter was wrong to deny a CTL. The difficulty with TS' approach in this regard is that it assumes that Vero was obliged to indemnify in the amount of $499,750. Vero's position was always that it was only obliged to pay the repair costs which it asserted were Euro 127,500. The parties settled their differences with more money being paid by Vero. But the submissions in this case did not address whether there was a CTL or whether Vero's stance in the earlier Federal Court proceeding was legitimately taken. TS' success against the carrier does not change this. Thus, I reject any approach which takes as its necessary foundation the implicit acceptance of one or other of the parties' respective positions in the earlier proceeding. 74 Secondly, putting aside storage costs (recovery for which from Vero fell under a suing and labouring clause outside the limit of indemnity: Part 1, section 10 of the policy and s 84(1) of the Marine Insurance Act), TS was fully indemnified for its loss by the recovery action against FP Shipping: full CIF value, pre-judgment interest and freight were received. TS received all its costs, on an indemnity basis from a point in time well before the trial. No claim was made against the recovery moneys for additional costs unrecovered from FP Shipping, as TS could have done if there were any: Assicurazioni Generali De Trieste v Empress Assurance Corporation Limited [1907] 2 KB 814 at 822; Derham SR, Subrogation in Insurance Law (The Law Book Company Limited, 1985) at 139 and the cases cited at fn 31. 75 The indemnity principle would thus demand that a payment of $200,000 under the policy for repair be recouped from an insured who has received over $700,000 for the invoice value of the goods as a total loss. The over-compensation is plain. The intellectual mechanics of the approach are, of course, to be based on the application of s 87 of the Marine Insurance Act. The parties' respective proportions should be based on their shares of the sum insured, CIF plus 10% ($770,095.58 + 10% = $847,105.14) being 59%:41%, up to $200,000. 76 The question is: How is the $425,000 to be treated? 77 The settlement deed as the document regulating the rights of the parties upon the payment of the $425,000 is central. Both sides rely upon its provisions. Most importantly, Vero submitted that cl 3 (see [37] above) was a binding agreement that TS and Vero would bear their own respective costs of the earlier proceeding. The consequence of such a construction would be that the whole sum of $425,000 could be viewed as unrelated to costs, and thus concerned with meeting TS' claims, all of which (at least substantially) derived from the insurance policy: the indemnity claim for a CTL, pre-judgment interest based on a hypothesis of a wrongful failure to pay the indemnity claim for a CTL, and storage costs under the suing and labouring clause and s 84, hypothesised upon a dispute about how long storage was necessary depending on whether repair or a CTL was involved. 78 It was this view, I infer, that led to Ms Kong's view that the whole sum of $425,000 was paid as an indemnity. It is the view expressed by Mills Oakley in their letter of 11 December 2017 ([46] above). 79 I do not consider that that is the correct construction of cl 3. The subject of cl 3 was the method of resolution of proceedings in the Court. Discontinuance of the proceeding after the close of pleadings (see rule 26.12(2)(a)(ii) of the Federal Court Rules) required the consent of Vero. Under rule 26.12(7): Unless the terms of a consent or an order of the Court provide otherwise, a party who files a notice of discontinuance under subrule (2) is liable to pay the costs of each other party to the proceeding in relation to the claim, or part of the claim, that is discontinued. 80 Clause 3 allowed the parties to end the proceeding by filing a document and ensuring that there were no cost consequences to disturb the receipt of the $425,000. 81 The proper approach to the construction and interpretation of the settlement deed was not a matter of contest. I refer to MOS Beverages Pty Ltd v Insurance Australia Ltd trading as CGU Insurance [2020] FCA 1716 at [18] and the authorities there referred to and discussed in connection with the construction of insurance policies. Here the parties were commercial participants, both competently advised. How would a reasonable business person have understood the document, understanding its background and surrounding circumstances? In the context of the whole dispute and its overall resolution, I do not read cl 3 as a contractual bargain that, for the purposes of the parties' future legal arrangements, including especially rights of subrogation foreseen in cl 11 and the legal consequences thereof, the sum of $425,000 was not paid in any respect for costs. Rather, I read cl 3 as the agreed mechanism for putting an end to proceedings. 82 The parties did not deal expressly with any division of the sum paid. The recitals recorded the parties' respective positions and, in particular, recorded Vero's denial of any liability to pay any more than the Euro 127,500, and also Vero's payment of some storage charges: see recitals E, G and I especially ([31] above). Clause 2(a) reflects TS' acceptance of the sum as full and final settlement for all claims, including the storage cost claim up to and including 28 February 2017 (storage thereafter being dealt with by cl 2(c)), and including costs. Importantly, complete releases were given by TS: cl 2(e). The policy, and any rights under it unrelated to this dispute, was and were not retrospectively cancelled, though the policy had expired two years before. 83 As I read the settlement document as a whole Vero was paying an undivided sum to TS for all the claims TS was making and to free itself of any potential liability under the policy for the claimed indemnity, for storage charges, for pre-judgment interest, and for the costs of the proceeding. No attempt was made to allocate the sum, and cl 3 was not a contractual bargain to the effect that the $425,000 was referable to all claims, but not to costs. 84 Clause 11 does not affect this conclusion. It preserved Vero's subrogation rights, whatever they may be, and certainly at least as far as the Euro 127,500 that had been paid. Clause 10 anticipated the possibility of an action by either or both against the carrier. 85 The importance of this absence of express allocation is that there is no clause that provides how the sum or any part of it is to be treated for the recoupment of any moneys extracted from the carrier, if proceedings were brought. 