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[1998] NTSC 73
Supreme Court of the NT
1998-05-01
Wales Cole J, Mildren J
Original judgment source is linked above.
Contract - Insurance - terms of policy - interpretation of contractual provisions - when indemnity became payable - should court apply contra proferentum rule
Contract - Insurance - interpretation contractual provisions - breach contractual provisions - damages for breach
Contract - Insurance - denial of liability - condition precedent - onus of proof
Contract - Insurance - Interest on damages and payment under liability
2.5.9 The Base Figure before Calculating Trends etc 32-33
2.5.12 The Amount of the Plaintiff's Standard Income 43
2.7 Any Sums saved during the Indemnity Period 44-46
3. Alleged Breaches of Good Faith and of Contract by the Plaintiff 75-84
3.4 Did the Plaintiff Breach the Contractual Provisions? 79-84
5. Additional Increased Costs of Working 85-91
5.6 Summary of Claim for Additional Increased Costs of Working 91
6. The Agreement to pay Gittus and Willis's Account 92-96
7. The Plaintiff's Claim for Damages for Breach of Contract 96-115
7.5 What is a Reasonable Time to Pay the Indemnity? 104-112
8. Interest Pursuant to s84 of the Supreme Court Act 115
This claim is brought against the defendant insurer for monies due and payable under the terms of a policy of insurance issued by the defendant in favour of the plaintiff, for monies due under an alleged agreement made between the parties to pay certain loss adjustors' fees in certain circumstances which the plaintiff contends in fact occurred, for damages for breach of contract, and for interest.
The plaintiff is a member of the Tropicus group of companies, which also included Tropicus Holdings Pty Ltd, and Gardeners World Pty Ltd, which traded as "Blossom Shops." The directors of the companies are Dennis Arthur Hearne (Mr Hearne) and his mother, Lorna Hearne (Mrs Hearne). Mr Hearne is a horticulturalist with a diploma as a science technician from Waite Agriculturists Research Institute and the University of Adelaide, and in genetics from Perth Technical College. In 1981 he was awarded a Nuffield scholarship and spent 9 months in the United States of America and in Europe studying plant tissue culture. He has worked in this field in Holland and Japan. He is the author and co-author of published books relating to plants and horticulture, and has been widely published in a number of journals and periodicals. He has been employed as a consultant on horticultural projects in a number of overseas countries. Mr Hearne has extensive experience in the culture of orchids, has held positions such as President of the Orchid Society of the Northern Territory and President of the Australian Chapter of the International Plant Propagators Association and has been a lecturer or key speaker at various orchid and horticultural conferences particularly in Holland and Thailand. Without dwelling on Mr Hearne's credentials and accomplishments, suffice it to say that I accept that he is an expert in the propagation and farming of orchid plants and flowers, and this expertise extends to the propagation of orchid plants by plant tissue culture, as well as by more conventional means.
In 1972 Mr Hearne purchased a nursery property at Coconut Grove, a suburb of Darwin, from a Mr and Mrs Hockley. He continued the nursery business as Dennis Hearne, trading as Tropicus Nursery. The nursery business originally did not specialise. From about 1980 onwards Mr Hearne had been involved in obtaining, propagating and breeding orchid plants and flowers from imported stock. At some stage, possibly at the time the property was acquired from the Hockleys, the title to the land was vested in Tropicus Holdings Pty Ltd. That company did not trade apart from owning the land and fixtures.
Prior to 1992 and thereafter, Gardeners World Pty Ltd operated two retail shops which sold cut flowers. These shops appear to have been managed largely by Mrs Hearne who held a 40% interest in the shareholding of that company.
In 1989, Mr Hearne went into a "partnership" with a Mr Foster under the style of "Majestic Orchids", an orchid cut flower farm. According to Mr Hearne, his main contribution to the "partnership" consisted of orchid stock, and presumably his expertise. For reasons not made known to me, the business arrangements between Mr Hearne and Mr Foster came to an end in late 1990 or early 1991. Mr Hearne brought back with him a "small amount of stock" and decided to start afresh concentrating on orchid cut flower production. His aim was to develop orchid stock (primarily dendrobiums) which would produce earlier than usual, which would flower more regularly throughout the year, which eliminated mutations which would have required culling, and which produced spikes at an enhanced rate. In 1991 the plaintiff was incorporated and took over the nursery business formerly owned by Mr Hearne. It was through this vehicle that Mr Hearne, as its managing director and chief horticulturist, pursued these aims. Mr Hearne expected that he would be able to produce cut flowers which would be attractive to the whole Australian market because he could provide supply throughout the year and not just at peak flowering periods, and because his flowers, which would be equal to the best, would last longer than imported flowers, because it was not necessary, as with imported flowers, to treat them with ethyl bromide, which reduced the vase life of the flowers. According to Mr Hearne, his research since 1980 with orchid propagation enabled him to achieve these results by 1991.
Between approximately October 1991 and October 1992, the plaintiff employed a Mr Lindsay Gray as a bookkeeper, to attend to administrative office work, and to liaise with the plaintiff's accountants and bankers. In December 1991, at the request of Mr Gray, Mr Nathan Rose, an accountant with a Melbourne firm called Rose and Associates Pty Ltd, met Mr Hearne with a view to looking over the plaintiff's operations. After visiting the plaintiff's premises and having discussions with Mr Hearne over a period of two to three days, Mr Rose was asked to take over from the Tropicus group's former accountants. According to Mr Rose, his particular expertise is in management accounting, which involves assisting his clients in the running of their businesses by maintaining constant contact and by providing appropriate bookkeeping and accounting systems, budgets and the like. One of the duties undertaken by Rose and Associates was the preparation of sales projections and cash flow projections for the plaintiff for various periods in 1992 to 1994 (see Exts. D4 and D11), a topic to which I will return later.
In 1993 the defendant issued a "Commercial Business Insurance Package," a policy of insurance, designed broadly to cover business losses caused by a variety of risks, in which the insured is described as Tropicus Holdings Pty Ltd, Gardeners World Pty Ltd trading as Blossom Shops, and the plaintiff company. The period of the cover was from 23/3/93 to 23/3/94. The policy (Ext. P19), which is the subject of this litigation, provided cover inter alia for what might be briefly described as "malicious damage to property" and consequential losses caused by interruption or interference with the "Business" following upon damage by any peril insured under certain other sections of the policy (including "malicious damage to property" [the "business interruption cover"]). A number of the issues in this case turn on the true meaning to be given to the policy wording. Counsel for the plaintiff, Mr Riley Q.C., submitted that a number of the provisions of the policy were ambiguous, and, accordingly, that the contra proferentum rule applied. In support of that submission, he sought to lead evidence designed to show that the policy was the defendant's, notwithstanding that the document itself states that it is "specifically designed for the clients of North Australian Insurance Brokers," who acted for the plaintiff. Mr Barr, counsel for the defendant, submitted that this evidence was inadmissible, as inter alia, the policy wording was not ambiguous, and no facts were pleaded to suggest it was, or that the defendant was the proffering party. I heard evidence on this issue from Mr James Taylor, a former principal of North Australian Insurance Brokers, de bene esse and will rule upon its admissibility later, if necessary.
According to Mr Hearne, in early 1993 he had mentioned to his then solicitor, Mr Neil Philip and Mr Philip's partner, Mr Nick Mitaros, that having sent some samples of flowers to Japan, he had received indications from two Japanese firms that they would be interested in importing a large number of flowers from the plaintiff if they were of the same quality as the sample. Mr Hearne told Messrs. Philip and Mitaros that he did not have the resources to expand the plaintiff's business to meet the potential of this market and that he was looking for a joint venturer or equity partner. Messrs. Philip and Mitaros indicated their personal interest and later introduced to Mr Hearne Mr Mitaros' uncle, a Mr Peter Kailis, who was also interested. A meeting of the interested parties was held on 26 May 1993, the minutes of which were tendered as Ext. P21. The minutes record a proposed "joint venture," the capital partners of which were to be Tropicus Holdings Pty Ltd (60%), Kailis Consolidated Pty Ltd (20%) and Messrs Philip and Mr Mitaros (20%). Mr Hearne said in evidence that the shareholding was to be held by the plaintiff and not by Tropicus Holdings Pty Ltd. According to the minutes, the basis of the arrangement was that a new company, Hearne's Floraculture Pty Ltd, would be formed with a fully paid up share capital of 1,000 $1 shares to be issued in the above proportions to the proposed shareholders. Various loans would be made by the shareholders to the company. Tropicus Holdings Pty Ltd would sell certain orchid plants, a shade house, benches, and ancillary equipment to Hearne's Floraculture, and a sublease of portion of Tropicus Holdings' land (as well as certain adjoining land to be acquired) would be granted to Hearne's Floraculture. The minutes also envisaged the employment of an administrative general manager. Certain budgets (including a sales and profit and loss budget (Ext. P22)) were approved. The joint venture was to commence on 1 October 1993. It would appear that Hearne's Floraculture Pty Ltd would not be purchasing the whole of the plaintiff's operations, and that certain parts of Tropicus Holdings' land upon which there was a second shade house, as well as a laboratory, were to be excluded. The minutes did not detail, except in a broad-brush way, the precise arrangements needed to be made between the parties for the "joint venture" to become reality. Nevertheless, Hearne's Floraculture Pty Ltd became incorporated sometime later in 1993, a bank account was established and some monies were deposited therein to build a shade house and attend to other minor works. Apart from employing a Mr Lugg, to whom I will refer later, the "joint venture" did not otherwise proceed, for reasons which will become obvious shortly.
On about 3 June 1993 a person or persons unknown put a quantity of a herbicide known as "Solicam" into a drum of fertiliser known as "Bugmaster" used for the spraying of orchids and other plants forming the plaintiff's stock. Consequently, the herbicide came to be sprayed onto the nursery plants. It is alleged in the statement of claim that some 30,000 dendrobium orchids were poisoned, and that the act or acts of the person or persons unknown caused the plaintiff to suffer malicious damage within the meaning of the policy. Mr Hearne called in the police who took samples for forensic testing, and as well, the plaintiff sent samples away for testing. These latter tests established (some weeks later) that the contaminant was Solicam. Mr Hearne also reported the matter promptly to North Australian Insurance Brokers which advised the defendant. The defendant in turn engaged assessors, Robins MBS Australia Pty Ltd to investigate the loss. Prior to isolating the cause of the contaminant, the plaintiff sought to save as many of the plants as possible by heavy watering. After the contaminant was identified, Mr Hearne sought advice from the senior herbicide adviser of the Australian distributors of Solicam who advised increasing the heat and humidity available to the plants, and flushing out the base of the plants by the frequent application of water.
Mr Hearne said that some plants died almost immediately. They were removed; unfortunately no records were initially kept of how many plants were destroyed until the plaintiff was alerted to the need to keep these records by the defendant's assessors. Thereafter counts were made which, for a time, were checked by the assessors, whilst the plaintiff attempted to mitigate his loss. Mr Hearne said that he believed then that he had the skills needed to minimise the damage and he and a number of his staff concentrated their efforts in that direction. He said that, initially there were signs which appeared to indicate that their efforts were succeeding, and some varieties of the canes produced saleable flowers; but after a few months, the plants became to show more and more symptoms. Mr Hearne sought further advice from the distributors of Solicam who suggested the frequent application of low levels of fertiliser; he also tried a number of other solutions, but none were effective, and over a period of about two years the whole stock was destroyed. Initially Mr Hearne personally attended to discussions he had with the defendant's assessors about the claim, but he said that ultimately he delegated that responsibility to Mr Nick Lugg.
Mr Lugg was initially approached to be the Administrative General Manager for Hearne's Floraculture Pty Ltd in June 1993, and ultimately accepted that employment on 19 October 1993. He was already aware, of course, of the problems facing the plaintiff, as were the other joint venture partners, if I may so call the other shareholders and directors of Hearne's Floraculture, which paid his wages. He was immediately seconded to the plaintiff, to enable the plaintiff to bring the plants to be sold to Hearne's Floraculture to a stage where this could be done. He confirmed that he took over responsibility for the plaintiff's insurance claim. I should add that it does not appear to be disputed that the plaintiff undertook to reimburse Hearne's Floraculture for his services.
It is not necessary at this stage to record in detail Mr Lugg's dealings with the defendant and its assessors. Suffice it to say that the defendant did not initially admit liability to the plaintiff either for the malicious damage claim or the business interruption claim. Indeed at one stage the defendant indicated that liability under the policy would be denied, but shortly thereafter the defendant admitted liability, according to the evidence of Mr Taylor. In any event the malicious damage claim was eventually settled in early 1994 and payment made to the plaintiff. So far as this case is concerned, the claim under the policy relates only to the business interruption claim.
I do not intend at this stage to detail the extensive history of that claim, although it will be necessary to consider it later. It is sufficient to note at this stage that both parties engaged various experts to assist in the resolution of the business interruption claim, that on twenty-four April 1994 the defendant made an interim payment of $20,000 to the plaintiff on a "without prejudice" basis, that in early July 1994 the defendant made a further payment of $20,000 to the plaintiff "as a sign of good faith" and also on a "without prejudice" basis, and that, the claim not having been resolved, the plaintiff commenced these proceedings against the defendant by writ filed on 11 October 1994.
For most of the hearing I understood the defendant's position to be that it did not dispute that the plaintiff was entitled to some payment under the business interruption section of the policy, and the issue so far as that was concerned was only one of the quantum; but that the defendant otherwise denied liability for the plaintiffs' other claims. At a late stage of this trial, I permitted the defendant to further amend its defence to raise a new defence, the effect of which was that the defendant asserted for the first time alleged breaches of the plaintiff's common law duty to act in the utmost good faith, and alleged breaches of certain express terms of the policy. Mr Barr, counsel for the defendant, did not initially suggest that this new defence would be a complete answer to the claim. He said, (Tr. pp951-2):
The amendments which the defendant seeks to introduce by the fifth amended defence relate to the failure on the part of the plaintiff to provide [certain documents] and, your Honour, the effect of those amendments, if allowed, would be to postpone the defendant's liability to make payment by way of indemnity and the consequent effect would be to cancel any liability for damages and interest up to at least the date of trial.
... it's pleaded in paragraph 25 of the proposed draft that the defendant's liability to make payment to the plaintiff by way of indemnity has not arisen or, alternatively, has only arisen from the time of disclosure of the documents previously withheld.
Significantly, your Honour, the defendant is not seeking to void the insurance or to avoid in the legal sense its liability to indemnify, but will in fact be arguing, if these amendments are permitted, that time for performance by it hasn't arisen or, alternatively, arose once the documents were to hand or within a reasonable time after that.
At this stage, the plaintiff had already closed its case, and the defendant was well into its case. Mr Barr indicated that the fresh grounds of defence were based on evidence already before me, (albeit that I had received that evidence for another purpose) and that he did not propose to call further evidence on the issue, unless the plaintiff indicated that it wished to do so, in which case he would reconsider his position. Mr Riley Q.C. opposed the application on a number of bases, one of which was that there was no evidentiary basis to support the defendant's contentions, and that a number of witnesses who were in the defendant's camp, so to speak, and could have been called on these issues, were not to be called. In response Mr Barr said: (Tr. p974)
... its my submission that there is very cogent evidence on which your Honour can make that finding ...
At no stage was it pointed out by Mr Barr that the amendments, if allowed, raised a condition precedent to the defendant's liability which cast the onus of proof upon the plaintiff, a matter neither I nor Mr Riley Q.C. appreciated: see Kodak (Australasia) Pty Ltd v Retail Traders Mutual Indemnity Insurance Association [1942] NSWStRp 19; (1942) 42 SR NSW 231 at 234, 236 et seq., per Jordan CJ; Toikan International Insurance Broking Pty Ltd v Plasteel Windows Australia Pty Ltd and Another: Plasteel Windows Australia Pty Ltd and Another v Sun Alliance Insurance Ltd and Another (1988) 15 NSWLR 641 at 648; Verna Trading Pty. Ltd. v New India Insurance Co. Ltd. [1991] 1VR 129 at 148, per Kaye J; Body Corporate Strata Plan No. 4303 v Albion Insurance Company Ltd. [1982] VicRp 70; (1982) VR 699, per Kaye J. Not being aware that the provisions of the policy being relied upon as having been allegedly breached were of a kind the performance of which by the plaintiff were conditions precedent to the defendant's liability, and that the burden of proof of compliance with those conditions rested with the plaintiff, I considered that there would be no injustice to the plaintiff (perhaps save as to costs) to permit the defendant to amend at such a late stage in the trial (see Tr. pps 975-976). Subsequently, when in final submissions, the true effect of the amendments became apparent to me and to Mr Riley Q.C., I heard further submissions on whether the amendments should be allowed to stand, or whether the trial should be adjourned to enable the plaintiff to call further evidence. Ultimately the parties reached agreement that amendments would be permitted to stand, that the legal onus of proof of non-compliance with the conditions etc would rest upon the defendant, and that the evidence upon which the defendant sought to rely and which had previously been admitted only for other purposes could be used for this purpose as well: see Tr. p 1105. As the approach to be adopted is by consent of the parties as the result of an agreement reached between them in the circumstances briefly outlined above, I will approach the resolution of the new issues raised by the Fifth Amended Defence accordingly.