86 The primary case of TS was put two ways, but fundamentally rests on the absence of express contractual allocation and the terms and nature of the deed of release. TS relied first on the decision of the British Columbia Court of Appeal delivered by McLachlin JA (as the later Chief Justice of the Supreme Court of Canada then was) in Wellington Insurance Co Ltd v Armac Diving Services Ltd (1987) 38 DLR(4th) 462. The facts were not without similarity to those here. A claim for indemnity under a marine policy was made for the loss of a vessel that had capsized. The insurer denied indemnity. Proceedings were commenced. The insurer paid half the amount claimed under a settlement described by the Court as (38 DLR(4th) at 463): … on the basis that the payment was not being made pursuant to the policy, but rather to bring an early end to the legal proceedings and as a public relations gesture. The insured's action was dismissed by consent "as if evidence had been heard and a judgment pronounced on the merits". 87 Later the insurer recovered judgment for its loss against a third party. The Court posed the question at 463: … whether the insurer, having denied that the payment made by it was required by the contract of insurance, is subrogated to the moneys obtained by the insured to the extent of such payment. The trial judge held the insurer was not subrogated because payment had not been made pursuant to the policy. 88 The Court first referred to the Canadian Insurance (Marine) Act, RSBC 1979, c 203, s 80(2), being the equivalent of s 85(2) of the Marine Insurance Act: … where the insurer pays for a partial loss … he is subrogated to all rights and remedies of the assured in and in respect of the subject matter insured as from the time of the casualty causing the loss, in so far as the assured has been indemnified, according to this Act, by the payment for the loss. 89 The question then posed was: Did the insurer pay for a partial loss? 90 The argument of the insurer was stated at 464: It submits that the proper test is not whether the payment was made pursuant to the policy, but rather whether the payment would not have been made except for the policy. 91 The argument of the insured was stated at 464: The insured, on the other hand, argues that the phrase "pays for a partial loss" in s.80(2) and the equitable concept of subrogation upon which it is based require that the payment have been made pursuant to the policy. 92 The Court then stated, at 464, the issue as one of characterisation: The issue reduces to this: What is the nature of the payment required to give rise to the right to subrogation under s 80(2)? 93 The Court viewed s 80(2) as set against the law of subrogation and its purpose was not to alter long standing principles of subrogation but extend them to partial loss. The question thus became framed as (at 464): What is the nature of the payment required to give rise to the insurer's right to subrogation at common law? 94 The Court thus turned briefly, but succinctly at 464-465, to fundamental principles: The authorities establish that it is the insurer's indemnification of the insured which gives rise to its right of subrogation. Thus, in Castellain v Preston et al. (1883), 11 Q.B.D. 380 (C.A) at p. 389, Brett L.J. stated: "But he cannot be subrogated into a right of action until he has paid the sum insured and made good the loss." [Emphasis added by McLachlin JA.] Similarly, Simpson & Co. et al. v. Thompson, Burrell et al. (1877) 3 App. Case 279 at p. 284, Lord Cairns L.C. stated: "where one person has agreed to indemnify another, he will, on making good the indemnity, be entitled to succeed to all the ways and means by which the person indemnified might have protected himself against or reimbursed himself for the loss." [Emphasis added by McLachlin JA.] The Supreme Court of Canada in Ledingham et al. v. Ontario Hospital Services Com'n et al. (1974), 46 D.L.R.(3d) 699, [1975] 1 S.C.R. 332, 2 N.R. 32 sub nom. Ledingham v. Minister for Transport, confirmed this view, holding that the right of subrogation depends upon and is regulated by the broad underlying principle of securing indemnity to the insured. What does indemnification mean in this context? The authorities suggest that what is required is payment made pursuant to a contract of insurance or "indemnity". Thus, in John Edwards & Co. v. Motor Union Ins. Co., Ltd., [1922] 2 K.B. 249 at pp. 254-5, McCardie J. held that to give rise to the right of subrogation, the insurer's payment must be made pursuant to a contract of indemnity: It derives its life from the original contract. It gains its operative force from payment under that contract. Not till payment is made does the equity, hitherto held in suspense, grasp and operate upon the assured's choses in action. In my view the essence of the matter is that subrogation springs not from payment only but from actual payment conjointly with the fact that it is made pursuant to the basic and original contract of indemnity. [Emphasis added by McLachlin JA.] McCardie J. went on to dismiss the insurer's claim to subrogation on the ground that its payment to the insured had not been made pursuant to a contract of indemnity. None of the authorities deviate from the principle that before the right of subrogation arises, the insurer must have made a payment pursuant to its contract of indemnity with the insured. The only qualification, if it can be called that, is the rule that where, with the benefit of hindsight it emerges that the payment made may not have been legally required under the policy, the right to subrogation remains if the payment was honestly intended to be a satisfaction of a loss under the policy: King v Victoria Ins. Co., Ltd., [1896] A.C. 250 (P.C.). That case does not support a departure from the basic proposition that a right of subrogation does not arise unless the insurer has made a payment indemnifying the insured for loss under the policy. 