2. Construction of the Policy - the amount of the indemnity
By its terms, the policy (Ext. P19) consists of the policy document which includes a schedule to the policy, and the written proposal is deemed to be incorporated therein. The written proposal was not tendered by either party: I assume therefore it has no relevance.
In the schedule to the policy, the "insured" is described as being "Tropicus Holdings Pty Ltd, Gardeners World Pty Ltd T/as Blossom Shops, Tropicus Orchids Flowers and Foliage."
The schedule sets out, under the heading "Particulars of Insurance" the following:
Under the hearing "Risk Insured" in the schedule appears
Section 6 of the Policy, under the heading "Business Interruption Policy" relevantly provides as follows:
Consequential loss as a result of interruption of or interference with the Business described on the Schedule following upon Damage as defined below.
less any sum saved during the Indemnity Period in respect of any expenses of the Business payable out of Insured Gross Income which cease or are reduced in consequence of the Damage.
provided that if the Sum Insured on Insured Gross Income is less than the Annual Income, the amount payable shall be proportionally reduced.
Provided the Business be conducted in departments the independent trading results of which are ascertainable the provisions of Clauses (a) and (b) of Item No. 1 shall apply separately to each department affected by Damage except that if the sum insured for any item is less than the aggregate of the sums produced by applying the Insured Gross Income for each department of the Business (whether affected by an event referred to in this Policy or not) to the relevant Annual Income thereof, the amount payable shall be proportionately reduced.
Except as hereby varied the terms and Conditions of this Policy shall apply."
The Policy provides the following definitions at p22:
DEFINITIONS (applicable to Part A and Part B of this Section)
'Damage' - Loss or damage by any peril insured under sections 1, 2 & 4 of this Policy or by explosion of any boiler or economiser on the Premises to property insured under this Policy for which liability is admitted.
'Insured Gross Income' - The money paid or payable to the Insured for goods sold, rent and/or for services rendered in the course of the Business less the items specified in the schedule as being uninsured.
'Standard Income' - The Insured Gross Income during that period corresponding with the Indemnity Period in the twelve months immediately before the date of the Damage, to which adjustment shall be made to reflect the trend in the Business and any other variables in order to arrive at the same result that could have been obtained had the Damage not occurred.
'Annual Income' - The Insured Gross Income during the twelve months immediately before the date of Damage, to which adjustment shall be made to reflect the trend in the Business and any other variables in order to arrive at the same result that would have been obtained had the Damage not occurred.
'Indemnity Period' - The period beginning with the occurrence of the Damage and ending not later than the number of months stated on the Schedule during which the results of the Business shall be affected in consequence of the Damage.
'Business' - Shall mean and be limited to that Business described in the Schedule carried on by the Insured at or from the Premises stated in the Schedule.
'Limit of Indemnity' - Our liability under this Policy in any one Period of Insurance shall not exceed the Sum Insured stated against each item in the Schedule."
2.2 A Summary of the Indemnity under Paragraph 1 for "Loss of Income"
First, the plaintiff must establish "consequential loss as a result of interruption of or interference with the Business described in the Schedule following upon Damage as defined below".
There is no doubt that the plaintiff suffered "Damage" as defined, viz. the malicious damage to its plants, which was insured under Section 1 of the policy, and that liability for that damage has been admitted. It is not in contention that the plaintiff has established "consequential loss as a result of interruption of or interference with the Business described in the Schedule" following upon that "Damage".
Subject to the proviso in Clause 1, and the Department Clause, the plaintiff is prima facie entitled to recover:
Standard Income - Insured Gross Income + Additional Expenditure - Sums Saved (see Clause 1).
It is common ground that the plaintiff company's business is a department of the "Business" as defined in the policy, the independent trading results of which are ascertainable. Accordingly, it is common ground that the department clause applies. Prima facie then, (and subject to the effect of the words in the department clause beginning with "except that ..." to the end of the clause) the Business for the purposes of calculating the amount payable under the indemnity is treated as being that only of the plaintiff, bearing in mind that neither Tropicus Holdings Pty Ltd nor Gardeners World Pty Ltd suffered any loss covered by the policy, as the clause provides "the provisions of Clauses 1(a) and (b) of Item No. 1 shall apply separately to each department affected by Damage."
There is a difference in opinion between the parties as to the meaning and effect to be given to the words "except that ... proportionally reduced" in the department clause. I will return to this later.
As mentioned above, this term is defined. Taking into account the effect of the department clause, the first stage of the calculation is therefore to ascertain "the money paid or payable to the [plaintiff] for goods sold, rent and/or services rendered in the course of the [plaintiff's business] less the items specified in the schedule as being uninsured". As there are no uninsured items, this may be ignored.
The question as to what period of time "Insured Gross Income" relates is answered by Item 1(a) which provides that it is "the Insured Gross Income earned during the Indemnity Period". The definition of "Indemnity Period" produces the result, having regard to the Schedule, and the fact that it was not disputed that the results of the plaintiff's business were affected by the Damage for at least two years in consequence of the damage, of a period of twenty-four months, commencing from 3 June 1993. So far, this is common ground between the parties.
The plaintiff's principle submission is that the plaintiff's "Insured Gross Income" is as follows:
So far, both the plaintiff's and defendant's experts are in agreement: see Exts. P62, Annexure AA1/2 as modified by P63 Annexure AC1/2 and Ext. D19, Appendix 4, and so far as consulting fees are concerned, Mr Cowling's evidence at Tr. 619.
The plaintiff's expert, Mr Cowling, made an adjustment to the above figures which are based on the plaintiff's sales figure shown in the trading and profit and loss accounts for 1993-4 and 1994-5. Because those accounts reflect the period 1/7/93 to 30/6/95, rather than the indemnity period from 3/6/93 to 2/6/95, it was necessary to add in the sales for June 1993 and deduct the sales for June 1995 (see Ext. P62 Annexure AA, par AA 10.2, and Annexure AA 1/2; Ext. P63, Annexure AC1/2). The adjustment amounts to $14,060 as follows:
The defendant's expert, Mr Nourse, did not allow for this adjustment. I consider that Mr Cowling is plainly correct to add a further $14,060.00 to the Insured Gross Income, resulting in a total of $335,170.00.
The defendant's expert, Mr Nourse, added a further sum of $160,000.00 for management fees for 1994-95 which was not allowed for by Mr Cowling (see Ext. D19, Appendices 3 and 4). Mr Riley Q.C. submitted that in practical terms it did not matter whether the figure for management fees is included as part of the Insured Gross Income or not because the figure must be included in "Standard Income" and therefore, when calculating the value of the indemnity, this figure becomes self-cancelling. Nevertheless I consider that Mr Nourse is correct and that management fees paid by Gardener's World Pty Ltd to the plaintiff are part of the plaintiff's Insured Gross Income if the plaintiff is treated as a separate department.
Accordingly, I find that the Insured Gross Income amounts to $495,170.00.
The definition of "Standard Income" requires two stages. The first stage of the definition requires a calculation of "the Insured Gross Income during that period corresponding to the Indemnity period in the twelve months immediately before the date of the damage."
If this means that the Insured Gross Income was limited to the twelve month period prior to the date of the loss, it could produce an absurd result, having regard to the fact that the indemnity period was for two years. It could be unfair to take one year's preloss gross income ("Standard Income") and deduct two years' post loss income; further, if the definition is taken literally, there is no period corresponding to the indemnity period in the twelve months immediately before the Damage because the indemnity period is for twenty-four months and not twelve months.
Some light on this problem is thrown by considering the second stage of the definition, which goes on to provide ... "to which an adjustment shall be made to reflect the trend in the Business and any other variables in order to arrive at the same result that could have been obtained had the damage not occurred." (emphasis added)
The italicised words in the definition indicate that the principle concern of the definition is to arrive at a calculation of what would have been the insured's gross income if the Damage had not occurred, based upon the previous year's trading figures. Although the definition does not specifically say so, the implication is that, when the definition uses the expression "the same result", it is focussing upon the period of the indemnity. This is supported by the requirements of Clause 1(a) which require a calculation of the difference between the Insured Gross Income earned during the indemnity period and the Standard Income. It is inherent that the periods must be the same.
Bearing in mind that the period of the indemnity in the Schedule to the policy is a maximum period and the definition of "Indemnity Period", if the Business had been affected for a period of six months, say, from 3 June 1993 to 3 December 1993, the definition of "Standard Income" would appear to require a calculation based on the Insured Gross Income in the period 3 June 1992 to 3 December 1992 to which the relevant adjustments are made to see what would have been the expected gross income of the insured during the period 3 June 1993 to 3 December 1993 had the Damage not occurred.
If the period of indemnity had been twelve months, the whole previous year's income from 3 June 1992 to 3 December 1993 would form the basis of the calculation. In any case where the period of indemnity is for twelve months or less, no problem arises.
Mr Barr submitted that the definition was drafted principally to ensure that seasonal variations are taken into account, so that, if the indemnity period is six months, a business whose peak is the summer holiday peak at the time the damage occurred is indemnified by reference to the previous corresponding year's trading figures, rather than by reference to trading figures from a quiet time of the year. He submitted that where the indemnity period was twelve months or multiples of twelve months, as here, the need to standardise is removed, and the words "that period corresponding with the Indemnity Period" have no meaning; perhaps he should have said, do not apply.
I consider that the meaning to be given to the expression "that period corresponding to the Indemnity Period in the twelve months immediately before the Damage" requires the calculation to be based, in this case, upon the trading figures from 3 June 1992 to 2 June 1993, but adjusted and extrapolated to produce the gross income that could have been obtained over the period from 3 June 1993 to 2 June 1995. I do not consider that it is appropriate to ignore the words "that period corresponding with the Indemnity Period", although in this case the words add nothing to the expression "the twelve months immediately before the Damage". The result is the same as contended for by Mr Barr.
The plaintiff's expert, Mr Cowling, based his initial calculations on the plant stock at the time of the Damage, and plants which did not come into production as a result of the Damage: see Ext. P63, Annexure AC1/2; Ext. P62, Annexure AA1/2. The reason for this is that, according to Mr Hearne, the number of dendrobium stems and therefore of flowers increases in the second and third years of each plant's life. The explanation for this is contained in Ext. P1, a letter written by Mr Hearne to Mr Cowling. Relevantly for this purpose, Mr Hearne states:
It is from observations performed to prove the existence of the Maturity Factor, that we have arrived at our '5, 12, 18' formula. Basically this means that a one year old plant will, on average, produce five useable stems in its first year. In its second year, it will produce an average of twelve stems and in the third year, an average of 18 stems.
Mr Hearne repeated this evidence before me: see Tr. pps 61-64. According to Mr Hearne, each useable stem represents a saleable flower, and after the third year, the plant would tend to plateau out at the 18 level or just below it. Consequently, Mr Cowling based his initial calculations so far as dendrobium sales were concerned on the number of plants in stock as at 3 June 1993, and the then ages of the plants, and extrapolated therefrom the total number of stems which could have been produced over the indemnity period, after allowing for a further period of aging by one year and for new plants coming into production. He then converted the result into a money value: see Ext. P61, Annexure A, p7, and Annexures A1/3, and A1/2; cf. Tr. pp 620-621; Ext. P62, Annexure AA p8, Annexure AA1/2 and 1/3.
Mr Cowling also prepared a calculation based on the actual sales for 1992-93, and then calculated a trend: see Ext. P63, Annexure AC1/3, and Tr. pps629-30. This method ignores the impact of the 5:12:18 formula.
Each of these calculations ignore the impact of the proposed joint venture, for reasons which Mr Cowling expressed at Tr. p631.
The end result, whichever method is adopted, is a figure ranging between $1,871,920.00 if the former method is adopted, and $1,958,122.00 if the latter method is adopted.
The defendant's expert, Mr Nourse, in his report Ext. D19, uses a method which is similar in approach to Mr Cowling's report Ext. P63 in that it ignored the 5:12:18 formula. He concluded that the plaintiff's Standard Income was $796,178.00. The difference between the result and Mr Cowling's figure of $1,958,122.00 is because of the following factors:
I do not consider that any of the calculations are strictly in accordance with the terms of the policy for the following reasons.
The definition of Standard Income requires a calculation based on the Insured's Gross Income for the period of twelve months from 3/6/92 to 2/6/93 as its starting point. The definition of Insured Gross Income requires that the money paid or payable to the Insured for goods sold, rent and/or services rendered in the course of the Business to be calculated; i.e. the actual monies paid or payable in that period. It is not possible to take into account at that stage figures based on other considerations, e.g. what was actually received in the post loss indemnity period, although this may have a relevance to 'trends and other variables'.
I note that the definition refers to "paid or payable" not "paid and payable". Therefore the calculation may be based on actual receipts, or on an earnings basis, for example, but not on a mixture of both, and certainly there is no warrant for simply adding the value of debtors at the end of the year to cash receipts, or excluding cash received in the year because it was earned at an earlier time.
There is no basis for calculating the base figure by reference to what could have been earned from dendrobiums on the 5:12:18 formula. This eliminates Mr Cowling's calculations in Exts. P61 and P62.
Mr Nourse's figure in Ext. D19 is based on the figures for the period July 1992 to June 1993. As this is not strictly the correct period, his base figure cannot be quite correct either. Mr Cowling's base figure in Ext. P63 is arrived at by taking the actual sales for dendrobiums in the period April 1992 to May 1993, applying a 'trend', adding in consulting income based on the actual income for 1993, and sales figures for other orchids and other sales based on "company supplied actual figures to March 1994 and company projections to May 1995." This does not strictly comply with the requirement of the policy that the starting point is the Insured's Gross Income for the period 3/6/92 to 2/6/93.
According to Mr Nourse, the reason he chose the period July 1992 to June 1993, was because monthly figures for June 1992 were not available to him. It appears that daily takings for June 1992 and June 1993 were not available. In those circumstances Mr Nourse's approach was reasonable and appropriate. The figures in Mr Nourse's report correspond with the income for July 1992 to June 1993 in accordance with Exts. P7 and P9 with the following differences:
The figure of $116,106.00 for fee income has been arrived at by Mr Nourse by reference to actual fees earned in 1994. This shows a considerable down-turn in income particularly for consulting fees, from the previous year. The assumption upon which Mr Nourse worked relating to fee income is therefore not based on fact, and nor is it in accordance with the wording of the policy.
The differences in approach by the experts have made it difficult for me to arrive at an appropriate base figure without resolving some further issues. The first is whether "management fees" should be included or not, and I have already decided that they should. I note that there is a difference of $16,000.00 between the 1993 - 1994 and 1994 - 1995 years, so allowing the amount of $96,000.00 will prima facie inflate the claim.
Why the management fees were reduced to $80,000.00 in the subsequent years is not explained, but the approach of the plaintiff's counsel was that this was not related to the Damage; in other words, the parties appear to have accepted that this downturn is a "variable". I will therefore include $96,000.00 in the base figure, but treat it as the parties have by reducing it to $80,000.00 p.a. as a 'variable'.
"Sundry income" of $15,338.00 is explained in the 1994 profit and loss account as "government subsidies". This does not fall within the definition of "Insured Gross Income" and is therefore not included.
Consulting fees of $83,526.00 is the appropriate base figure. Whether any adjustment for "trends or other variables" needs to be made will be considered later.
"Insurance recoveries" of $400.00 does not fall with the definition of "Insured Gross Income" and it is therefore not to be included.
The next question is whether "deferred income" of $30,187.00 should be included in the base figure. Prima facie the accounts show, by inference, that this falls within the definition of "Insured Gross Income" because the income was "paid or payable" in the 1993 year. The fact is that the plaintiff's accountant brought it in as sales income into the 1993 accounts. The amount is shown in the 1993 balance sheet as "deferred income" from the 1992 year; there is no corresponding figure in the 1992 balance sheet. There is no explanation for this, and the figure is not included in Ext. P7. The plaintiff's accountant, Mr Rose, was not questioned about it. The difficulty will be what to do with it in calculating any trend, but that is another question. Mr Barr submitted that the amount should be taken into account, and I consider that this is correct.
2.5.9 The Base Figure before Calculating Trends etc.
I therefore calculate the base figure, i.e. the Insured's Gross Income before calculating trends etc, for the 1992-1993 year, as follows:
Like the parties, I am prepared to assume that this figure reasonably represents the Insured Gross Income for 3/6/92 to 2/6/93.
There is considerable dispute between the experts as to the method of calculation of the "trend in the Business and other variables" and what figure or figures should be allowed, in relation to both sales and consulting fees.
As previously noted, the definition seeks to arrive at the result that "could have been obtained had the Damage not occurred", and adjustment is required to be made to the Insured Gross Income for the relevant period to reflect "the trend in the business". The word "trend" is not defined, and bears its ordinary English meaning. One way of ascertaining the trend is to look at past trading figures to see if a trend is disclosed; but the past trading figures may not fully disclose the trend if factors affecting the trend are masked by the inclusion of extraordinary items of income not likely to be repeated in future years, for example. For this reason, I do not consider that the trend can be gauged by reference to the deferred sales income, unless it could be assumed that similar deferred sales income was likely to have been repeated in future years but for the loss. There is no evidence to suggest this.
The plaintiff's case is that the "trend in the Business" would be affected by the 5:12:18 formula, which is not fully reflected in the sales income for 1992-93, because production in subsequent years would be affected by the aging of the plants, and by new plants coming into production. Mr Cowling's figures attempt to take this factor into account. Mr Cowling found some support for his calculations which took this factor into account by comparing the actual income earned from dendrobium sales in April, May and June 1992 with the corresponding months in 1993: compare the resultant calculation in Exts. P61 and P62 with Ext. P63. One difficulty I have with this approach is the proposed sale of part of the plaintiff's stock to Hearne's Floraculture Pty Ltd in the latter part of 1993. On the evidence before me, I have to consider the possibility that, but for the Damage, the plaintiff would have sold 37,000 orchid plants and other equipment for $299,600.00 (say $300,000.00) on or about 1 October 1993, and possibly a further 65,000 plants for $182,000.00 in the event that negotiations to acquire the additional land contemplated in Ext. P21 were successful. If the first sale of 37,000 plants was affected, this would not only be a "variable" in actual contemplation as at the time of the Damage, but the reduction in the plaintiff's stock would affect Mr Cowling's "trend" calculations. I note that there is no evidence as to the split up between the price to be paid for the plants, and the rest of the assets to be sold. The subsequent sale of 65,000 plants for $182,000.00 suggests a price a little under $3.00 per plant, which suggests that the 37,000 plants might have been worth $111,000.00, with the balance of the equipment worth approximately $189,000.00. This equipment is not shown as an asset of the plaintiff, but as an asset of Tropicus Holdings (see Ext. P10). According to Holding's balance sheet as at 30/6/93, the total value of its non-current assets was $382,930.00 of which $232,268.00 represented land, buildings and improvements. There were also other assets (office equipment $174.00; motor vehicles $2,175.00) which were not to be sold. At best, the depreciated value of Holding's non-current assets is $92,828.00 plus $55,485.00, which equals $148,313.00, and which suggests that the 37,000 plants were to be sold for a price something in the order of about $4.00 per plant, or say, $152,000.00. No figures were presented to me by the parties to show how this would have affected the calculation of "Standard Income"; nor do I know whether the contemplated sale should be treated as income or the sale of a capital asset.
Mr Barr submitted, that notwithstanding the use of the expression "could have been obtained" in the definition of "Standard Income", (c.f. "would have been obtained" in the definition of "Annual Income") I should treat "could" as meaning more probable than not (Tr. 998-999). He accepted that the ordinary meaning of "could" suggests that possibilities are taken into account, even if they are not probabilities, whereas "would" implies that which is more probable than not. I accept that that is the ordinary distinction between "could" and "would", as Mr Riley Q.C. submitted (Tr. 1087). I do not accept Mr Barr's submission that I should treat "could" as meaning that I should only take into account trends or variables which are probable, in calculating "Standard Income". The definition of "Annual Income" is relevant only to "averaging"; the plaintiff recovers a pro-rata proportion of its loss if the "Sum Insured on Insured Gross Income is less than the Annual Income". There is nothing unfair or unreasonable in calculating Annual Income on a more restrictive basis than in calculating Standard Income. I do not see why the plain words of the definition ought not to be applied.
This being so, I consider that I have to take into account the possibility that the plaintiff may have sold at least part of its stock (viz 37,000 plants) by 1 October 1993, and the possibility that the resultant income would be "Insured Gross Income" for the purposes of the definition, notwithstanding that Mr Barr was not opposed to ignoring the effect of the joint venture (Tr. p 1057). The facts show that Hearne's Floraculture Pty Ltd was in fact incorporated, a bank account was opened, Mr Lugg was engaged and a shade house was created upon Tropicus Holdings' land by Hearne's Floraculture. Apparently very little else was done. There is no evidence that any shares were issued to the plaintiff or to Tropicus Holdings. The prospects of the joint venture ever getting a lease over the extra land contemplated by the joint venture by 1 October 1993 appear to me to be remote. This may have affected the decision of the joint venturers to proceed, or it may not. The difficulty is that the Damage occurred too soon after the initial agreement in principle between the joint ventures to foresee with any certainty how things may have turned out. Doing the best I can with scanty materials, I think that the possibility of the joint venture purchasing the plants is low, and I assess it as being in the order of 25%, and that I should take that into account. In general terms, this could have meant a lower income for the plaintiff particularly in 1994-95 than the trend suggested by Mr Cowling's figures. The effect on income in 1993-94 is difficult to gauge. The plaintiff no doubt would have hoped to have benefited from its (or Tropicus Holdings') proposed 60% shareholding, but even if, as Mr Hearne said in evidence, the shareholding in Hearne's Floraculture Pty Ltd would have been held by the plaintiff and not Tropicus Holdings Pty Ltd, dividends payable are not within the definition of "Insured Gross Income".
If one puts to one side the impact of the proposed sale, there are difficulties in accepting the raw figures prepared by Mr Cowling based on expected dendrobium production as being a real possibility. These figures assume 100% probability that every plant will produce the predicted number of stems; that every flower produced will be sold, i.e. that the market could absorb the whole of the plaintiff's proposed expanded production; no wastage of any kind, whether due to marketing problems or other factors; and that the plaintiff had the capital available and the business expertise to expand the business to that extent. I accept that the evidence indicates significant marketing opportunities for the plaintiff, particularly in dendrobium sales, in Australia. As to the plaintiff's capacity to expand, I am satisfied that the plaintiff's financial position as at the time of the loss was "tight", as Mr Hearne himself conceded. It was having difficulty servicing its existing loans. One of the reasons why Mr Hearne contemplated the joint venture in the first place was that he felt that he needed an injection of capital to expand. The history of the plaintiff's relations with its bankers as revealed in Exts. D12, D20 and D23 suggests that it is very unlikely that the plaintiff could have obtained further borrowings from its existing bankers. I accept the general thrust of Mr Riley Q.C.'s submission that the plaintiff already had most of the infrastructure needed to expand in that it had not one shade house (as Mr Nourse apparently thought) but two, and an "iglo" in addition to the shade house built by the joint venture, and that the plaintiff already had access to immature plants in its phytotron, pots, charcoal, peat moss, polystyrene and fertiliser etc; and that it had some capacity to borrow funds from other sources, eg. from the sale or licensing of technology owned by Mr Hearne, all of which (and I have not mentioned everything relied upon by Mr Riley Q.C. in detail) suggests that the plaintiff had some capacity to expand its Business contrary to the opinion of Mr Nourse (see Ext. D22). However, in general terms, expansion of the plaintiff's business would still have required an injection of capital to meet additional running costs (see Mr Nourse's report, Ext. D22, p 23 under the hearing "Working Capital Requirements") and the plaintiff's capacity to borrow funds depended on its capacity to repay, which in turn would, generally speaking, depend on the plaintiff's ability to demonstrate that capacity. Unless a lender was driven by considerations foreign to ordinary lending policies in the market place, capacity to repay further loans is difficult to demonstrate if the existing borrowings are not being adequately serviced, and the plaintiff's history with its bankers exhibited difficulty in this area.
There are two other observations about the calculations of the trend by the experts. First, in general, I prefer the averaging method adopted by Mr Nourse as being more realistic for the reasons he gives at Tr. pps 794-795 than that adopted by Mr Cowling. I find it very improbable in any event, and an affront to common sense that a virtually new business could expand its turnover in dendrobiums from something in the order of $100,000.00 p.a. to $1,286,215.00 in the space of two years. To achieve this kind of fantastic result would have required an incredible amount of luck as well as management and entrepreneurial skills that Mr Hearne by his own admission simply did not have. Secondly, both methods assume compounding rates of expansion for a period of two years at whatever percentage figure is chosen. The basis of that assumption is highly questionable, because prima facie the trend will carry on in this way ad infinitum. Such an approach overlooks limiting factors such as the size of the market place, the plaintiff's managerial and entrepreneurial capacity, the possibility of competition in the market place, the capital costs of expansion and so on. The figures are also likely to be distorted because, when one starts from a small base figure, a modest increase in income represents a large increase in percentage terms, and it is very questionable that increases in those percentages can be sustained. Finally, the raw data upon which the trends are calculated is based on very limited trading, and to the extent that it was based by Mr Cowling upon plants in stock and to be produced, the numbers of plants is also highly questionable. The plaintiff was only incorporated in 1991. If the calculated trend based on past trading results had been exhibited over a long period, this would be convincing. A trend calculated over a short period may represent no more than a temporary increase which would be subject to later correction by market forces and other factors.
Bearing in mind all of these difficulties, I consider that I should adopt the approach of Mr Nourse in Ext. D19, appendices 7 and 8, with the following reservations:
and I accept these figures, notwithstanding that they are more favourable than the plaintiff's projections prepared by the plaintiff's accountants, Rose and Associates Pty Ltd (Ext. D4). Having regard to the lower test of possibilities rather than probabilities, I do not consider that it is necessary to make any further adjustment to the figures to allow for other factors both positive and negative which I have mentioned which may affect the result, including the effect of the 5:12:18 formula. I consider that they have been, in a broad brush way, allowed for in this calculation.
As to consulting fees, the approach of the experts is, as mentioned above, that Mr Nourse allowed the fees actually earned in the 1994 and 1995 years on the assumption that there had been no loss of consulting fees during the indemnity period, whereas in fact the plaintiff's consulting fee income in 1994 and 1995 reduced from $83,526.00 in 1993 to $36,106.00 in 1994 and nil was earned in 1995. Mr Cowling allowed $83,526.00 on the basis that "it was not anticipated that Consulting Income would vary after 1993" (Ext. P63, Annexure AC1/2), i.e. he based Consulting Income on the 1993 figures.
The proper question is whether the base figure of $83,526.00 should be adjusted to allow for trends or other variables. This depends on an analysis of how the plaintiff earned Consulting Income, and whether, but for the Damage, that income could have increased, remained stable, or decreased. Mr Riley Q.C. submitted that the loss of Consultancy Income in 1994 and 1995 was due to the fact that Mr Hearne, whose efforts produced the Consultancy Income for the plaintiff, had less time to devote to it because he was obliged to spend most of his time in loss mitigation.
The plaintiff's evidence was that in 1993 he was engaged in two consultancies, one in Turkey, and the other in Sabah. He said he was not paid for the Sabah consultancy, which was an "exploratory trip", except for his airfares and accommodation, but he was paid for the Turkish consultancy. He said that in the following year, the Turkish consultancy "fell through" as he was "not able to adhere to the accounting practices that were suggested", and that the Sabah consultancy was "put on hold" because of a change in government (see Tr. p83). He said that he had not done anything further in the way of consulting because there had been no opportunity to pursue it because of "the perilous state of our business". He said that in 1996 he was invited to become involved in a project in India, but this could not be pursued for the same reason. He said that his intentions were, so far as 1994-95 was concerned, that he was willing to take any opportunities that came his way, but circumstances would have prevented him from accepting them.
In the face of this evidence, I consider that it is highly improbable that the plaintiff would have continued to have earned consultancy fees in 1994 and 1995 at the same rate as in 1993. I infer from Mr Hearne's evidence that the actual consultancy fees earned in 1993 and 1994 came from the Turkish consultancy which did not proceed for reasons which had nothing to do with the plaintiff's Damage or Mr Hearne's lack of time to devote to that project. Mr Hearne did not give evidence that he rejected any offers in 1994 or 1995 because he was too busy; the project in India was in 1996 and outside the indemnity period. The most favourable view of Mr Hearne's evidence is that after the damage, he lost the opportunity to seek out consultancies if he had been minded to do so, but even this is very doubtful, in that he does not appear to have been in the habit of seeking out consultancies; rather the inference is that he waited for offers to come to him. In these circumstances, I think it is reasonable to adjust the 1993 income based on the actual income earned in 1994 and 1995, as Mr Nourse has done.
2.5.12 The Amount of the Plaintiff's Standard Income
The plaintiff's Standard Income is therefore $1,290,000.00, as follows:
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Both experts have proceeded on the basis that there was no additional expenditure incurred as referred to in Clause 1(b), because no approval was ever given by the defendant to incur that expenditure. Neither counsel suggested that this approach was incorrect, and there is in fact no evidence that the defendant gave its approval for that expenditure to be incurred. The amount to be allowed under this provision is therefore nil.
The wording of the provision is "less any sums saved during the Indemnity Period in respect of any expenses of the Business payable out of Insured Gross Income which cease or are reduced in consequence of the Damage".
Mr Cowling's estimate of the savings is $106,000.00. Mr Nourse's estimate is $101,918.00, but the two approaches are widely differing. Mr Cowling's figure is made up from two components: (1) costs not incurred in bringing a new shade house into production during the Indemnity Period; (2) commission not paid in relation to the consulting contract in Turkey. Mr Cowling made no other deductions, apparently on the basis that reduction in overheads were not truly cost savings because "the effect is to damage the economic fabric and operational base of the insured and thereby prevent it from returning to normal operations" (see Ext. P63, Annexures AC and AC1/4).
Mr Nourse analysed the plaintiff's profit and loss statements for the years ended 30 June 1994 and 30 June 1995, to identify savings when compared to expenditure for the year ended 30 June 1993. His figures took into account savings on consulting fees as well as other items, but on the face of it, he made no allowance for the costs of not bringing into production a new shade house.
In my opinion the savings of not bringing a new shade house into production are not in respect of expenses payable out of Insured Gross Income which ceased or were reduced during the indemnity period. The type of savings envisaged by the policy are those expenses which were of a type needed to earn Insured Gross Income prior to the loss; how otherwise, could they "cease" or be "reduced"? If the new shade house was never brought into production, there were never any expenses attributable to producing income in respect of it which ceased or were reduced.
Mr Riley Q.C. criticised Mr Nourse's approach in that the mere fact that an item of expenditure in 1994 is less than in 1993 does not mean that there was a saving as a result of the Damage; there needs to be shown a connection between the Damage and the savings. I accept this submission, but prima facie all items of expenditure incurred in the Business are "expenses of the Business payable out of Insured Gross Income", and if an item of expense is reduced, in a case such as this, where the Damage significantly affected the Business' operations, it would be reasonable to infer that the saving resulted from the damage. Mr Riley Q.C. submitted that this was not necessarily so; the item may have not been paid irrespective of the Damage. In principle, I accept this submission, but if this is so, the plaintiff, who knows if there are such items, should prove what they were. One obvious example is the reduction in expenses incurred in relation to consultancy income. If, as I have found, consultancy income was not in fact reduced because of the Damage, but was reduced because of other extraneous factors, it would be wrong to treat those expenses as a saving. Mr Cowling himself acknowledged this. Consequently I am unable to accept Mr Cowling's calculation.
Mr Riley Q.C. also submitted that Mr Nourse wrongly included as a saving, items not spent on the maintenance of capital assets (such as motor vehicles), the argument being that the reduction is caused, not by the Damage, but by the plaintiff's lack of funds, and that the result of the reduced expenditure is probably a reduction in the value of the capital asset. There is some force to this argument, but assuming it to be correct, there is nothing in Mr Nourse's report which is identifiable as an item of this kind. For example, the cost of maintaining motor vehicles could be included either under "motor vehicle expenses" or "repairs and maintenance". No evidence was called to show whether any item of this nature existed, how much was involved, and why the expenditure was not incurred.
I consider that I should accept Mr Nourse's figure of $90,534.00, less the savings he allowed for in respect of consulting fees ($6,940.00 + $9,500.00 = $16,440.00), a total of $70,094.00.
To summarise the amount of the indemnity, (leaving aside the effect of the proviso to Clause 1 and the Department Clause) I arrive at the following:
This exceeds the sum insured for Insured Gross Income ($600,000.00).