95 The Court concluded at 465-466 that it was not a payment under the policy: In the case at bar, the insurer's payment cannot be said to have been made with the intention of reducing the loss claimed under the policy. The insurer unequivocally denied any liability to pay that loss. The payment made to the insured was not made in partial satisfaction of the claim of loss, but rather in consideration for a complete abandonment by the insured of its claims under the policy. The insured's action on the policy was dismissed by consent "as if evidence had been heard and judgment pronounced on the merits". These facts are consistent with the view that the insurer expressed at the time that the payment was not made with the intention of indemnifying the assured or reducing the loss payable on the policy, but rather "in order to conclude this matter without any further legal costs accruing, and as a public relations gesture". The payment was the consideration paid for Armac's agreement that its claim on the policy be dismissed and for Armac's release of the insurer for any claims arising under the policy and the capsizing of its vessel. In such circumstances it cannot be said that the insurer was intending to make a payment indemnifying the insured for a loss coming within a risk issued by the policy. Rather, the insurer was paying for an agreement by the insured whereby it avoided a possible claim and the cost of litigation. That agreement settled all matters outstanding between the parties arising out of the sinking of the insured's vessel, including any possible future claim by the insurer for subrogation. I conclude that the events surrounding the payment indicate unequivocally that the payment made by the insurer was not an indemnification of the insured under the policy. The "sum insured", to use the language of Castellain v. Preston, supra, was never paid. In these circumstances, no right of subrogation arises. I would dismiss the appeal. [Emphasis added.] 96 TS relied squarely on this case, and submitted that there were important similarities: the unequivocal denial of liability (see recital I); that the payment was made in terms for abandonment of all claims by TS (see cl 2(a) and (e) and cl 3); that the action was ended by a means other than a recognition of the entitlement of the insured (in Wellington dismissal; here discontinuance); and that the payment was not expressed by the insurer to be indemnifying the loss or reducing the loss payable on the policy even on a disputed or compromise basis, but to conclude the dispute. 97 Vero submitted that Wellington had been treated cautiously by later authority, and had failed to pay due regard to the basal authority of the Privy Council in a Queensland appeal, King v Victoria Insurance Company Limited [1896] AC 250, and to the vindication of the equity at the foundation of the subrogation and recoupment. Although not precisely articulated thus, Vero's submissions can be seen to engage with what might be seen to be a certain narrowness in the Court's approach in Wellington: two rules - the first that the payment must be under and within the contract, with a qualifying rule that if with the benefit of hindsight the payment was outside the policy, subrogation applies if the parties honestly thought it to be a payment within the policy. In its submissions, TS sought to confine narrowly the applicable rule thus, into such strict categories. As I discuss below, the principle and arguably the decision in Wellington can be seen as broader than this: The relevant question is whether it can be taken (whether from express words or inferred or implied from the circumstances) that the payment or some part of it was mutually intended to be an indemnity for the insured loss and in that sense be under the policy. 98 In King, wool was damaged in a collision between the lighter upon which the goods had been placed and punts which had broken away from their anchorage, to which they had been improperly secured. The wool was the property of a bank which was the insured under a policy issued by Victoria Insurance and the punts were the property of and under the control of the Queensland government. King (the appellant) was the nominal defendant. The insurer paid the bank, took an assignment of the right of action and brought an action against the nominal defendant. The defence, in so far as relevant, was that the wool and the damage were not covered by the policy. The payment was thus said to be voluntary and thus not attracting any right of subrogation. There had been no dispute between insurer and insured: both had honestly treated the policy as applying. Lord Hobhouse (on behalf of the Privy Council comprised otherwise of Lord Watson, Lord Davey and Sir Richard Couch) said the following at 254-255: To their Lordships it seems a very startling proposition to say that when insurers and insured have settled a claim of loss between themselves, a third party who caused the loss may insist on ripping up the settlement, and on putting in a plea for the insurers which they did not think it right to put in for themselves; and all for the purpose of availing himself of a highly technical rule of law which has no bearing upon his own wrongful act. It is not alleged that there was anything but perfect good faith in the claim made by the bank and satisfied by the insurance company. It is not alleged that the question of negligence has not been as fully and fairly tried in this action as it could have been in an action by the bank; or that the government has been in any way prejudiced by the form of the action. But it is claimed as a matter of positive law that, in order to sue for damage done to insured goods, insurers must shew [sic: show] that if they had disputed their liability the claim of the insured must have been made good against them. If that be good law, the consequence would be that insurers could never admit a claim on which dispute might be raised except at the risk of finding themselves involved in the very dispute they have tried to avoid, by persons who have no interest in that dispute, but who are sued as being the authors of the loss. The proposition is, as their Lordships believe, as novel as it is startling; at least Mr. Cohen was unable to furnish any authority for it, and they know of none. Yet it is difficult to suppose that such cases have not frequently occurred. 99 The expression of the matter by McLachlin JA in Wellington at 465 can be seen to accord with King as far as it goes: Subrogation arises if payment is made even if not legally required under the policy, if it was honestly intended to be in satisfaction of a loss under the policy. There is, however, nothing in King which requires the fashioning of a rule based on, and limited to, the precise facts of King: that is, one limited to circumstances where the parties (mistakenly) believed the policy to apply, and honestly paid under the policy on that belief. The likely breadth of circumstances of bona fide settlement of insurance claims is wider than that. 100 Thus, certainly where there is no dispute as to coverage, and the parties to the contract of insurance honestly intend a satisfaction of or reduction of loss under the policy, the strict legalities of contractual cover will not prevent the equity arising. As noted by the authors of Meagher, Gummow and Lehane's Equity: Doctrines and Remedies (5th ed, LexisNexis, 2015) at 387 [9-290], subrogation as an equitable principle arises to give effect to the equities between the parties on payment rather than in working out their strict contractual rights. Although McCardie J in John Edwards and Company v Motor Union Insurance Company Limited [1922] 2 KB 249 said at 255: "the essence of the matter is that subrogation springs not from payment only but from actual payment conjointly with the fact that it is made pursuant to the basic and original contract of indemnity", in the light of King, his Lordship is to be understood as concluding "pursuant to a bona fide and reasonable belief that it is required by the basic and original contract of indemnity and there is such a contract": see Meagher, Gummow and Lehane (2015) at 387 [9-290]. 