As previously noted, both the proviso to Clause 1 of the policy and the exception to the Department Clause have what might be termed "averaging clauses".
Both counsel acknowledged difficulty in applying either clause to the calculation of the indemnity. I should note, by the way, that counsel for the plaintiff, Mr Riley Q.C., conceded that the provisions of the Insurance Contracts Act 1984 (Cth.) did not apply to this policy because the contract of insurance was "Northern Territory insurance" within the meaning of s9(2) of that Act: consequently the defendant is not prevented by s44(1) of the Act from relying on these clauses.
Mr Riley Q.C.'s submission is that the ultimate exception to the Department Clause is incapable of being given any meaning, and should be severed from the clause. Mr Barr submitted that if the clause is meaningless, it is incapable of severance, and the whole Department Clause should go; but he submitted that the clause could be given a meaning. In effect Mr Riley Q.C.'s position was that the proviso to Clause 1 should apply with reference to the Insured Gross Income and Annual Income of the plaintiff only.
Mr Riley Q.C. pointed out that, according to Fawcett's Business Interruption Insurance, (modified for Australian Law and Practice by Tony Morgan, published by Robins MS, Chartered Loss Adjusters), the traditional wording of this clause is as follows:
If the business be conducted in departments the independent trading results of which are ascertainable, the provisions of Clauses (a) and (b) of the Item on Gross Profit shall apply separately to each department affected by the damage, except that if the sum insured by the said Item be less than the aggregate of the sums produced by applying the Rate of Gross Profit for each department of the business (whether affected by the damage or not) to its relative Annual Turnover (or to a proportionally increased multiple thereof where the maximum indemnity period exceeds twelve months), the amount payable shall be proportionally reduced.
As Mr Riley Q.C. pointed out, the main difference between the traditional wording and the Department Clause in this policy is that the latter does not use the expression "the rate of the Insured Gross Profit" and the words in parenthesis are omitted. As to the latter consideration, there is nothing in the definition of "Annual Income" in the policy to require Annual Income to be proportionally increased where the maximum indemnity period exceeds twelve months (see Tr. pps 1078 f.f.).
Mr Barr submitted that I should interpret the policy in a robust and commonsense way in order to arrive at the presumed intention of the parties. His submission seems to be that, in effect, the clause requires a calculation based on the sum of the annual incomes (as defined) of each of the businesses in the 1993 year. If this sum exceeds the sum insured, then the plaintiff recovers under Clause 1 that percentage of the difference arrived at under para. 2.8 hereof, as the sum insured bears to the annual income. Mr Nourse's calculation of "co insurance" at p31 of his report Ext. D19 is calculated in this way. However, the wording of the averaging provision in the Department Clause requires the aggregate of the Insured Gross Incomes of the various Businesses to be applied to "the relevant Annual Income" thereof, and this appears to have been overlooked in the calculation.
Mr Barr's submission required a rewriting of the Department Clause in this fashion:
Provided the Business be conducted in departments the independent trading results of which are ascertainable the provisions of Clauses (a) and (b) of Item No. 1 shall apply separately to each Department affected by Damage except that if [the sum insured for any item is less than] the aggregate of the sums [insured on] [produced by applying the] Insured Gross Income for each department (whether affected by an event referred to in this Policy or not) [is less than] [to] the relevant Annual Income thereof, the amount payable shall be proportionally reduced.
[The words italicised in square brackets are added to the text, and the words in square brackets not italicised are deleted from the text].
An insurance policy is subject to the same general rules of construction as any other written contract: Australian Casualty Co. Limited v Frederico
[1986] HCA 32; (1985-86) 160 CLR 513 at 520. I accept that words may be supplied, omitted or corrected if this is necessary to avoid absurdity or inconsistency: Fitzgerald and Another v Masters [1956] HCA 53; (1956-57) 95 CLR 420 at 426-7. However, one begins the task of construction by seeing what is the plain, natural and ordinary meaning of the text. The usual approach is to consider the clause in the context of the contract as a whole, and usually unless after taking into account the objective aim of the clause, there is ambiguity, or patent error or omission, the Court will not depart from the plain ordinary meaning: see for example, Australian Broadcasting Commission v Australian Performing Right Association Limited, [1973] HCA 36; (1972-73) 129 CLR 99 at 114-115.
The purpose of an average provision is to require the insured to bear a rateable proportion of a partial loss if there is under insurance: Mann, Annotated Insurance Contracts Act, 2nd Edn., Law Book Company Information Services, p112. In the light of that purpose, is there any ambiguity in the averaging provision to the Department Clause? The clause begins "if the sum insured for any item". In this case there are several "items" for which there is a sum insured. Taken literally, this would refer to the sum insured for Insured Gross Income if one is dealing with the indemnity for Insured Gross Income, or the sum insured for claims preparation if one is dealing with claims preparation etc. This is less beneficial than what would be the case if there was only one insured and the Department Clause did not apply, as in those circumstances there would be no averaging on items other than Insured Gross Income. Of course, there is nothing particularly surprising about an averaging provision applying to more than one item of indemnity. Whilst it might appear to be odd that the policy would apply averaging to another item of indemnity, such as for claims preparation, the general intent of the Department Clause seems to be to allow the insured to recover loss of Insured Gross Income from a separate identifiable department, where other departments have suffered no loss, by looking at that department separately. If each department of the Business had suffered a loss, it could be suggested that one would anticipate the probability that greater professional fees might be incurred in claims preparation than if only one department suffered the loss. However, the averaging provision is expressed to be an exception to the amount payable only in respect of the indemnity for Insured Gross Income, in that the words of the exception follow immediately after reference to "the provisions of Clauses (a) and (b) of Item 1". Neither party sought to urge upon me that the effect of the averaging provision in the Department Clause went further than to affect the indemnity for Insured Gross Income. Taking the words in the context of the clause and of the policy as a whole, and bearing in mind that the indemnity for claims preparation is of a wholly different kind to the indemnity for loss of Insured Gross Income, I consider that there is an ambiguity in what is meant. Another possibility is that the draftsman of the clause intended to cover the situation if the policy had included separate sums insured for each department. Further, if applied literally to any item other than the Insured Gross Income, it could have the effect of proportionally reducing Insured Gross Income, even if the sum insured for Insured Gross Income was adequate. If one takes professional fees for preparation costs as an example, one would normally expect that the sum insured for that item to be small compared with the sum insured for Insured Gross Income. If applied literally, the insurer would be able to use the lowest sum insured of any item of indemnity as the base figure, which would obviously significantly affect the extent of the proportional reduction to other items. This does not seem reasonable, and therefore it should be construed, if some other construction is open, so as to avoid this consequence: c.f. Lewis Construction (Engineering) Pty. Ltd. v Southern Electric Authority of Queensland (1976) 50 ALJR 769 at 775. The other possibility is that "any item" should read "the said item", and applying Fitzgerald v Masters, supra, I consider that this is the preferable construction.
The next part of the clause reads "... is less than the aggregate of the sums produced by applying the Insured Gross Income for each department of the Business ... to the relevant Annual Income thereof ...". In this case there are three departments, the plaintiff, Tropicus Holdings Pty Ltd and Gardeners World Pty Ltd, which for ease of reference I will call respectively A, B and C. Let us assume that each of A, B and C has an Insured Gross Income (IGI) and an Annual Income (AI). What is meant by "applying" the IGI of each department to the relevant AI? One possibility is that one is required to calculate a ratio or ratios, i.e. IGI:AI. What is meant by the "relevant" Annual Income? I think what is meant is that one is to perform the calculation by reference to the IGI and AI of each separate department. Therefore if this is correct the "aggregate of the sums produced by applying the Insured Gross Income ..." etc ("D") is required to be calculated as follows:
The first difficulty with this, is what period of time is referred to. Is it the Indemnity Period? The second difficulty with this process is that, in practical terms, regardless of which period is chosen D will usually be a small number. For example, if:
The next stage of the provision requires a consideration of whether or not the sum insured is less than D. As D is likely to be a very small figure, and the sum insured is likely to be a very large figure, it must inevitably be the case that the sum insured is greater than D with the result that there will never be any occasion when averaging will occur. I went through this exercise during submissions with Mr Barr at Tr. pps 1007-1015. As he said, this does not make sense. This cannot be the intention of the parties.
Clearly, the end product of the calculation must be a large number, bearing in mind that the sum insured for Insured Gross Income will in practice, usually be a very large number, (as in this case, where the number is $600,000). The clause uses the expression "the aggregate of the sums produced ...", so what was obviously intended was the sum of three large numbers, which in a general way, represents the sum of the incomes of each department, adjusted in some way. Here there are several possibilities. One possibility is to repeat the calculation required by Clause 1 under the indemnity for Insured Gross Income in respect of each department, whether or not that department suffered a loss as a result of the damage, substituting Annual Income for Standard Income and arrive at the aggregate. This would give the expression "by applying the Insured Gross Income ... to the relevant Annual Income" the meaning "by subtracting the Insured Gross Income ... from the relevant Annual Income," and in view of the words in parenthesis "whether affected by an event referred to in the Policy or not", this would presumably indicate that in doing this calculation, at least so far as Clause 1(a) is concerned, the words "in consequence of the Damage" are ignored if in fact a department was not affected by the Damage. This would at least solve the problem of what period of time is referred to, as Clause 1(a) refers to the indemnity period. How would this work in practical terms? Using the same figures assumed above, the result would be:
The sum of these figures (D) is therefore $604,830.00. Theoretically this could work (in this case, the result is that the sum insured is less than D).
Should the calculation go beyond para 1(a) of the Indemnity for Insured Gross Income? Theoretically there is no difficulty if para 1(b) is also included. In some cases more than one department may be affected by the Damage, and if so, it is reasonable to apply para 1(b) as well. If only one department is affected, it is difficult to see how para 1(b) could have any practical application. The same consideration applies to the sums saved clause.
Once "D" is calculated, one must then see if the sum insured for Insured Gross Income is more or less than D. If the sum insured is more than D, there is no proportional reduction. If the sum insured is less than D, then the clause provides that "the amount payable is proportionally reduced". The "amount payable" must mean the amount which would otherwise be payable as the indemnity for Insured Gross Income, in other words, in this case, the figure arrived at in paragraph 2.8 above, viz $724,736.00. I note that the sum of $724,736.00 has been arrived at by ignoring the averaging clause in Clause 1. I think that it is tolerably clear that the intention of the parties is that only one average clause is to apply; i.e. that if the average clause in the Department Clause applies, that applies in lieu of the average clause in Clause 1 of the policy. Neither party suggested otherwise. The next difficulty is to know what is meant by "is proportionally reduced". What proportion is being referred to? The triggering factor for proportional reduction of the amount of the indemnity is that the sum insured is less than D. It was submitted that what is meant is that the amount of the indemnity in the sense explained is to be reduced by the ratio of the sum insured to D. Therefore if the sum insured ($600,000) is less than D, the amount payable (E) would be calculated as follows:
In my opinion, this interpretation of the provision, is theoretically consistent with the purpose of provisions of this kind, i.e. it endeavours to ensure that the insured bears a rateable proportion of a partial loss if there is under insurance, bearing in mind that the sum insured for Insured Gross Income of $600,000 is a single amount in respect, not of each of the three separate companies which comprise the "Business" considered severally, but of the total potential income of the three businesses considered as one. Is this conclusion affected by any problems caused by the definition of "Annual Income?"
Mr Barr's principle submission was that there was no practical difference between the definitions of "Standard Income" and "Annual Income". Yet, the wording of the definition of Annual Income is different from the definition of Standard Income in two respects: first, in respect of Annual Income, the definition uses as a base Insured Gross Income in the period of twelve months immediately before the date of the Damage, whereas the definition of Standard Income uses as a base the Insured Gross Income during the period corresponding with the Indemnity Period in the twelve months immediately before the damage. Secondly, the definition of Standard Income uses the expression "the same result that could have been obtained", and, as I have found, this requires possibilities rather than probabilities to be considered, whereas the definition of Annual Income uses the expressed "the same result that would have been obtained", which requires probabilities rather than possibilities to be considered.
If this is so, in cases where the possibilities are more favourable than probabilities, Standard Income would be a higher figure than Annual Income. In cases where the possibilities are largely negative, Annual Income might exceed Standard Income. The larger Annual Income becomes, the more likely it is that D will be greater than the sum insured. This does not produce an entirely logical result given that it is the difference between Insured Gross Income and Standard Income in para 1(a) of the calculation which is arrived at before the averaging provision is applied. Thus, in a case where Standard Income is larger than Annual Income, the difference between Insured Gross Income and Standard Income is more than the difference between Insured Gross Income and Annual Income. This has two effects: (1) the original calculation required by Clause 1(a) is inflated thereby increasing the amount of the loss; (2) the averaging provision is also affected as D will be smaller than it otherwise would be, with the consequence that the proportional reduction will be less. A similar problem would appear to arise if the period of indemnity was less than twelve months, and the effect of the damage was felt during a period of high income for the business. The definition of Standard Income requires the Insured Gross Income in the relevant corresponding period of the previous year to be considered, whereas the definition of Annual Income requires the whole of the previous year to be considered. So far as the first part of the calculation is concerned the insured's loss is calculated beneficially in that Standard Income is calculated by reference to a period of high turnover, thus producing a larger difference (or loss) than would be the case than if, say, an average over the whole year was considered. The definition of Annual Income does not require this, with the apparent result that the calculation of the trend etc to produce "the same result ... had the Damage not occurred" would appear to result in a smaller figure.
The same problems of this definition also arise in applying the averaging clause at the end of Clause 1 of the indemnity provision for Insured Gross Income. However this may be, I do not think that this result is so significant as to warrant the acceptance of Mr Barr's proposition that there is no difference between Standard Income and Annual Income. If this were so, there would be no point to a separate definition. The policy clearly intended that there must be some difference between the two concepts. I am unable to see what must have been intended, other than what the definition says according to its natural meaning. As Sutton, Insurance Law In Australia, 2nd Edn., (1991), The Law Book Company Limited, at 541, puts it:
It is no part of the province of the court to make a reasonable contract for the parties; its duty is merely to construe the agreement that has been made, however unreasonable the terms may be, and for it to interpolate qualifying words into the agreement would be to make a new contract for the parties which is impossible in law. Hence, if a policy is framed in language so precise, express and strong as to admit of one construction only, this construction must be adopted however unreasonable it is, since the court will not spell out a reasonable contract for the parties.
In so far as there are departments which are not affected by the Damage, the definition of Annual Income raises another difficulty in that it refers to the requirement to adjust the Insured Gross Income "to reflect the trend in the Business and any other variables in order to arrive at the same result that would have been obtained had the Damage not occurred." It is difficult to apply these words literally to a department not affected by the Damage. One would surely ask why, if the object of the definition is to "arrive at the same result that would have obtained had the Damage not occurred", the definition does not simply require Annual Income to be calculated by reference to the Insured Gross Income during the indemnity period. The obvious explanation is that the parties may wish to settle the claim before the end of the indemnity period. Suppose the indemnity period is for twelve months. It may be apparent quite soon after the Damage that there is a total loss of income for the whole indemnity period for one department only. If the definition of Annual Income required the loss to be calculated by reference to the Insured Gross Income during the indemnity period instead of the Insured Gross Income based on the previous year's trading, it would be necessary to wait until the end of the indemnity period before the Annual Income for the unaffected departments could be calculated. This would not be in the interests of either the insured or the insurer as a matter of practical commercial reality.
However, where the actual Insured Gross Income during the indemnity period for a department of the Business not affected by the Damage is in fact known because the indemnity period has elapsed before the settlement is reached, it would seem absurd that a complicated calculation should be made to work out trends and variables based on past figures when the actual income is in fact known. If the question is, what would the Insured Gross Income of such a department be if the Damage had not occurred, and if the Damage did not affect the result at all, the actual income earned during the indemnity period would supply an accurate answer. It would be possible, once the actual income was known to identify the trends and variables from the previous year's trading, so that the definition could theoretically be strictly satisfied, but this would be a pointless exercise. The only problem with this result is that the answer supplied by applying the formula now under discussion in such a case must always be zero, because the same figure will always be minuend and subtrahend. This seems to make the whole exercise pointless where the department in question in fact is not affected by the Damage. But is this an unreasonable result? The effect of the results which I have arrived at so far, does not render the averaging provision nugatory, but it clearly does not take into account any under insurance of the group as a whole. Therefore, if the group is grossly under-insured, to the point where the sum insured is barely adequate even for the plaintiff, the formula as thus interpreted would result in no averaging at all. This seems to be an unreasonable result. Is there another interpretation of the averaging provision which would avoid this consequence?