101 I am not concerned with the problem before McCardie J in John Edwards as to whether subrogation is available if there is no policy of insurance, in that case because of public policy, there being only an honour policy by the effect of provisions equivalent to s 10(2)(b) of the Marine Insurance Act. 102 Neither King nor John Edwards dealt with the question of the equity in the context of a compromise of a dispute between insurer and insured of a claim for indemnity, where different views are held as to the operation of the policy in the circumstances at hand, and where, as often is the case, as no doubt here, those views are honestly and bona fide held, informed by legal advice (which may be different), but the parties are prepared to act and settle on a basis different to that which they think is the correct policy position. It would no doubt be (to use Lord Hobhouse's expression) "startling" if there could be no subrogation if the insurer was correct in its view of the policy notwithstanding its bona fide willingness to compromise and pay a disputed and compromised sum (in this sense) under the policy by settling a bona fide claim under the policy. 103 The question in King was one of defence by a defendant to an action brought by the insurer. The question in John Edwards was, however, whether insured or insurer (on the honour-only policy) was entitled to funds paid by the third party to blame for the collision for loss of hire by the insured for which the insurer had already indemnified (in honour only) the insured. 104 Wellington is not inconsistent with King. It is clear that there need not strictly be liability under the indemnity policy. There must, however, be a policy of indemnity out of which the right of indemnity springs: State Government Insurance Office (Qld) v Brisbane Stevedoring Pty Ltd [1969] HCA 59; 123 CLR 228 at 240-241, together with payment: John Edwards. A bona fide (even if mistaken) belief of the application of the policy and a payment thereunder will also suffice to raise the equity: King. If the parties are in dispute as to the extent of response of a policy there is no reason in equity or in principle why moneys paid in a bona fide compromise of a claim made under the policy should not be able to be treated as giving rise to the equity of subrogation to the extent that the payment can be seen as mutually intended to reduce the loss claimed under the policy of indemnity, by acceptance in the compromise of the insured's claim, even if the primary position of the insurer (which may in fact be correct) is that it is not liable to the extent claimed and to the extent paid under the compromise. It is difficult to see why the same conclusion should not apply to the compromise of a dispute as to whether the policy responds at all, at least to the extent that the payment can be seen as ex gratia, the insurer reserving its rights. This expression of the matter conforms with how Jacobs JA (with whom Mason JA (as the Chief Justice then was) and Manning JA agreed) expressed the matter in Sydney Turf Club v Crowley [1971] 1 NSWLR 724 at 730: If an insured claimed to be indemnified by one insurer and that insurer disclaims liability, but honestly and by way of ex gratia payment with reservation of his rights pays the amount of the claim, then he is entitled to be subrogated to the rights of the insured against the real insurer. King was cited for this proposition, but arguably the expression of the matter is a principled extension or practical application of Lord Hobhouse's expression of the matter on the facts in King. In any event, it has been applied: ICI Australia Operations Pty Ltd v Workcover Authority of New South Wales [2004] NSWCA 55; 60 NSWLR 18 at 76 [302]-[304] (McColl JA) and 22 [1]-[3] (Mason P agreeing, Meagher JA agreeing generally); Wabbits Pty Limited v Godfrey [2009] NSWSC 1299 at [80]-[88] (Ward J as her Honour then was); and Advanced Arbor Services Pty Limited v Phung [2009] NSWSC 1331 at [71] (Johnson J). Further, this way of expressing the matter can be seen to conform with the reasons of McLachlin JA in Wellington: Whether the payment was made "with the intention of reducing the loss claimed under the policy" (see [95] above). 105 Disputes are common between insurers and insureds about matters such as whether a policy applies, whether a claim can be refused, what is the proper amount of indemnity for a given casualty, even whether the policy can be avoided or the insurer's position determined on a hypothesis different from the circumstances of the policy's creation (see, for instance, ss 28(3), 29(3) and 29(6) of the Insurance Contracts Act 1984 (Cth)). Often, indeed usually, such disputes will be the subject of compromise and agreement. Sometimes significant legal and other associated costs will be expended by the parties in assessing, formulating and pressing their contentions. It may not be easy to formulate a form of compromise which contains provision for a payment that can fairly be seen to be referable to the policy - whether by admission that payment falls within an obligation to pay, by recognition that there is doubt about the obligation to pay but the parties will compromise their claims by agreeing that there is an obligation to pay, or by agreeing that there is no admission of an obligation to pay but nevertheless payment ex gratia will be made reserving rights as if it did. The above is not exhaustive. The circumstances are countless. Where a payment is made to resolve such a dispute about coverage, the question arises whether any payment or some part of any payment by the insurer engages the doctrine of subrogation. The analysis derived from King and Sydney Turf Club is practical and built on considerations of equity and commercial good sense. 106 The extent to which a payment by the insurer is to be characterised as payment of indemnity under the policy is a matter of financial importance to both insurer and insured. To the extent that the insurer pays under the policy and the insured is indemnified under the policy (the two being equivalent) each has an interest in any recovery action and any proceeds of recovery. 107 The equities of subrogation and of recoupment depend upon substance and not form, and upon the practicalities of application of commercial good sense and right behaviour, including the duty of good faith. The question of the meaning of legal instruments of compromise is important, but may not be comprehensively determinative. 108 From King and Sydney Turf Club, and recognising the purpose of the equity based on the principle of indemnity, the conception of payment under the policy in circumstances where there has been a dispute about coverage can be articulated as follows: Was the payment (and in what amount) made in such circumstances as to lead to the conclusion that the parties to the insurance policy and to the dispute honestly and bona fide treated the payment (whether or not disputed or compromised) as a payment representing a reduction of the loss covered by the policy and so indemnity under the policy, and so negate any proposition that the payment was unrelated to the policy and voluntary or that it was related to some other consideration bargained for that is not capable of characterisation as indemnity under the policy. An obvious example of the latter would be the legal costs of the dispute about coverage; another would be payment for the putting an end to the policy. This articulation conforms with how the Court in Wellington expressed the application of principle to the facts (see [95] above). The payment or some relevant part of it will be treated as representing indemnity under the policy if from the parties' agreement in all the surrounding circumstances it was the mutual intention of the parties to reduce the loss insured against by the policy, whether derived expressly, impliedly or inferentially. 109 King, Sydney Turf Club and Wellington, as well as other cases (mostly) cited by the parties support this approach. 110 In Bupa Australia Pty Ltd v Shaw [2013] VSC 507; (2014) 18 ANZ Insurance Cases 61-989, Almond J distinguished Wellington as concerned with a payment to compromise litigation and not as a payment under the insurance policy. His Honour accepted the expression of the matter by McLachlin JA in Wellington. In Bupa, the Court inferred that the insurer had intended to indemnify the insured, concluding that hospital expenses had been paid plainly under the policy. Later, the insured sued his surgeon for negligence and settled in a way that compromised any right of Bupa in subrogation. Almond J held that Bupa was entitled to equitable compensation equivalent to the sums it paid by way of indemnity under the policy. 111 In Austin v Zurich General Accident and Liability Insurance Co Ltd [1944] 2 All ER 243 at 246, Tucker J (in a judgment described on appeal by MacKinnon LJ as "masterly") likewise applied King to circumstances of the honest satisfaction of a claim made under a policy issued by it even though the insurer did not admit liability. 112 In Brooks v MacDonnell (1835) 1 Y & C Ex 500; 160 ER 204, insurance was effected on goods on board a ship consigned to Buenos Aires. The ship and cargo were captured by the Brazilian Government and condemned for an attempted breach of blockade. Notice of capture was given to underwriters and an offer to abandon made. The underwriters declined to accept the abandonment and offered a sum being 35% of the sum insured on condition of cancellation of the policy. This was accepted by the insured. Years later under a convention between Great Britain and Brazil the goods were restored and compensation was made. The underwriters made a claim to part or all of the compensation. In rejecting the claim by underwriters, the Lord Chief Baron (Abinger B) characterised the compromise as a payment to purchase an exoneration from all further liability in respect of loss under the policy, stating at 1 Y & C Ex 517; 160 ER 211: It is quite clear that neither party contemplated the settling of a total loss. I must consider that they intended to effect an arrangement by which the underwriters, representing to the assured that there was fair ground for expecting that their goods would ultimately be returned, though some loss might be incurred by the delay in the sale, said take 351. per cent. from us, and absolve us from all further claims; and we, on the other hand, will in like manner release you from all further demands. I so interpret the contract; and it appears to me that no other reasonable construction can be put upon it consistently with the conduct of the parties. How can I possibly assume that the assured would be so absurd as to give up 1001. per cent, for 351. per cent., when the full demand was not in any jeopardy? Or that the underwriters would be absolved from a loss total or partial, without paying some consideration for it? I consider that the underwriters in effect said, we consider this as a partial, and not a total loss. If you will also treat it as such, and will discharge us from all future liability, by putting an end to the policy, we will give you a liberal compensation. 113 Importantly, Abinger B considered the correct approach to be the construction or characterisation of the compromise bargain against all the circumstances. 114 In Qureshi (Guardian ad litem of) v Nickerson [1991] BCJ No 624; 77 DLR(4th) 1, the British Columbia Court of Appeal applied Wellington and John Edwards in rejecting a proposition that a payment was made pursuant to a contract of indemnity in circumstances where no contract existed, there being only a payment pursuant to gratuitous discretion. 115 In Insurance Corp of British Columbia v Teck Metals Ltd [2020] BCJ No 295, WP Riley J applied Wellington and King and formulated the matter (at [38]) as requiring evidence that payment or assumption of liability was made "with a bona fide intention of covering the insured's loss under a valid insurance contract". That expression of the matter can be accepted. In the settling of a disputed claim where the parties do not expressly address the matter in a settlement document, that evidence may be taken from all the surrounding circumstances that may reveal inferentially or impliedly the mutual intention of the parties. 