What would be reasonable and in accordance with the purposes of an averaging provision is some exercise which compares the sum insured with the anticipated earnings of the group as a whole. Thus, one would expect a clause such as this to require the calculation of the anticipated future earnings of each department of the group. Mr Barr submitted that such an exercise would result in a formula:
AIB means "Annual Income of the Business" (i.e. of each of the
Mr Barr suggested that such a result can only be arrived at by a significant redrafting of the Department Clause in the way suggested by Mr Barr, which I have set out above in paragraph 2.9. This is such a wholesale re-drafting of the clause as to make a new bargain for the parties, and cannot be accepted. There are other problems with this formula which are discussed in paragraph 2.11 below.
Mr Cowling, in his reports, has approached the problem by ignoring the averaging provision in the Department Clause and applying the averaging provision contained the proviso to the paragraph 1 under the heading "Insured Gross Income": see Ext. P61 Annexure A1/6; Ext. P62 Annexure AA1/6; Ext. P63 Annexure AC1/6.
However, I consider that the result contended for by Mr Barr (and apparently accepted by the plaintiff) is capable of being arrived at by inserting into the clause the words "arrive at" before the words "the relevant Annual Income", so that the clause would read:
... except that if the sum insured for [the said] item is less than the aggregate of the sums produced by applying the Insured Gross Income for each department of the Business (whether affected by an event referred to in this Policy or not) to [arrive at] the relevant Annual Income[s] thereof, the amount payable should be proportionally reduced.
Given that the definition of Annual Income refers to "the Business" and not to a department of the Business, and that the clause refers to "the relevant Annual Income", I think that it is clear that the Department Clause envisages calculating separate Annual Incomes for each department. The definition of Annual Income requires Annual Income to be "arrived at" by reference to Insured Gross Income. This interpretation does the least violence to the language employed by the draftsman, and would accord with the purposes of such a clause. I think the word "applying" indicates that the draftsman had in mind the definition of Annual Income, where Insured Gross Income of the Business as a whole is to be adjusted, and he wanted to achieve the result that Insured Gross Income for each department was to be separately adjusted. I consider that this construction should be preferred.
Mr Riley Q.C. submitted that I should apply the contra proferentum rule and construe the provisions in a way most favourable to the plaintiff. In this case, I do not consider that the contra proferentum rule applies in favour of the plaintiff. First, it is a rule of last resort, and I do not have to resort to it to resolve the question of construction: see The Western Australian Bank v The Royal Insurance Co. [1908] HCA 11; (1908) 5 CLR 533; M.G.I.C.A. Ltd v United City Merchants (Australia) Ltd (1986) 4 A.N.Z. Ins. Cas. 60-729. Secondly, I do not consider that the policy was proferred by the defendant. The history of the drafting of the policy was given by Mr Taylor. He explained that because North Australian Insurance Brokers (NAB) which wrote a lot of business with the defendant, became unhappy with the wording of the "commercial package product" which the defendant normally issued, the amount of business it wrote with the defendant fell into decline. The defendant's commercial underwriting manager at the time, Mr Glen Moore, spoke to Mr Taylor and asked what the defendant needed to do to write more business with NAB. Mr Taylor said the defendant needed to fix up its policy wording. Mr Moore indicated that this would take a long time to achieve, and suggested that NAB draft the wording and send it to him for editing. Mr Moore drafted the wording using as precedents other commercial packages in use, as well as the defendant's own wording, and submitted it to the defendant. Subsequently Mr Moore set the draft back with about 50 or 60 changes to it, and indicated that this was the wording the defendant wanted, unless NAB could point to mistakes, or had a particular piece of business which was attractive but required some specific changes to the wording. Mr Taylor then recorded these changes onto the draft in NAB's word processor, and ran off a limited number of copies to be used until the defendant had "keyed in" the policy wording into its word processor. He said that the policy in this case came from NAB's word processor, which I note is consistent with the front cover which says that it is "specifically designed for the clients of North Australian Insurance Brokers." At no stage was NAB authorised to accept risks on behalf of the defendant. It is common ground that NAB was the plaintiff's agent in this transaction and not the defendant's.
On the facts of this case, the wording of the policy was not that of the defendant alone, but was the wording of both parties. Although NAB was not the plaintiff's agent at the time the policy wording was settled, the policy was not in fact prepared by the defendant when it was issued. It was prepared by NAB who sent it to the defendant for execution.
The contra proferentum rule applies only where a commercial document has been prepared by one party, and has no application where it has been prepared by both parties. I am unable to find in the circumstances of this case that the policy was prepared or proferred by the defendant. There is no evidence as to which terms from NAB's original draft were changed by the defendant. Here the facts suggest, if anything, that the plaintiff, through NAB, was the proferens, in that it came from NAB's word processor and was sent to the defendant.
Accordingly, I consider that there is no reason to depart from the construction I have preferred based upon the contra proferentum rule.
In paragraph 2.9 above I have discussed the approach to the interpretation of this definition, and do not intend to repeat what I have already written.
I have already, in paragraph 2.5, calculated the plaintiff's Insured Gross Income before calculating trends etc for the year 1992-93 as amounting to $389,108, and the plaintiff's "Standard Income".
2.10.2 The Period of Time for Calculating Annual Income
One problem not discussed in the context of the preferred meaning to be given to the averaging clause is the period for which annual income is to be calculated. Mr Barr contended that the period should be the same as the "Indemnity Period". Mr Riley Q.C. contended that the period should be one year.
Mr Barr's submission is based on the words at the end of the definition of Annual Income, viz., "in order to arrive at the same result had the damage not occurred". In the case of Standard Income, the same words were relied upon, but the case for Standard Income was strengthened by the fact that the wording of Clause 1(a) requires a calculation of the difference between the Insured Gross Income earned during the Indemnity Period and the Standard Income and it is logical therefore that the period for Standard Income would be the indemnity period. The same logic does not apply to Annual Income.
Mr Riley Q.C.'s submission is that the definition of Annual Income is confined by its plain terms to a period of twelve months, as that is the only period referred to. Inherent in this submission is a contention that the words "in order to arrive at the same result ..." etc do not necessarily imply the same period as the Indemnity Period. He submitted that even if the effects of the damage had been spent in six months, it is still possible to provide a calculation based on a period of twelve months.
Another consideration is that the indemnity period is in itself open to two possibilities. On the one hand, the Schedule to the Business Interruption Section states that the indemnity period is twenty-four months. On the other hand, the definition of "Indemnity period" could in a given case result in a lesser period. In any case where the effects of the Damage were spent in less than twenty-four months, the "Indemnity Period" would be less than twenty-four months. If so, is that lesser period to be chosen, or is Annual Income always to be defined by reference to the indemnity period of twenty-four months?
If one returns to the purpose and object of an average clause, the potential period of the loss is twenty-four months, and therefore this would suggest that the sum insured, if under insurance is to be penalised, ought to reflect the possibility that there could be a loss extending for twenty-four months regardless of whether the effects of the damage lasted six weeks or eighteen months. But if this was intended, the definition of Annual Income fails to express that intention at all, and fixing a period which could be as short as a few weeks makes no sense at all. This conclusion is also supported by the consideration that the definition of Annual Income omits the words "during that period corresponding with the Indemnity Period" which appear in the definition of Standard Income.
In the result, I am driven to the conclusion that I should accept Mr Riley Q.C.'s submission. The period contemplated by the definition of Annual Income is therefore twelve months. Because adjustments are to be made to the figure to reflect trends and variables, the definition contemplates arriving at a figure for a prospective period of twelve months commencing from the date of the Damage based upon the Insured Gross Income for the twelve month period immediately preceding the date of the Damage. Both parties' submissions accepted this, although they differed on whether the period was for twelve months or twenty-four months.
Taking the plaintiff's Insured Gross Income as amounting to $389,108.00, it is necessary to calculate the trends and variables over the next twelve month period. In calculating Standard Income, I arrived at a figure for the plaintiff of $501,459.00. The only significant difference between Standard Income and Annual Income so far as the plaintiff is concerned, is that the latter requires only probabilities and not possibilities to be taken into account. Accordingly the proposed sale of plants to Hearne's Floraculture Pty Ltd is to be ignored. However not all the possibilities were negative. I think the positive and negative possibilities cancel each other out. I consider therefore that the plaintiff's Annual Income should be assessed at the same figure as for Standard Income.
As to Tropicus Holdings Pty Ltd, neither expert included any income from this company in calculating Annual Income. According to Ext. P10, Tropicus Holdings' only income was rent received, $17,500.00 in 1992-93 and $10,000.00 in 1994-95. Rent falls within the definition of "Insured Gross Income". Mr Cowling in his report Ext. P61, p5 has excluded this rent because it is an intercompany transaction and did not increase the total income of the insured. Mr Nourse has apparently excluded Tropicus Holding's income because "the Business" described in the Policy Schedule refers to the Business of the plaintiff and of Gardeners World, but not to that of Holdings. As the parties are in agreement about this, I will disregard Tropicus Holdings' income.
As to Gardeners World Pty Ltd, Mr Nourse has not arrived at a separate figure for this company. His approach was to add up the total Insured Gross Income for both the plaintiff and Gardeners World, and calculate a "trend" for the combined companies: see his report Ext. D19, p17 and Appendix 1. Mr Cowling has calculated a separate figure for Gardeners World by reference to 1993 income adjusted for trends and other variables and has arrived at a figure of $506,440.00 (Ext. P63, Annexure AC1/5; Ext. P62, Annexure AA1/5; Ext. P61, Annexures, K3 and N1). Mr Cowling has concluded that the "trends and variables" for 1993 were such as to warrant the conclusion that the 1993 actual income is the Annual Income. Mr Cowling has also adjusted receipts from Interflora Australia to bring in as income only the amount due to Gardeners World.
The raw data shows that Gardeners World's income for 1992-93 and 1993-94 is as follows (see Exts. P8 and P61, (Annexures K3 and K4)):
Counsel for the plaintiff submitted that the whole of the Interflora receipts should not be included. Gardeners World Pty Ltd was a member of Interflora Australia Unit Ltd (Interflora). The main purpose of this company appears to be to operate a clearing house system for the delivery of flowers by one member on behalf of another. Mr Hearne explained the system in this way. If a customer in Darwin called at Gardeners World requesting the delivery of flowers to a person interstate, Gardeners World would receive the order and the price for the flowers. Gardeners World would then phone the order through or, after the system became computerised, enter the information relevant to the order onto the computer where it would be transmitted to Melbourne. The order would then be sent on to another member florist in the vicinity of the address of the recipient of the flowers. The latter member would attend to the delivery of the flowers. The plaintiff would receive as its commission 20% of the total purchase price, the balance being paid to the delivering florist. Payment was arranged through Interflora which would directly debit the plaintiff's bank account for the 80% payable, as well as its own charges or costs. Effectively the plaintiff ended up with a net amount of 12% of the price of the order. If the plaintiff were to deliver the order on behalf of a florist interstate, the plaintiff received 80% rather than 20% of the price of the order. The details of the system are set out in Ext. P11, (Section 13, pps 9-15).
Mr Hearne said in cross-examination that he understood that in Gardeners World's books, his accountant treated the whole of the price received for an order to be placed interstate as income and treated the whole of the amount deducted from his account as an expense.
Mr Cowling prepared a calculation of Gardeners World's Interflora income by treating all funds received by Gardeners World as "fiduciary income". The net result is that in 1993 Interflora receipts amount to $110,437.00: see Attachment N1 to Ext. P61. Mr Riley Q.C. submitted that funds received in relation to Interflora sales were for orders affected on behalf of other members for which Gardeners World merely received a commission, and therefore, only 20% of those funds fell within the definition of "Insured Gross Income", the balance not being income to Gardeners World, but in effect trust monies.
There is no evidence that Gardeners World treated any of these monies as trust monies in its books of account. The monies were not paid into a separate trust account but were apparently banked in the same account as its own monies. There is nothing in Ext. P11, Interflora's clearing house by-laws, to indicate that the monies are subject to an express trust. There is no evidence of any intention to create a trust either by Gardeners World or by anybody else. The burden of persuasion that Gardeners World intended to create a trust is on the person asserting it, in this case, the plaintiff: see Ford and Lee, Principles of the Law of Trusts, 2nd Edn., The Law Book Company p67. It was not suggested that some other form of trust was created, e.g. a constructive trust, and on the facts of this case I am unable to see how the monies could be so treated. Under the by-laws, Interflora would send to each member a statement of the members' debits and credits on a monthly basis. If the statement resulted in a credit, Interflora would credit the members' bank account; if the statement resulted in a debit, Interflora would debit the members' bank account through a direct debit system. According to Mr Hearne, Gardeners World received more orders locally for delivery interstate than it received from interstate florists for local delivery, so that usually Gardeners World's account was debited by Interflora. I do not see that this matters, or that it points to the monies being trust monies.
I next consider the submission of Mr Riley Q.C. that these monies do not fall within the definition of "Insured Gross Income". From the point of view of a customer of Gardeners World who paid, let us say, $100.00 for a bunch of flowers to be delivered to someone in Melbourne, the monies were paid for a service to be rendered, i.e. the purchase and delivery of flowers in Melbourne. Gardeners World acts as the customer's agent, and purchases the flowers from a Melbourne florist on its customer's behalf. For this service it receives a commission. Gardeners World does not itself sell the flowers to its customer, but acts as the customer's agent. Therefore it seems to me that only the 20% commission falls within the definition of "Insured Gross Income", as this is the payment received for the service rendered. In the reverse situation, where an order is placed by a florist in Melbourne for delivery of flowers by Gardeners World in Darwin, Gardeners World charges the full price for the flowers, but receives only 80% of the price because 20% is kept or paid to the Melbourne florist for its commission. In that situation I consider that the whole price is for "goods sold" and falls within the definition of Insured Gross Income.
According to Attachment N1 to Ext. P61, Gardeners World's commission for 1992-93 amounted to $40,280.00. Its sales at the request of interstate and overseas florists for local delivery are also set out and amount of $87,675.00. The total Insured Gross Income from Interflora is therefore $127,955.00. There is no similar break-down for 1993-94. The total Interflora receipts for 1993-94 were $22,294.00 less than 1992-93, or about 10% less than the previous year. I consider that the figure of $127,955.00 should be reduced by 10%. The amount of Interflora income to be allowed for the purposes of Gardeners World's Annual Income is therefore $115,160.00, to which needs to be added the sales of $408,987.00. Gardeners World's Annual Income is therefore $524,147.00.
The aggregate of the annual incomes for the relevant year is therefore $1,025,606.00. As the sum insured is $600,000.00, and this is less than the aggregate of the annual incomes, the amount payable in respect of Insured Gross Income is required by the "proportionally reduced". The proportion to which $600,000.00 bears to $1,025,606.00 is 58.5%. Taken literally, this would mean that the amount otherwise payable would be reduced by 58.5%. I do not consider that this is what was intended, because the closer the sum insured came to the aggregate of the annual income, the larger would be the amount of the reduction. For example, if the aggregate of the annual incomes came to $700,000.00, the proportion which $600,000.00 bears to $700,000.00 is 85.7%. This would not be in accordance with the purpose of an averaging clause, which is intended to require the insured to bear more of the loss the more the insured is under-insured. I consider therefore what must have been intended is that the reduction would be the amount of the difference between that percentage which the sum insured bears to the Annual Income of the Business and 100%, i.e. in this case 41.5%.
The final problem, before the amount of the indemnity can be calculated is whether the sums saved are to be taken into account in calculating averaging. The paragraphing of Item 1 under "Insured Gross Income" separates "sums saved" from Clauses (a) and (b). The Department Clause applies the provisions of (a) and (b) separately to each department affected by Damage but does not mention sums saved. There are three possible scenarios where the Department Clause applies: (1) sums saved are to be entirely ignored; (2) the averaging provision ignores sums saved for the purpose of calculating the reduction; and (3) the amount payable before calculating the proportional reduction includes sums saved.
Despite the poor drafting of these provisions, I do not think that the intention of the draftsman was that sums saved would be ignored entirely. I think that the words "less any sums saved ..." would logically continue to apply even if (a) and (b) were applied to each department affected by the Damage. I consider that "the amount payable" is intended to refer to the amount which would be payable if there was no reduction brought about by the averaging provision. Therefore, the sums saved are taken into account when calculating the amount of the reduction.
I conclude that the amount of the indemnity is $423,971.00 calculated as follows:
Less Insured Gross Income of the Plaintiff 495,170.00
(I note that there is no excess in this section of the policy).
These allegations are contained in paragraphs 21 to 25 of the Fifth Amended Defence, the background to which is referred to in Paragraph 1 above.