116 Here, there is no doubt that Vero was seeking to end the whole litigation. But there is equally little doubt that the whole of the payment of $425,000 was paid for all the claims made and the whole dispute. The parties did not attribute any part of the sum to costs; nor did the parties attribute any part of the moneys to payment, whether as ex gratia or as disputed, under the policy. That said, unlike Wellington, it cannot be said that the deed stated that the payment was not being made under the policy but rather "to bring an early end to the legal proceeding and as a public relations gesture". Nor was liability denied completely. The engagement of the policy was admitted. The dispute was as to extent of response. The policy was maintained and not cancelled (as in Brooks v MacDonnell). Subrogation rights were maintained, and possible future litigation against the carrier recognised. The deed was expressed to be one of "Release". Full relevant releases were given, as one would expect. Its purpose was to settle the "Dispute": recital J, which was the dispute as to Vero's liability for the Insurance Claim and Vero's liability in the proceeding except to the extent of the Euro 127,500 payment. The deed must, however, be understood in its context. A difficult dispute had taken considerable time and money. The parties' positions had been set out in the mediation papers. An offer of compromise had been made in August 2016 referable directly to indemnity for damage to the goods. TS' costs were (as now agreed) $277,260.16 up to the date of the deed of settlement. The claim that had been made at the mediation was for $180,000 costs (as two thirds of what was said to be accrued as at 28 February 2017). The balance of the claims by TS were under the policy, though disputed. Pre-judgment interest was claimed; but that can be seen as inextricably tied to claims under the policy. 117 The proper approach to the problem is to ascertain whether it can be concluded that the payment (or any part of it) can be seen as treated by the parties as a payment representing an indemnity under the policy as a bona fide compromise of a claim under the policy, liability for which was denied beyond the earlier payment of Euro 127,500. 118 The parties did not express themselves in that way. But they did not say that it was not, or that no part of it was, paid for indemnity. It is the surrounding circumstances that can assist in the inference or implication of mutual intention. Can it be concluded that some part of the payment could only sensibly and conformably with the parties' behaviour be seen to be mutually treated as, and so be characterised as, a payment representing an indemnity under the policy for disputed, but accepted in compromise, sums claimed? 119 The insurer submitted that one should look to the mediation claim by TS (see [28] above) and from that conclude that about 25% of the $736,000 claim was $180,000 in costs. Thus, it was submitted the $425,000 should be viewed as divisible as 25% as to costs and 75% as to indemnity under the policy. 120 TS submitted that the proper characterisation was a payment not under the policy but to obtain extrication from litigation and a release from all claims on the foundation of a plain denial of liability under the policy beyond Euro 127,500. TS also submitted that where the parties had reduced to writing what they wished to say about the nature of the payments, it was not for the Court to rummage through the evidence of the claims made and communications made in attempts to settle. 121 Vero urged what they saw as a commercial common sense in allowing parties to agree upon settlement without the additional impediment of negotiating the cost and revenue sharing of a subrogated recovery action. 122 I reject TS' submission that Vero should be left with the consequences of the deed and that recital I, cl 2(a) and the limited scope of cl 3 and cl 11 meant that no part of the $425,000 can be characterised as payment under the policy in the relevant sense to invoke the indemnity principle and the equity of subrogation and of recoupment. The deed is silent on the question; but that silence does not provide the answer to the question. The task is the ascertainment of the mutually inferred or implied intention as to the treatment of the payment of the $425,000 for the purposes of the engagement of the equity based on indemnification. Whilst I accept Ms Kong's evidence which is consistent with all other available and evident circumstances that Vero's payment was made in good faith, I reject the submission that in the context of the settlement of this dispute it was for Vero alone to nominate by some process of appropriation the character of the payment. In any event it did not do so. The parties' expression of the matter can be accepted as important; but they were silent on the question. They each had a bona fide position in the dispute. Vero could have nominated a break up of what it was paying, but TS would have been required to agree to it. What percentage of an otherwise satisfactory sum to resolve the dispute was referable to the costs of their dispute and what was referable to a (compromise) payment of indemnity was a matter of financial significance to both parties: as the debate in this case reveals. 123 A variation of the figures reveals the problem more starkly. If TS had spent $200,000 in costs; if its claim for damage had been $200,000 under the policy; if Vero denied any further liability under the policy but had been willing to pay $100,000 to settle the case; and if no provision of the deed provided for any allocation for payment of a claim under the policy, albeit disputed, without more it would simply not be possible to say that Vero had paid (a compromised sum) as an indemnity for the loss under the policy. 124 If an insurer in Vero's position wishes to protect its position and take the benefit of any future recovery action it has to pay under the policy in the sense discussed in King and Sydney Turf Club, as discussed above. Its compromise must reveal that it is paying (albeit under dispute and reserving its position) some sum by way of reduction of the loss insured under the policy. Vero seems to have thought that it did so by cl 3. I do not agree. In the light of that conclusion and the fact that TS' costs were (and were known to be) considerably below the sum paid, the only sum which can be concluded objectively as inferentially or impliedly paid representing an indemnity, and referable to the claims, under the policy was that above TS' actual costs. I do not consider it appropriate to make some proportional scaling back to party/party costs as appeared in the mediation papers. It is not a process of imputation based on a consistent approach to the earlier negotiations in the mediation. Apart from any other reason, I cannot conclude that the evidence discloses all those negotiations that might permit an inference of that kind. The task is to characterise the $425,000 paid under the deed by reference to what must be inferred or implied to be necessarily mutually intended to be a payment for indemnity. The parties made no allocation or division in the deed. As a matter of inference or implication to inform the existence of an equity based on indemnification, it can be seen as indemnification to the extent that it cannot possibly be referable to the costs of the proceeding. 125 Such characterisation by inference or implication of mutual intention would need to recognise that there were three claims under or referable to the policy: the damage claim, the pre-judgment interest on the damage claim, and the storage claim. (The mediation papers do not appear to make a claim for pre-judgment interest on the storage claim.) 126 Both in relation to the storage charges and the legal costs, the amounts incurred by TS as at the time the $425,000 payment was made and the deed of release executed are somewhat confused and opaque. In late February 2017, the storage charges which had not been indemnified by Vero were said in TS' mediation paper to amount to $33,113.07. The statement of agreed facts filed in this proceeding states that, at the time of settlement (1 June 2017), the unindemnified storage charges incurred by TS up to 28 February 2017 amounted to $30,969.42. To confuse matters further, TS' draft cost sharing agreement stated that at the time of settlement there were $33,923.81 in outstanding storage charges, which had been incurred up to 28 February 2017. In relation to legal costs, TS' mediation paper stated that its legal costs incurred to date were $240,000, while the statement of agreed facts states that TS had incurred legal costs of $277,260.16 up to the date of settlement. The three-month gap between the date of the mediation paper (28 February 2017) and date of settlement (1 June 2017) may explain this discrepancy in legal costs. For consistency and clarity, I propose to use the figures agreed by the parties for the purpose of this proceeding to have been incurred by TS as at the date of settlement when the $425,000 payment was made. 127 The sum of $147,739.84 ($425,000 - $277,260.16) can be seen to be payment for claims under or referable to the policy, other than costs. I reject any submission that the costs should now be assessed in some way. The parties have agreed them for the purposes of this case. At the mediation TS asserted the sum to be in a figure consistent with the present agreement (to the extent that $37,260.16 could have been incurred by TS between 28 February 2017 and 1 June 2017). Also, it is not a question of what the Court would have ordered if the case had proceeded and TS had won; it is a question of discerning the mutual intention of the parties at the time the payment was made in circumstances where the parties have failed to be explicit about the character of the moneys paid to settle the case. 128 Vero submitted that cl 2(c) deals exhaustively with storage costs and none of the $425,000 can be seen as referable to storage costs. TS submitted that cl 2(c) deals with the position of storage costs after 28 February 2017 and cl 2(a) deals with the storage claim which had been valued at $33,113.07 in the mediation (now agreed to be $30,969.42 at the date of settlement). I accept TS' submission in this regard. 129 If the process of ascertainment of mutual intention by inference or implication is to eliminate from the payment of $425,000 such extant claims as could not possibly be referable to the damage to the goods and pre-judgment interest therefor (both of which were recovered from the carrier) it is necessary to deduct from $147,739.84 the storage claim agreed by the parties to amount to $30,969.42 as at the date of settlement, leaving a sum of $116,770.06 as the part of the sum of $425,000 inferentially or implicitly necessarily paid as indemnity by way of compromised claims for damage to the cargo, and interest thereon. No greater sum can be concluded to be the mutual intention of the parties, in the absence of words of appropriation in the deed or other facts leading to a different compelling inference or implication. I reject the proposition of Vero that, in this process and at this stage, I should limit or deny any deduction for the storage claim by some evaluation of the worth of the suing and labouring claim to this extent. The claim was there; it was bona fide. I am not asked to decide the extent of the valid invocation of the suing and labouring clause. The only task available to the Court is to assess what can necessarily be seen to be the mutual intention of the parties as to the funds or part thereof. 130 Whilst I am not asked to decide who was correct in the earlier dispute, I was asked by Vero to characterise part or all of the $425,000 as a bona fide payment under the policy in the sense described by Jacobs JA in Sydney Turf Club. Without any clause addressed to such topic and construing cl 3 as I do, the only sum that can be seen in the circumstances to be a disputed payment in the nature of indemnity under the policy for damage to the goods and interest thereon is that which cannot be seen as referable to costs or the storage claim. 131 This conclusion is not reached by a process of appropriation to amounts or debts as was done by TS in its correspondence (see [43] above) or in support of the alternative claim. Appropriation is not a relevant concept. The deed provided for full release of all claims. The question is: From the terms of the deed of release, set against the facts in which it was entered, and for the purposes of the arising of an equity from the policy and from payment, whether it can be said that any part, and if so what part, can be characterised as a mutually intended (expressly, inferentially or impliedly) payment representing indemnity referable to paying a (disputed) further amount for damage to goods and interest thereon, being claims for which TS was fully indemnified by the carrier. 132 In my view that sum is $116,770.06. If I am wrong about cl 3 the sum is $425,000 less $30,969.42, being $394,030.58. 133 I am fortified in my conclusion that at least the sum of $116,770.06 was mutually intended as a payment for damage to the goods by TS' approach to the possible cost sharing agreement. Its conduct manifested a recognition by way of admission that at least such sum was recognised as an indemnity under the policy. As later conduct it cannot assist in the construction of the deed; but it is conduct which can assist in supporting by later admission a conclusion as to earlier inferred or implied intention. 