The defendant asserts, and has undertaken to prove that in breach of its common law duty of good faith and in breach of the express terms of the policy, the plaintiff:
(a) failed to properly respond and supply budgets prepared by or on behalf of the plaintiff prior to the Damage in response to a written request communicated to the plaintiff on or about 31 December 1993 for, int_er alia_, "budgeted production, both before and after the event, on both a varietal and age basis.";
(b) failed to properly respond and supply budgets/forecasts prepared by or on behalf of the plaintiff prior to the Damage in response to a written request communicated to the plaintiff on or about 25 March 1994 for, inter alia, "Budgets/Forecasts 1993/94";
(c) failed to properly respond and supply budgets and/or sales projections prepared by or on behalf of the plaintiff prior to the Damage in response to a request communicated to the plaintiff at a meeting which took place on 25 March 1994 for, inter alia, "1993/94 budgets/sales projections prior to the poisoning";
(d) failed to give discovery of financial projections prepared by or on behalf of the plaintiff prior to the Damage as part of the discovery process in this proceeding.
The plaintiff did not file a further reply or seek to amend its reply: the existing reply simply joins issue with the defence.
Mr Barr relied upon Clauses 3(a) and 3(d) on page 44 of the Policy. Clause 3 is under a section "Applicable to All Sections of the Policy" and under a sub-heading "General Conditions". Relevantly it provides:
(a) give notice in writing to us as soon as practicable of any loss or damage to property or any accident or injury which may give rise to claim and submit such detailed particulars and proofs as we may reasonably require;
(b) give to us all necessary information and assistance to settle or resist any claim, or to institute proceedings; (sic) against other parties for the purpose of enforcing any rights or remedies to which we shall or would become entitled or subrogated upon our payment or making good any loss or damage under this Policy.
As to subclause (a), the question is whether any of the documents which the defendant claims were not supplied to it fall within the description "detailed particulars and proofs". Subclause (a) seems to be concerned with events, i.e. loss or damage to property, or accidents or injuries which may give rise to a claim, rather than to the quantum of the indemnity. Prima facie 'detailed particulars and proofs' suggests an obligation to provide full details of the loss or damage to property etc and an obligation to provide written witness statements or other evidence in relation thereto.
As to subclause (b), the question is whether those documents, if not supplied fall within the description "all necessary information and assistance to settle ... (the plaintiff's) claim".
Mr Riley Q.C. disputes that there was a breach of either condition: alternatively he submitted that the documents of which complaint is made were provided to the defendant, (although late), and were in any event of no significance and could be ignored, either as not being "reasonably required" or "necessary information" or because of the de minimus rule.
It is necessary to point out, once again, that had the defendant insurer been subject to the Insurance Contracts Act 1984 (C/W), it may well have been open to the plaintiff to have relied upon the protection offered by s54 of that Act. That section was obviously designed to offer some relief against the harshness of provisions such as this, in appropriate cases. It may well be, that insurers not bound by the Act, as part of their duty of good faith, are bound to disclose that fact and what that entails to those proposing insurance with them, with the consequence that non-disclosure may preclude them from relying upon s9. However, that has not been raised by the plaintiff. The effect of the clauses, therefore, is to be considered in accordance with the general law.
As to what is meant by "proofs", Ivamy, General Principles of Insurance Law, 5th Edn. Butterworths, at p 406 says:
The nature of the proofs that may be required must necessarily vary according to the nature of the insurance. For instance, in fire insurance the proofs may consist of books of account, vouchers and invoices, whether originals or copies, or of plans, specifications, and estimates, and the assured may be required to supplement the information therein contained by a written or verbal explanation.
I do not consider that the documents complained of are "particulars", but they may well be "proofs", which relate to the settlement of the claim rather than to the fact of loss or damage. However, clause (a) itself requires only such proofs as the insurer "reasonably" requires, and clause (d) only requires "necessary" information. Ivamy, op. cit at p 405 states:
In requiring proofs, however, or in deciding whether the proofs given are sufficient, the insurers cannot act capriciously, unreasonably, or unjustly by requiring evidence which is not necessary to satisfy them on any reasonable view of the case. It is sufficient if the assured lays before them evidence with which reasonable men would be satisfied, and it is unnecessary to show that the insurers have been, in fact, satisfied.
I consider that Ivamy accurately states the tests to be applied to both clauses. In deciding what is reasonable or necessary, the first consideration is the nature of the insurance. This is a business interruption policy, under the terms of which, in order to calculate the indemnity, adjustments to the Insured Gross Income are required to be made to reflect the trend in the Business and other variables. The question then is whether these documents are reasonably required or necessary to have been provided on any reasonable view of the case in order to prove the extent of the indemnity, i.e. to settle the claim.
3.4 Did the Plaintiff Breach the Contractual Provisions?
The documents in question are identified by Mr Barr as Exts. D11 and D4.
Ext. D11 consists of four documents, each relating to the plaintiff. Three of the documents are headed "Projected Sales July 1992 to June 1993". They are very similar, but the figures are different. The fourth document is headed "Projected Sales July 1993 to June 1994". Each document appears to be a faxed copy sent to the Blossom Shop from the plaintiff's accountants Rose and Associates on 10 June 1992. In handwriting there appears to be a notation "Attention Eric Sutherland from Lindsay Gray." In June 1992 Eric Sutherland was the Relieving Managing of the Nightcliff Branch of the plaintiff's bankers, the National Australia Bank (Ext. D20). I have no doubt that the projections relate to the plaintiff and were prepared in Mr Rose's office at the plaintiff's request. Despite Mr Hearne's lack of memory concerning this document, I accept Mr Barr's submission that Mr Hearne probably provided information to Rose and Associates which was used to prepare the projections. The projections themselves I consider were probably prepared solely to support an application by the plaintiff to its bankers for additional overdraft facilities.
The projected total sales for the plaintiff in July 1992 to June 1993 were in the order of $1,200,000.00, and for 1993-94 in the order of $1,600,000.00. Ext. P9 shows that the plaintiff's actual total sales for 1992-93 were $209,582.00. It is difficult to see what possible value Ext. D11 was to either party in the settlement of the claim, when the first year of the projection exceeded the actual sales by something in the order of 600%.
No doubt projections made by the company of its future sales may be of relevance if those projections assisted or would have assisted in the calculation of trends. It is not disputed that the plaintiff provided considerable information of value to enable this exercise to be done. Mr Nourse, for example, had available to him the company's financial records and monthly sales figures, and in addition there were graphs prepared by one of the plaintiff's employees showing the number of stems expected and actually produced with their appropriate dollar values (see Exts. P23 and D2). Further, the plaintiff's expert, Mr Cowling had produced a detailed report Ext. P61 which sets out a lot of other additional information. I am satisfied that it was neither necessary or reasonable to provide this document to the defendant given that it was an out-of-date document which grossly over-estimated the plaintiff's future sales.
As to Ext. D4, this was a document prepared by Ross and Associates in relation to the plaintiff and purports to be a projected statement of trading from March 1993 to February 1994. This projection was prepared by Rose and Associates in about April 1993 following a request by the plaintiff's bankers (see Ext. D12) who were considering whether to renew a loan due to expire on 31 March 1993. Two copies of the projection were sent out to the plaintiff by letter dated 14/4/93 (Ext. D15). There is evidence that the bank received at least one copy. The total projected income for the period was $382,980.00.
The first difficulty that I have is that the defendant asserts that Ext. D15 was not provided to it by the plaintiff, yet it was the defendant who produced this document at the trial. There is no evidence as to who provided the document to the defendant, or how, where or when the defendant obtained it. The document could have come only from three sources: (1) the plaintiff; (2) Rose and Associates or (3) the National Bank. As to Rose and Associates, the evidence of Mr Rose was that he was instructed by Mr Hearne in 1994 to provide the defendant's loss adjusters, Robins, with whatever information they required. He said that he and one of his staff, a Miss Brown, met a gentleman from Robins in January 1994. Mr Hearne had placed no restrictions on what might or might not be provided, and he left Miss Brown with Robins' representative after a short while. He said that the projections Exts. D4 and D11 were available and would have been provided if asked for, but he could not say if they were requested or not. Copies of some documents were later provided by letter (see Ext. D16) but the projections are not therein listed. It is not possible to conclude whether Robins asked for this type of document or they were provided with this document. The next possibility is the National Bank. There is evidence that on 21 January 1994 the plaintiff authorised the Bank to provide information to the defendant's loss adjusters (see Ext. P27), but the authority does not include the provision of copies of documents. Nevertheless it is possible that the Bank did provide that Ext. D15. Finally there is the possibility that the plaintiff provided it, either through Mr Hearne or by Mr Lugg. Neither could remember providing it. Given the amount of information provided, and the fact that it was Mr Lugg who handled the Business interruption claim, it is not surprising that Mr Hearne could not enlighten the Court. Mr Lugg, said that he could not recall providing Ext. D15, and, because projections were superseded by actual figures, he did not consider projections to be relevant, although he was aware that projections had been prepared by Rose and Associates. He considered the projections prepared for the joint venture might be relevant, and these were provided, as at that time he saw the future of the plaintiff tied up with the joint venture. He said that had he been specifically asked for this type of document, he would have provided it. He said he provided the joint venture's budget because it was made shortly before the loss, related to the 1993-94 year, and his understanding was that the joint venture would effectively take over the whole of the plaintiff's trading activities (this was not to be the case apparently, but is accurate so far as dendrobium production is concerned, and the plaintiff had on legal advice initially limited its claim to dendrobium production losses). I think it very unlikely that the plaintiff provided Ext. D4. There was no evidence from the defendant as to how or when it came to obtain the document. I am therefore unable to find that the document was never provided by the plaintiff either directly or indirectly.
Nor do I consider that I should find that the plaintiff deliberately withheld the document, knowing that the defendant required it. The defendant's first request for information is set out in Ext. P33. That refers to "budgeted production, both before and after the event, on both a varietal and age basis." The request was not for sales projections. The plaintiff did its best to comply with this request (see Ext. P34) and the graphs (Ext. P23). The defendant's assessors by letter dated 24/3/94 (Ext. P43) listed the material they considered relevant to the claim, copies of which were attached to the letter (see Ext. P42). There is no request for, or suggestion that, sales projections are needed. The first suggestion that sales projections may be required is in a note of a meeting held on 25/3/94 between Mr Lugg, Mr Cowling, Mr Flanigan (from Robins), Mr Steadman (an accountant assisting the defendant's assessors) and Mr Taylor from the plaintiff's insurance brokers. Under the heading "Action" in Mr Lugg's writing, is a note "93/94 Budgets/Sales Projections Prior to the Poisoning". Mr Lugg's evidence (Tr. pps 475-476) was that, in effect, he provided the Hearne Floraculture projections, because he understood they were the ones required. There is no evidence from anyone else present at the meeting that suggested otherwise, although both Mr Cowling and Mr Taylor gave evidence.
Although in hindsight in this rather complicated litigation I consider that Ext. D4 was a document which was relevant and useful, I am unable to find that the defendant requested it and that the plaintiff breached the contract by failing to provide it. Further, Ext. D4, in my opinion was not necessary to enable the defendant to assess the plaintiff's loss; it already had the same type of information, albeit in a different form.
I therefore conclude that the defendant has failed to prove that the plaintiff breached either of the relevant conditions of the policy.
I do not consider that in this regard the duty of the plaintiff to act in good faith is more extensive than the conditions of the policy.
Accordingly, the defence set out in paragraphs 21 to 25 of the Fifth Amended Defence fails.
This claim falls under paragraph 2 of the Business Interruption Section of the Policy and is limited to $10,000.00. The amount claimed is $10,000.00 and the defendant does not dispute the quantum of the claim. As any possible defence to this part of the claim is now disposed of, the plaintiff is entitled to receive this sum. These funds, I find, would have been used to partly pay off Mr Cowling's fees.
This part of the claim falls under paragraph 3 of the Business Interruption Section of the policy. The maximum amount recoverable is $250,000.00, and it is not subject to averaging. The plaintiff claims the amount of $107,159.00: see Annexure AC1/7 to Ext. P63. The defendant denies that any sum is payable under the provisions of the policy conditions.
Additional expenditure incurred during the Indemnity Period in consequence of the Damage in respect of increase in cost of working in excess of the amount payable under Item 1 for the purpose of resuming or maintaining normal business operations or administrative facilities and to minimise any interruption or interference (be there a reduction in turnover or not), but not exceeding the sum stated in the Schedule.
The plaintiff's claims falls under three broad heads:
(a) wages for staff members diverted from their normal work and employed in loss mitigation;
(b) increased administrative costs - i.e. Mr Lugg's wages; and
(c) additional water costs.
The amount claimed under this head is $71,067.00. The defendant did not challenge the quantum of the claim but submitted that in fact no additional expenditure was incurred.
The evidence was that at the time of the damage, the plaintiff employed a scientist and two laboratory assistants in a laboratory as well as staff in an installation called the phytotron on the premises. The scientist, Mr Van T'Sant was employed full time in the laboratory, as were the laboratory assistants. The phytotron staff included two persons Mark Mollison and Ramona Crossen who were employed to work in the phytotron full time. The phytotron is a controlled environment chamber used, as Mr Hearne explained it, "as a creche in order to acclimatise plants when they were freshly taken out of the laboratory jar but before they went into shade house conditions ... so, the phytrotron basically gave the plants a real boost and forced them into very active rapid growth". (Tr. p94).
Without going into detail, it is sufficient to observe that the normal duties of these staff members were directed towards the mass production of new plants on a relatively large scale. Commercial production of stems from the plants did not occur until well after the plants were placed into a shade house.
After the damage, these personnel were required to spend a large amount of their time assisting Mr Hearne in his efforts to save the existing plants. The methods used were labour intensive and also involved collecting data to see if the methods used were effective, as the distributors of Solicam were unable to offer a simple solution, and a number of different solutions were tried. In addition, some data was collected to support the claim. Weed control also became a significant problem.
The claim is put on the basis that as these staff were taken from their normal duties in order to minimise the damage to the plants, the wages expended on that activity fell within paragraph 3 of the indemnity.
Mr Barr submitted that, on the facts, there was no "additional expenditure incurred" and no "increase in cost of working". He submitted further that if the staff had been dismissed and they had been replaced by new staff employed specifically to do loss mitigation, whilst the cost of the new staff may have been an item of additional expenditure, the dismissal of the other staff would have been a saving to have been taken into account under paragraph 1 of the indemnity.
The purpose of the indemnity provided by paragraph 3 is to indemnify the plaintiff for additional expenditure incurred in resuming or maintaining normal business operations or in loss mitigation. This obviously may occur in a variety of ways. Additional staff may be employed, existing staff may be taken from another department of the Business, or they may be required to work overtime. The first question is, whether on the facts, additional expenditure was incurred. Mr Riley Q.C. submitted that there was additional expenditure because the staff were taken from plant production, which was in effect a different section of the Business, to work in loss mitigation; it was as if the staff had been sacked and new staff employed for mitigation purposes.
I consider that Mr Barr's submission is correct. The wages paid to the staff were part of the expenditure incurred by the plaintiff in the production of stems. The ultimate purpose of the staff employed in the laboratory and the phytrotron was to produce plants which in turn would grow stems and produce income. The damage not only interfered with stem production from the existing plants, it delayed or prevented new plant production. The loss of income from that process is reflected in the amount of the indemnity under paragraph 1 of the indemnity. Whilst staff were diverted from their preloss duties to mitigate damage, there was in fact no additional expenditure incurred, as the wages paid did not increase, nor was there an "increased cost in working in excess of the amount payable under paragraph 1." I therefore reject this part of the claim.
The defendant's expert, Mr Nourse, considered that Mr Lugg's wages were in part additional expenditure and he allowed $11,459.25.00 on the basis that some responsibility for the wage rested with Gardeners World Pty Ltd: see Ext. D19 pps 25-26.
Mr Barr submitted that the expenditure was not additional expenditure because the plaintiff had needed an administrator to relieve Mr Hearne for at least a year before the Damage (Tr. p217), and that as Mr Lugg's employment was related to the proposed joint venture, his salary was not incurred in consequence of the Damage, and there was no increased costs in working.