134 The sum of $116,770.06is to be added to $200,000 (representing the Euro 127,500 payment) for the total sum in respect of which Vero has a right of recoupment from the sums obtained from the carrier. On this basis Vero is entitled to 59% of $863,758.70 up to, but no more than, $316,770.06, together with its proportionate share of the interest on the trust account that is payable to the parties. TS is entitled to the balance. Vero submitted that the percentages should be 65% and 35%, being reached by using the CIF value of the goods as the denominator in the calculation, rather than the CIF value plus 10%. Reliance was placed on s 87 and s 22(c) of the Marine Insurance Act and the reference to "insurable value" in s 87 and the definition of the phrase in s 22(c) as the "prime cost of the property insured," plus freight and insurance. TS pointed out in response that the measures of "insurable value" in s 22 were "subject to any express provision or valuation in the policy" and that here the policy expressly defined "Basis of Valuation" as "CIF value plus 10%". Given the sums involved, it is a debate that is unnecessary to resolve. That said, there is force in the submission of TS. 135 If I am wrong in my refusal to conclude that Wellington or the proper construction of the deed of release is or are a complete answer to Vero's claimed interest, Vero is entitled to 59% of $863,758.70 up to, but no more than, $200,000 plus the relevant proportion of interest. 136 An insurer who wishes to maintain rights of subrogation or recoupment to sums paid to settle or compromise a dispute about coverage should identify what is paid by way of compromise or indemnity under the policy, even if disputed and in that sense ex gratia or compromised, and subject to reservation of rights. If this requires agreement with the insured, as a matter of mutual commercial interest, so be it. If no clarity is given to the matter, an insurer cannot expect guesswork or surrogate ex post facto negotiation for its benefit. If, as here, there can be identified a minimum position that cannot be referable to any contemporaneous claim other than the equivalent of a disputed, but compromised, payment under the policy such should be appropriately characterised as referable to the necessary inferred or implied mutual intention as I have sought to do, if the circumstances and surrounding documents otherwise permit. But guesswork, supposition and hypothesis about a negotiation that was never undertaken by the parties to the deed, which deed did not deal with the matter, is not a foundation for ascertainment of rights in equity. 137 I do not consider it necessary to analyse in any detail the approach to subrogation in the speeches of Lord Templeman, Lord Goff of Chieveley, Lord Jauncey of Tullichettle and Lord Browne-Wilkinson in Napier v Hunter [1993] AC 713. There the substantial recoveries that were made against the defaulting and negligent syndicate manager were to be held in equity, with an equitable lien, in favour of the stop loss reinsurers from the highest to the lowest before the reinsured was entitled to participate. This layered (top-down) approach whereby each higher layer was successively fully recouped before a lower stop loss reinsurer or the reinsured participated properly reflected the nature and structure of the insurance programme: a stop loss programme where the first stop loss reinsurer and thereafter each higher stop loss reinsurer only became engaged upon the full and exhaustive response of the lower layer. The approach could be seen to be quite different to treaty reinsurance or (here) to the operation of s 87 where parties can be seen as proportional co-reinsurers or co-insurers. It is unnecessary to discuss how a substantial and material excess in primary insurance would be treated. Here the excess was de minimis ($250). 138 There is no suggestion that Vero or TS could or should be looked at as a stop loss insurer even taking account of s 87. Vero accepted the risk for certain marine casualties. The insured was under insured. Section 87 makes the insured a self-insurer for the uninsured balance. That does not transform that uninsured balance into a position of subordination to the indemnity provided by Vero, as if Vero was a stop loss insurer, or vice versa. 139 The resolution of the dispute is to be reached by understanding the nature of the payment of $425,000. It is not a case where the unilateral intention of the insurer is determinative as it might be in other circumstances, such as early in the claims handling process. The parties were in serious dispute; they settled their dispute; they provided for certain aspects of their mutual position by a settlement document. The document was silent on the characterisation of the moneys. What the settlement moneys were for, or more relevantly, whether such moneys (or any part of them) could be viewed as a reduction of the insured loss was a matter of bona fide mutual intention. Once the insured was fully recovered from the carrier for the whole insured loss, the insurer was entitled to recoup from that full recovery the moneys it had paid in reduction of the loss by way of indemnity. The $200,000 (Euro 127,500) was clearly such a payment, and accepted as such; the $425,000 could only be said to be such, in all the circumstances here, by ascertaining what could only be a payment in reduction of the loss by way of indemnity. The insurer is entitled to recoupment in this regard. 140 The outcome does not necessarily lead to an over-indemnification of TS as insured as was argued by Vero. Such a conclusion assumes (contrary to my conclusion) that all of the $425,000 can or should be viewed as an indemnity for the loss for which recovery was achieved. No attempt was made by anyone to account in detail for all TS' costs, expenses and recoveries in connection with the export and damage of the goods and the aftermath of storage, the dispute and the recoveries. That is, the case was not approached on an overall and comprehensive basis of calculating what TS' position was. A late attempt was made by TS to show this but I rejected an affidavit of Mr Marks from TS which sought to show this in a global fashion. The parties approached the matter in the structuring of the case and issues for trial as a question of the proper characterisation or identification of the $425,000 payment. That is how I have approached its resolution. 141 I wish to express the Court's gratitude for the care taken in and quality of the assistance given by counsel and instructing solicitors. 142 I will hear the parties on the form of appropriate declarations and costs. I certify that the preceding one hundred and forty-two (142) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Chief Justice Allsop.

Technology Swiss Pty Ltd v AAI Limited trading as Vero Insurance

At a glance

Court

Decision date

Before

Source

Judgment (12 paragraphs)

Parties

Legislation Cited (3)

Cases Cited (7)

Cited By (3)