Mr Riley Q.C. submitted that the evidence was that Mr Lugg was a borrowed servant of Hearne Floraculture Pty Ltd which paid his wages; that the plaintiff incurred a legal liability to Hearne Floraculture Pty Ltd which had invoiced the plaintiff for his wages in the sum of $30,588.00; and that Mr Lugg had been employed to handle the plaintiff's insurance claim and to take over the administrative work formerly performed by Mr Hearne whose time and expertise was needed in "loss mitigation". I accept this submission. There is no evidence that Mr Lugg spent any time with the affairs of Gardeners World Pty Ltd, other than to occasionally take a telephone order on its behalf. This can be ignored as de minimus. It is not to the point that had the joint venture proceeded Hearne Floraculture Pty Ltd, through Mr Lugg, would have provided some administrative services at a cost to the plaintiff as envisaged by the minutes of the meeting of the joint venturers in May 1993, or that the plaintiff needed extra administrative staff. As at the time of the loss, and for some months thereafter, the functions performed by Mr Lugg had been performed by Mr Hearne. Because of the Damage, Mr Hearne was no longer able to perform those functions and the plaintiff incurred the expense of Mr Lugg's salary in order to perform those functions. That resulted in an increased cost in working to the plaintiff for the purpose of resuming normal business operations and administrative facilities and in order to minimise any interruption or interference with the Business.
Accordingly the plaintiff is entitled to the whole sum claimed under this head, viz., $30,588.00.
The amount claimed is $5,534.00, representing the difference in charges for normal watering operations and the amount actually expended. The difference is said to have been caused by the need to heavily flush the damaged plants over an extensive period of time to wash away as much of the poison as possible. No submissions were put to me by either party.
A number of accounts from the Power and Water Authority were tendered as Ext. P25. I was not provided with any details of how the amount of $5,534.00 was calculated.
Analysing the data in Ext. P25, for the period 16/6/92 to 16/3/93 the plaintiff consumed an average of 53 units of water per day. The accounts from 17/3/93 to 13/7/93 show a nil average. This was because the water meter failed to operate. The next period is from 14/7/93 to 5/5/94. During this period the plaintiff consumed an average of 87.55 units per day. Therefore, during this period, had the plaintiff's average been only 53 units per day, the plaintiff's water costs would have been $6,432.08 (at 41 cents per unit). Instead the plaintiff paid $10,625.15 for the units consumed. The difference is $4,193.07. I think this roughly represents the increased cost in watering over this period, but to allow for the fact that part of the additional consumption may have been due to seasonable factors, and the possibility that part of the consumption prior to 16/3/93 was understated because the water metre ceased functioning prior to then, I will reduce this by 15%. This results in an amount of $3,564.11. I consider that this additional expenditure falls within the indemnity and I award that sum.
5.6 Summary of Claim for Additional Increased Costs of Working
6. The Agreement to pay Gittus and Willis's Account
The claim, as pleaded, relies upon a separate agreement reached on 29 June 1994, whereby the defendant agreed to forward Robins' file to Gittus and Willis, and if the latter's report substantially differed from Robin's report, the defendant would pay Gittus and Willis's fees. The plaintiff further alleges that Gittus and Willis's report substantially differed from Robin's report, and claimed the amount of the fees, being $4,885.00.
The defendant pleads that the agreement was "to contribute" to Gittus and Willis' fees "only if the defendant's loss adjuster, Robins MS, had made fundamental errors in its assessment of the plaintiff's losses."
This raises questions as to whether there was a binding agreement, if so, what were the terms, and if the defendant breached the agreement.
Mr Lugg gave evidence that after he had received Robin's offer of 8 June 1994 (Ext. P53) he requested Gittus and Willis to make an appraisal of that offer. Subsequently Gittus and Willis wrote to the plaintiff (Ext. P54). Mr Lugg thought that they were critical of Robins' and he was reluctant to reveal it to the defendant. A meeting was held on 21 June 1994 between himself, Mr Neil Weeks, a senior officer of the defendant, Mr Les Holden, the senior manager of commercial insurances for the defendant, and Mr Taylor from NAB. At the meeting, Mr Lugg revealed the existence of Ext. P54 and gave it to the defendant. A number of other things were discussed but nothing was said about Gittus and Willis of any relevance.
Subsequently Mr Lugg said a further meeting was held between Mr Holden and himself. I consider that the "meeting" was in fact a telephone call made on 29 June 1994. Mr Lugg's note of this call is endorsed on Ext. P58:
- he is happy to instruct Robins to pass file to Gittus and Willis and seek report.
- if G and W report substantially disagrees with Robins then TIO will pay G and W fees.
- Robins letter is in response to Lawyers letter only.
Mr Lugg, in evidence was not asked to refresh his memory from the note. He said he was now only able to remember the effect of what was said, which was that if the Gittus and Willis report differed substantially in the approach Robins took the defendant would pay the costs of Gittus and Willis's report. Later he changed this, saying:
my recollection of the words was I think he used, if Robins had made a fundamental error, or - yeah, fundamentally erred in their approach ... or words to that effect. Then they would pay, yes. (Tr. p 422).
Mr Lugg said he confirmed the agreement by a letter which he delivered to the defendant at 2.30 pm on 29 June. He confirmed that the arrangement was as set out in this letter, Ext. P56, the relevant parts of which are:
...Further to our telephone conversation I note your willingness to instruct Robins MBS to supply their file to Gittus and Willis and that we seek a report from Gittus and Willis after having assessed the files. I thank you for you (sic) your offer and give our support for this approach. Accordingly I would be grateful if you could so instruct Robins MBS.
I also note your comments that if the Gittus and Willis report disagrees substantially with the approach taken by Robins then TIO will cover the fees involved ...
... I would appreciate your comments on the instructions to Gittus and Willis. Should they be jointly or in Tropicus name only? ...
By letter dated 30 June 1994, Mr Holden replied (Ext. P57):
Robins MBS have been instructed to contact Gittus and Willis to make the appropriate arrangements to review and discuss the Business Interruption claim file.
Any instructions to Gittus and Willis must come from yourselves as at this stage they are acting on your behalf...
Our offer of a contribution of their costs remains on the basis that Robins MBS have made fundamental errors in their assessment, not that Gittus and Willis disagree with the assessment.
In cross-examination, Mr Lugg said this (Tr. p 494):
So notwithstanding your evidence yesterday, you still have some understanding that the TIO would pay? --- On the basis that the report disagreed substantially with the approach that was taken by Robins, then TIO would cover the fees involved, yes.
He said that he did not see any difference, other than "semantics", between what he had written in his letter to the TIO in Ext. P56 and what Mr Holden had said in his letter in reply, Ext. P57. Consequently, he did not reply to Ext. P57 or seek to have the matter further clarified. Mr Holden was not called to give evidence.
On the whole, I consider that Mr Lugg was a very honest witness who did his best to recall the events of which he gave evidence as accurately as he could in every respect. Regrettably his evidence leads me to the conclusion that there are three possibilities which are of equal probability. One is that the agreement was as he asserted it in his letter to Mr Holden; another is that the agreement was as is asserted by Mr Holden in his letter, which in Mr Lugg's mind amounts to the same thing; the third is that there was no consensus ad idem at all. There is nothing which assists me to choose between these possibilities. The plaintiff bears the onus of proving that there was a binding agreement of some kind, and the terms thereof. The agreement, if one can call it that, set out in Mr Holden's letter, is clearly not the same as the agreement pleaded, and as the amount of the defendant's contribution is not specified, that agreement would be void for uncertainty.
I am unable to find that the plaintiff has proven the existence of a binding agreement to pay Gittus and Willis's fees. The position is not helped by the fact that Mr Holden was not called. True it is that I may draw an inference that his evidence would not have assisted the defendant, but that does not assist me given the state of Mr Lugg's evidence.
Mr Hearne also gave evidence on this topic. According to him, the meeting took place between himself, Mr Lugg and Mr Holden at the defendant's office before any progress payments had been made. The correspondence shows that the subject under discussion was a telephone call between Mr Lugg and Mr Holden. I consider that Mr Hearne is mistaken in his recollection and I reject his evidence on this topic entirely.
This part of the plaintiff's action is therefore dismissed.
7. The Plaintiff's Claim for Damages for Breach of Contract
The plaintiff's claim is pleaded on the basis that it was an implied term of the policy that:
(a) the defendant would pay the plaintiff's claim under the Policy within a reasonable time;
(b) the defendant would not unreasonably refuse to make progress payments to the plaintiff pursuant to Part A of Section 6 of the Policy;
(c) the defendant paid to the plaintiff $40,000 in part settlement of the plaintiff's claim under the policy.
(d) in breach of the implied terms, the defendant unreasonably refused to make any further progress claims under the Policy unless the plaintiff agreed to settle its whole claim for the sum of $92,000.
At the trial Mr Riley Q.C. put the plaintiff's claim on a somewhat broader basis than that which was pleaded. No objection to this was taken by Mr Barr. The submission was that it was not until 22 August 1997 that the defendant admitted that the damage fell within the scope of the policy, and the defendant continues to deny that any payment is due under the policy. It was further submitted that any failure by the plaintiff to provide documentation related to the quantum of the claim and had no bearing upon the acceptance or otherwise of the claim, as the defendant's position was that the claim did not fall within the scope of the policy. Mr Riley Q.C. also asserted that the obligations pleaded as implied terms arose out of the duty of the insurer to act in good faith towards its insured. The main thrust of the submission was that the defendant breached implied term (a) above because it did not settle the claim within a reasonable time.
There are a number of authorities which show that an insurer may be liable for general damages over and above the indemnity to which the insured is entitled. However it is necessary to consider these authorities with some care.
Sutton, Insurance Law in Australia, 2nd Edn., (1991) The Law Book Company, states at pps 866-867:
15.107. Where an insurer is willing to perform the contract of insurance according to its terms but nevertheless asserts a view of the contract which turns out to be wrong, although he believed that view to be correct, there is no intention not to perform the contract and no repudiation of the insurer's obligations. The claim by the assured is a claim for indemnity under the policy and the insurer in denying liability relies on the terms of the policy to support that denial. In no sense does he repudiate the contract of insurance. He may repudiate liability under the contract but he does not repudiate the contract itself. But if the insurer goes further than this and manifests "a definite resolve or decision against doing in the future what the contract required" so as to amount to a direct negation of the undertaking contained in the policy, there is a repudiation of the contract and the assured has the option of accepting that repudiation and suing for damages for breach of contract, or of ignoring the repudiation, affirming the policy and suing upon it.
If he adopts the former course he is not bound by the terms of the policy and his measure of damages including consequential loss, will be governed by the rule in Hadley v. Baxendale as to remoteness of damage. If he adopts the latter course, the terms of the policy continue to apply, the insurer's indemnity is in respect of loss of or damage to the property insured, together with any additional benefits provided for in the policy, and any consequential loss outside those benefits will not be recoverable.
More recent authorities relied upon by Mr Riley Q.C. suggest that there is an obligation upon the insurer to pay under the policy within a reasonable time, and the failure to do so amounts to a breach of contract which sounds in damages: see Moss and Another v Sun Alliance Australia Ltd (1990) 93 ALR 592; Settlement Wine Company Pty Ltd v National & General Insurance Co Ltd (1994) 62 SASR 40; Bankstown Football Club v CIC Insurance Ltd (Supreme Court of New South Wales, Cole J (unreported) 16/12/93); CIC Insurance Limited v Bankstown Football Club Limited (Court of Appeal) (1994-95) 8 ANZ Ins. Cas. 61-232. A number of other authorities are referred to both at first instance and in the Court of Appeal in the CIC Insurance, case, supra.
Has there been a departure from earlier principle, so that the insured can recover general damages for late payment even though there has been no repudiation of the contract, and no acceptance of that repudiation by the insured? If so, what is the basis of that departure? In the CIC Insurance case, for example, there was a finding that the contract had been repudiated and that the repudiation had been accepted: see p 75, 568; yet the judgment for the amount of the money due on the policy was set aside because under the policy, the insured was not entitled to payment until the insured had incurred the costs of reinstatement, that provision had not been waived, and therefore the insurer was entitled to rely upon that provision in the contract! See p 75, 568. The judgment of Kirby P on this point appears to be based on the proposition, (contrary to his later finding) that there was no repudiation by the insurer (see p 75, 565). When the question of general damages was discussed by Kirby P., it was predicated upon a finding by Cole J that the insurer had breached the contract, by not paying within a reasonable time (p 75, 565). Priestly JA held that the insurer had breached the contract by indicating a refusal to pay the costs of reinstatement when they occurred in the future, i.e. he treated the insurer as being in anticipatory breach (p 75, 571). Yet there are authorities which suggest that there can be no damages for anticipatory breach unless the party not in breach terminates the contract, although those authorities have been criticised: see Cheshire and Fifoot's Law of Contract, Seventh Australian Edn., p 774. Powell JA, although of the view that the insurer had repudiated the contract and that this repudiation had been accepted by the insured, felt that the appeal could not be determined on this basis because of the way the appeal had been conducted. Consequently, he held that the only damages for breach of contract which the insured could recover was limited to interest (p 75, 598).
The status of this decision is affected by the result of the appeal to the High Court (1995-97) 187 CLR 384, which in the end, set aside the damages award and remitted that question back to the Supreme Court.
One basis for the departure is that there are obligations on an insurer to promptly admit liability to meet a sound claim for indemnity and to pay the claim promptly required by virtue of its obligation to act with the utmost good faith towards its insured, and that as the latter obligation is an implied term of a contract of insurance by virtue of s13 of the Insurance Contracts Act 1984, so must be the former: see Moss and Another v Sun Alliance Australia Ltd, supra, at pps 601-2, per Bollen J. All of the cases referred to by Mr Riley Q.C. were cases subject to the Insurance Contracts Act. However, as this contract is not subject to the Act, this line of reasoning does not assist the plaintiff.
Another basis is the implication of a suitable term by the general law. This approach was rejected by Marks J in Protean (Holdings) Ltd (receivers and managers appointed) and Ors v American Home Assurance Company (1986) 4 ANZ Cas. 60-683 at 74, 056-7, at least so far as admission of liability was concerned, but his Honour appears to have accepted that the failure to pay under the policy within a reasonable time amounted to a breach of contract. The precise basis for this is not clear to me, if it is not based upon either the express or implied terms of the contract. Moreover, his Honour seems to have rejected the view that the obligation was based upon the duty to act in good faith (see p. 74, 060). In the United States, the problem has been solved by the evolution of the tort of bad faith (see the discussion in the Law Reform Commission's Report No. 20 on Insurance Contracts, p 327-328).
The problem is obscured further by the question of whether the failure of an insurer to pay the indemnity gives rise to a claim for damages for breach of contract, or merely for an action for a liquidated sum due under the policy. The distinction is discussed by Jordan CJ in Larratt v Bankers and Traders Insurance Co. Ltd [1941] NSWStRp 34; (1941) 41 SR NSW 215 at 223; by Pearson J in F & K Jabbour v Custodian of Israeli Absentee Property [1954] 1 WLR 139 at 143ff.; by the Supreme Court of Tasmania (Full Court) in Russell Young Abalone Pty. Ltd v Traders Prudent Insurance Company Ltd (1992-93) 7 ANZ Ins. Cas. 61-182 at 78,038; 78,039-40; and by Powell AJ in the CIC case at 75,596- 75,598. In the present case the plaintiff sues for the sum of the indemnity rather than for damages for breach of contract in failing to pay the moneys due under the contract. It was not asserted that the defendant had repudiated the contract and that the plaintiff had accepted the repudiation.
The next possible explanation lies in the statement of Mason CJ and Wilson J in Hungerfords and Others v Walker and others [1989] HCA 8; (1990-91) 171 CLR 125 at 146:
Once it is accepted that the cost of borrowing money to replace money paid away or withheld is not too remote, it is pointless to insist on a distinction between the award of damages for loss of the use of money in the case of a liquidated claim and the award of such interest in an unliquidated claim. The award of damages in accordance with Hadley v Baxendale is unrelated to, and free from, any requirement that there is, or should be, any "wrongful" withholding of money, be it a debt or damages.
The conclusions that I have reached are that firstly, where, as here, a contract does not stipulate a time for performance by the insurer, the insurer must perform its obligations under the contract within a reasonable time. This obligation is an implied term of the contract. This is the general rule in contract law, (Laurinda Pty Limited and Others v Capalaba Park Shopping Centre Pty Limited [1989] HCA 23; (1988-89) 166 CLR 623; Reid v Moreland Timber Company Proprietary Limited and Others [1946] HCA 48; (1946-47) 73 CLR 1 at 13) and it applies to insurance contracts unless there are indications to the contrary in the policy. The failure to pay within time may amount to a fundamental breach entitling the insured to repudiate the policy if the insurer evinces an intention not to be bound by the policy or an intention to carry out the contract only if and when it suits the insurer: Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd, supra. In any event, if the insurer fails to pay within a reasonable time, the insurer is in breach and the insured may sue for the indemnity under the policy, and for damages for breach of contract. In order to sue for damages, it is not essential that the insurer has repudiated the contract (Luna Park (N.S.W.) Limited v Tramways Advertising Proprietory Limited [1938] HCA 66; (1938-39) 61 CLR 286 at 300) but usually the measure of the loss will be the amount of the indemnity due under the policy: Russell Young Abalone Pty Ltd v Traders Prudent Insurance Co. Ltd supra. Nevertheless, regardless of whether or not the action is for the monies due under the policy or for damages for breach, where the policy is still on foot the insured may also claim damages for the loss of use of the money in accordance with the rule in Hadley v Baxendale: Hungerfords v Walker, supra. The losses thus caused are recoverable either because the loss is necessarily within the contemplation of the parties and therefore reasonably foreseeable within the first limb of the rule in Hadley v Baxendale, or may fall within the second limb of the rule if the loss arises from special circumstances of which the defendant had actual knowledge: Hungerfords v Walker, supra, at 142, 149. Usually this loss will be properly quantified by reference to compound interest at commercial rates, depending upon for what the plaintiff intended to use the money. However, as the cases to which Kirby P referred in the CIC case, supra, at 75,765-66 show, the loss may fall to be assessed in accordance with other factors if the losses fall within the second limb of the rule in Hadley v Baxendale.
7.5 What is a Reasonable Time to Pay the Indemnity?
What is a reasonable time for the insurer to pay the indemnity due under the policy is to be determined objectively and depends upon the circumstances, which must take account of the rights and obligations of both parties: Protean (Holdings) Ltd (receivers and managers appointed) and Ors v American Home Assurance Co., supra, at 74,059. In Settlement Wine Company Pty Ltd v National & General Insurance Co Ltd (1994) 62 SASR 40 at 71 Perry J said:
Of course, even though the test is objective, an insurer cannot be expected to know all that might come out after a long court hearing. It is a question of what an insurer, making reasonable investigations, might ascertain.
In this case, the Damage which gave rise to the claim for malicious damage to the plants and for Business interruption losses was reported to the defendant promptly, and the defendant appointed its assessors to investigate the claim promptly. It was a precondition of the right to indemnity for Business interruption that liability for the malicious damage claim be admitted. According to the evidence of Mr Taylor, the insurer, some six or seven months after the loss, indicated to him that the claim would be rejected because the Damage was deliberately caused by Mr Hearne (Tr. 509). He said that about two weeks there-afterwards, the insurer changed its mind and indicated to him that the claim would be admitted. Within a further two weeks of this, he said a settlement figure had been agreed, and it was subsequently paid by two instalments. In fact the material damage claim was paid on 8 February 1994 by one instalment (Tr. p 110). This was eight months after the damage. Thereafter the plaintiff concentrated on attempting to settle its Business interruption claim. The plaintiff had not only engaged Mr Lugg in October 1993 in order, primarily, to pursue its claims under the policy, but in March 1994, engaged the accountant, Mr Cowling, to assist in the formulation of the claim.
Mr Cowling's first report, setting out details of the claim, is Ext. P15 and is dated 21 April 1994. Shortly thereafter, the defendant made its first progress payment of $20,000.00, but that was on a "without prejudice" basis. It is difficult to understand why the defendant was not prepared to admit liability at that time. If any information was then lacking, it related only to quantum and not to liability. Mr Riley Q.C. submitted that the defendant did not admit liability until August 1997, and then during the trial, added the new defence at a late stage asserting that the monies were not yet due under the policy, a matter never raised before. This is demonstrated by the pleadings. In its original defence and counterclaim filed 9 November 1994, the defendant denied liability under the policy (see paragraph 8). That denial was repeated in its Amended Defence. In its Further Amended Defence dated November 1996, the defendant maintained its denial of liability (see paragraph 15.1). This position was maintained in its "Third Amended Defence" (sic) dated August 1997, but by letter dated 11 August 1997 the defendant admitted that "the plaintiff suffered malicious damage within the meaning of the policy but the extent of the damage remains in issue:" (see the pleading book); and foreshadowed further amendments to its pleadings to reflect this admission which finally found its way into the Fifth Amended Defence dated 29 September 1997. As Mr Riley Q.C. submitted, the inference is that the defendant refused to admit liability for tactical reasons, i.e. to put pressure on the plaintiff to settle.
I do not overlook that there were serious problems with this claim which inevitably meant that there would be delay in settlement. First, there was a suspicion that the damage to the orchids did not fall within the indemnity provisions. That matter was being investigated, apparently, both by the police and by the defendant's assessors. Indeed some of the information the defendant's assessors sought from the plaintiff's accountants in January 1994 was obviously directed towards this question. Why else would they be interested in obtaining copies of Mr and Mrs Hearne's personal tax returns, (see Ext. D16) and details of the plaintiff's loans and financial arrangements with its bankers, except to see if the plaintiff was financially unsound and Hearne therefore had a motive to make a fraudulent claim? Liability was initially denied in January 1994, apparently based on a misunderstanding by the police, and then promptly withdrawn when the police changed their position.
Secondly, the damage by its nature was ongoing, and the plaintiff was doing its best to limit the extent of the damage by what Mr Hearne called "mitigating". According to Mr Hearne he at first thought that his efforts were successful, but by at least August 1994 if not earlier he said it became clear to him that the majority of the plants would never recover (Tr. pp 278-280 and Ext. D7). Up until then, according to Ext. D7, the position was as follows:
Reference is made to our formal Business Interruption Claim of 17 May 1994 and the subsequent update by Gittus and Willis of 26 July 1994, neither of which has been accepted by your company.
You may recall that one of the factors in the claim was, that at the time of the submission, there was a healthy flush of flower spikes developing. This lead us to speculate that the effects of the poisoning had only set the plants back by the equivalent of one year and accordingly, we based our claim on this supposition.
It was for this reason that he agreed to settle the material damage claim earlier in 1994 for only the loss of 29,574 plants, (see Exts. P37, P38 and P39) whereas the business interruption claim ultimately formulated was based upon the loss of a significantly larger number of plants.
In view of the plaintiff's position, the question of on-going Damage beyond the first year ought not have presented a problem to the insurers in the period May to August 1994. Indeed in the original claim formulated by Mr Cowling, Ext. P16, there is an attached letter from the plaintiff which states:
... it is now obvious that the plants have been set back by at least one full year ...
Present indications suggest that the plants will go forward and provide the expected performance data from now on but as explained above, will be forever a year behind the normal behaviour pattern.
Consequently Mr Cowling's initial formulation was based upon the proposition that the Damage had set back plant production by one year, except for those plants already destroyed and which were the subject of the material Damage claim: see Ext. P16.
Thirdly, there were difficulties interpreting the policy, and how therefore the indemnity should be calculated. These difficulties were significant as the first part of this judgment shows. Initially the difficulties were such that the plaintiff attempted to negotiate the claim on an entirely different basis. Mr Lugg said that following discussions with Mr Flanigan of Robins, it was agreed that Mr Cowling would be engaged to look at the material already available to prepare a submission as to the quantum of the claim, and the defendant would check this submission through a Mr Stedman, another accountant. This appears to have been at a meeting held on 25/3/94: see Ext. P44. According to Mr Cowling, he was initially engaged by Mr Taylor in March or April of 1994 to act as an arbiter between the parties. A number of documents had already been assembled by Robins (Ext. P42) to be provided to the accountants for this purpose. It is apparent that the parties initially proposed to look at loss of gross profit as the basis for the claim: see Ext. P43 (dated 25/3/94) which states:
Further we advise that we shall submit to your offices on Tuesday, 29 March 1994 details regarding definitions of gross profit shortfall, turnover and other ancillary areas that will need to be clarified in order that the submission is in accordance with guidelines laid down by the Territory Insurance Office.
Mr Lugg's memory on this issue was not very good, but he thought that these definitions were needed because "there was some grey areas or confusion in terms of some of the definitions as to the way things should be incorporated in terms of income and also for the way that co-insurance should be applied." (sic) (Tr. p 386). Mr Cowling said that he was initially instructed to prepare the claim on the basis of what the parties understood the intent was, which was based on the gross profit and not Insured Gross Income. No definitions were ever forthcoming from the defendant as foreshadowed. Some further documentation was also required from the plaintiff at the meeting of 25/3/94 which Mr Lugg said he obtained (one of the items requested was "93/94 Budget/Sales Projections Prior to Poisoning" which I have already discussed). The first report which was provided to the parties and prepared by Mr Cowling, Ext. P15, is dated 14 April 1994 and was prepared on the basis of gross profit, and was, as it says, a "preliminary report" based on the difference between "Insured Gross Income" and "Estimated/Actual Gross Income", taking into account averaging. It is clear that at about this time, Mr Flanigan ceased to handle the claim on behalf of Robins and was replaced by a Mr Hallsten from Robins' Adelaide office. During the latter part of April, Mr Lugg said that there were a number of discussions with the assessors concerning the approach to be taken to the claim and that he could get no clear guidance as to what was required. Mr Lugg's frustrations were very evident when he gave his evidence recalling this period, and is demonstrated in Exts. P47 and P49. It is apparent to me that the source of the problem lay in the obscurity of the definitions in the policy and in its provisions. The fact is that neither party understood the provisions, and the plaintiff through Mr Lugg wanted to know what the insurer thought they meant because without this knowledge it was impossible to know what information was needed to support the claim. The only indication given by the defendant apart from asking for specific documents from time to time, was that the claim had to be assessed strictly in accordance with the policy's terms. Accordingly the plaintiff was forced to do its best and engaged Mr Cowling to prepare a fresh claim, which was presented on 17 May 1994 (Ext. P16). The amount claimed was $358,652.00, slightly lower than the original estimate in Ext. P15, but to be fair, it appears that Mr Cowling did not attempt to come to grips with "annual income" or "Standard Income" other than to assume that these definitions meant "estimated/actual gross income". The major difference between the two claims is that in Ext. P16, Insured Gross Income was not based on gross profit, but on the estimated gross income from loss of dendrobium production and on the assumptions mentioned earlier. The defendant's response was an offer of $92,339.00, less the $20,000.00 already paid on 8 June 1994, accompanied by the threat that:
... if the Insured continued with their unrealistic and unsustainable expectations of settlement value, we will be left with no alterative but to recommend to Insurers that the claim be left to run for the full twenty-four months indemnity period.
The general impression of the defendant's offer is that it is unrealistically low, calculated to offer a minimal amount, includes obvious errors of fact, purports to deduct amounts which in some cases are without any justification under the policy, and is designed to inflate the effect of the averaging provisions to reduce the claim as much as possible. Thereafter no further offer was forthcoming despite an effort to have Robin's offer commented upon by other assessors, Gittus and Willis, whose report, Ext. P18 dated 26 July 1994, was critical of Robin's approach and suggested that the true loss was, when calculated over the full indemnity period, $511,806.00. This information apparently brought no response from the defendants, and apart from a further progress payment of $20,000.00 made on 6 July 1994, no further effort was made by the insurer to settle the claim.
I do not consider that the defendant had any real excuse for not understanding the terms of the policy which it issued. If the terms were difficult to understand, it behoved the defendant to obtain legal advice. Of course, this may or may not have resolved the problems of definition, but there is nothing to show that the defendant ever sought legal advice. The defendant should also have informed the plaintiff what it understood the policy meant. In Burts & Harvey, Ltd., and Alchemy, Ltd. V. Vulcan Boiler and General Insurance Company, Ltd. [1966] 1 Lloyd's Rep. 354, Lawton J said, (in relation to a business interruption policy claim):
In this particular case negotiations have been made exceedingly difficult by the fact that the indemnity provisions of the policy were inappropriate to this particular case. That is not the fault of the plaintiffs. If insurance companies will issue policies which contain conditions which are inappropriate to a particular case, they can hardly say that it is the fault of the assured that it has been difficult to find out how much is due.
(see [1966] 1 Lloyd's Rep. 161 for a report of the earlier proceedings). This case is not quite the same as that before Lawton J in that the policy document had an unusual history, as I have noted previously, but I think that the principle is the same.
In all the circumstances, and allowing for a reasonable period for the defendant to consider the plaintiff's claim and to get any legal advice it needed, I consider that a reasonable time to have paid the amount due would have been not later than about fourteen days after the receipt of the Gittus and Willis report, Ext. P18. By that time, the defendant had all the information it needed, except that it did not then know that the remaining stock was not likely to recover as had been expected. But, at about this time the plaintiff notified the defendant that the position had changed, and clearly the plaintiff was indicating that basis of earlier negotiations would also change (see Ext. D7). There does not appear to have been any further response by the defendant, and on 11 October 1994 the plaintiff issued the writ in these proceedings. I consider that, notwithstanding the changed basis of the claim foreshadowed by Mr Hearne, the defendant should have been in a position to settle the claim fairly promptly after Ext. D7 had been received. I consider a reasonable time to have been by 30 September 1994, because, although the basis may have changed, the available information known to the defendant should have been sufficient by then.
Accordingly I find that the defendant breached the implied term on 1 October 1994.
The difficulty in this case is to know how the loss might best be calculated. This depends upon whether the losses suffered may reasonably be supposed to have been in the contemplation of both parties, at the time they entered into the contract, as the probable result of the breach, in accordance with the second limb of the rule in Hadley v Baxendale, or, if there are no such losses falling within that limb, whether there were losses falling within the first limb. Obviously it is crucial to this question to also consider what the plaintiff would probably have done with the money once it received it.
By 1 October 1994, the joint venture was already over. Mr Lugg had left the plaintiff's employ mid August 1994. At the time the parties entered into the policy, the defendant did not know of the plaintiff's plans to enter into the joint venture. I do not consider that it is appropriate to assess the damages by reference to any loss of business opportunity connected with the joint venture, save to say that, having regard to the fact that Hearne Floraculture Pty Ltd had spent about $110,000.00 on a shade house erected on Tropicus Holding's property, as Mr Hearne indicated to the National Bank on 20 July 1994 (Ext. D23), it is likely that this sum at least would have been expended on acquiring that asset. However, this was a business interruption policy. I think the defendant must have been aware that the plaintiff probably had borrowed capital with its bankers. Hardly any business these days operates without borrowed funds from a bank. The defendant must have known that delay in the payment of money would affect the amount of interest it would have to pay to its bankers. I consider also that the National Bank would probably have demanded that at least part of the plaintiff's debt to it be retired. The major problem so far as the bank was concerned was the interest only loan of some $210,000.00 but the total borrowings of the group were $550,000.00. Despite Mr Hearne's optimism I consider that the bank's position is clear from Ext. D23; it expected its indebtedness to be reduced from the payout which the plaintiff received. Whilst there is no evidence as to how much the bank would have required the obvious target is the amount of $210,000.00, which was a short-term interest only loan, and I consider that it is probably that this debt would have been retired. This leaves a balance of $98,000.00 approximately of which I expect the plaintiff would have used $90,000.00 as operating capital to assist the plaintiff to re-establish its business, because not all of the $98,000 would have been available for that purpose given that monies were owed to other creditors such as Mr Cowling for his fees, Gittus and Willis, and even the former accountants, Rose and Associates. I consider it likely that the plaintiff would have used this capital to reduce its overdraft, but leaving the facility in place so that it could reborrow the money when needed.
Mr Riley Q.C. submitted figures based on the assumption that $350,000.00 would have been reinvested in the business, but I do not consider that that is a likely outcome.
In conclusion, I consider that the damages should be assessed on the basis of the rates of interest charged by the National Bank on the sums of $210,000.00 and $90,000.00 and that interest should be paid on those sums at compound rates from 1/10/94 until judgment: see Hungerfords v Walker, supra, at 149. Although some figures are available in Exts. D20 and D23, I do not have all the figures available to me, nor the skill, to calculate this amount. I will leave it to the parties to see if an amount can be agreed; if not, I will hear the parties further.
8. Interest Pursuant to s84 of the Supreme Court Act
In view of my findings under paragraph 6, the plaintiff is entitled to interest on the difference between the sums awarded, less the amount of $300,000.00, pursuant to s84 of the Act, from 1 October 1994 until judgment at commercial rates. I will leave it to the parties to see if they can agree the relevant amount before judgment is entered.
I will adjourn further consideration of the issues to be determined for 28 days to enable the parties to see if agreement can be reached as to the quantum of interest and damages due to the plaintiff. If agreement cannot be reached, I will hear the parties further at a time and date to be fixed. If the parties are able to agree the amounts outstanding, the parties are at liberty at any time to apply for the entry of judgment.
Tropicus Orchids Flowers & Foliage Pty Ltd
Territory Insurance Office [1998] NTSC 73; 148 FLR 441; 10 ANZ Ins Cas 61-412
(1908) 5 CLR 533
(1990) 93 ALR 592
(1988) 15 NSWLR 641
(1994) 62 SASR 40
(1976) 50 ALJR 769