Federal Court of Australia

AAI Limited trading as Vero Insurance v Technology Swiss Pty Ltd [2021] FCAFC 168

ORDERS

THE COURT ORDERS THAT:

1.    The appeal and cross-appeal be dismissed.

2.    The parties are to file and serve written submissions on the question of costs by 1 October 2021.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

PERRAM J:

1    On 6 December 2014 the Respondent (‘the insured’) shipped a consignment of fog cannons from Melbourne to Bangkok, the cost, insurance and freight (‘CIF’) value of which was $770,095.58. It did so by contracting with a freight forwarder, Famous Pacific (Vic) Pty Ltd (‘FP Shipping’). The freight forwarder arranged for carriage of the fog cannons on board the CMA CGM Quartz which was operated by an ocean carrier, CMA CGM. During the voyage the fog cannons were damaged as a result of having moved during transit, most likely due to inadequate stowage. The damage to the fog cannons was discovered during routine survey after they were unloaded from the CMA CGM Quartz in Bangkok.

2    The insured had entered into a contract of marine insurance with the Appellant, a marine insurer (‘the insurer’). Relevantly, the policy provided for a limit of indemnity of $500,000 for any one conveyance with the basis of the valuation being CIF plus 10%. There was an excess of $250 for each loss.

3    In the month following the arrival of the fog cannons in Bangkok, that is to say on 29 January 2015, the insured made a claim on the policy. The insurer accepted liability for the claim and granted indemnity in respect of it subject only to the quantification of the loss. The insurer took the view that the fog cannons could be repaired for around $200,000. (The sums involved were generally in Euros but it is convenient to approach the matter, as the parties did, in Australian dollars). The insured did not agree. It thought that the cost of repairing the fog cannons and transporting them for that purpose exceeded what they would be worth at the end of the process and therefore that it had suffered a constructive total loss under the policy. Further, its purchaser had indicated that it would refuse to accept the repaired fog cannons. The insurer and insured sought to persuade each other as to the merits of their respective views on whether the fog cannons were a constructive total loss, but without success.

4    Whilst that dispute remained unresolved it was necessary for the fog cannons to be stored, lest eventually they were to be repaired. From January 2015, not long after they were damaged, they were stored by the Respondent at its expense in a bonded warehouse in Thailand.

5    In August 2015 the Respondent sued the Appellant in this Court in a proceeding entitled Technology Swiss Pty Ltd v AAI Ltd t/as Vero Insurance (NSD 959 of 2015). That proceeding is separate to the proceeding with which this Court is presently concerned and it is convenient to refer to it as the ‘first Federal Court proceeding’. In that proceeding the insured claimed the full amount of the indemnity of $500,000 (less the $250 deductible) and the costs of storing the fog cannons in the bonded warehouse which it was said were recoverable under a separate term of the policy (the distinction between this lesser storage costs indemnity and the central indemnity against loss of the fog cannons assumes greater significance later in these reasons and should be noted). The insured made other claims in the alternative in the event that the loss was characterised as a partial loss. It also sought interest up to judgment and costs.

6    Shortly after the commencement of the first Federal Court proceeding the insurer paid the insured $200,000 which was its view of the costs of repairing the fog cannons. Subsequently, it indicated that it would also indemnify the insured for the costs of storing them in the bonded warehouse, but only once the Respondent provided evidence that those costs had actually been incurred.

7    Two years of litigious activity then ensued in the preparation of the litigation for trial. Experts on the repair of fog cannons were marshalled and their competing views readied for an airing in court. Prior to trial, however, the parties took part in a mediation which began on 12 February 2017. This appears to have led to protracted negotiations which, on 1 June 2017, produced a settlement. It was embodied in a deed of release of the same date (‘the Deed’). It will be necessary to return to the terms of the Deed in more detail shortly but for the purposes of identifying the issues in the appeal it is convenient in the first instance to deal with it only in general terms. The Deed identified four disputes between the insurer and the insured. These were:

(a)    the claim for indemnity for the damage to the fog cannons, ie a claim for a sum which was up to $500,000 less the deductible. The insurer put its exposure under the indemnity at $200,000 but the insured thought it was $500,000;

(b)    the claim for storage costs up to 1 March 2017 (but not between that date and the date of settlement embodied in the Deed – 1 June 2017);

(c)    the first Federal Court proceeding; and

(d)    various disputes between them about the operation of the policy (most of these were concerned with the quantum issues flowing from the fact that the insured was insured for less than the value of the fog cannons and the related proposition that it had therefore to bear a proportionate share of the losses and associated costs).

8    For the purposes of this appeal only disputes (a)-(c) are centrally relevant. The litigation in (c) embodied all of the aspects of the disputes in (a)-(d) but included two other claims important to this appeal. The first of these was a claim for interest up to judgment and the second a claim that the insurer should pay the insured’s costs of the case. The central clause within the Deed was clause 2(a) which provided:

Technology Swiss agrees to accept $425,000 (the Settlement Monies) from Vero in full and final settlement of the Insurance Claim, the Storage Costs Claim, the Proceeding and the Dispute.

9    The four claims referred to in cl 2(a) reflect the claims set out above at (a)-(d). There was a separate question concerning the costs of storage after 1 March 2017 until the date of the Deed, 1 June 2017 (as opposed to the earlier storage costs before that date – the subject of (b) above). These later storage costs were dealt with separately in cl 2(c) under which the insurer agreed to pay the insured those costs. They are not germane to the present debate.

10    As part of the settlement embodied in cl 2(a), the insured released the insurer from all claims it might otherwise have had: cl 2(e). The parties also agreed that the insured would file a notice of discontinuance of the first Federal Court proceeding with no order as to costs within 7 days of the receipt of the settlement monies: cl 3.

11    Subsequent to the Deed, the insured sued the freight forwarder, FP Shipping, for the loss of the fog cannons in the County Court of Victoria. The pursuit of that suit exposed a shortcoming in the settlement they had reached in relation to the first Federal Court proceeding. Because the insurer had indemnified the insured for the damage to the fog cannons at least to the extent of $200,000 (being the first payment it made) there is no doubt that it was entitled to be subrogated to the rights the insured had against FP Shipping at least as to that amount. However, in the settlement that they had reached the insurer and the insured had not apportioned the global payment of $425,000 as between the insurer’s liability under the central indemnity and as to other liabilities which did not spring from that indemnity. Chief amongst these was the claim made by the insured for its legal costs of the first Federal Court proceeding and the claim relating to costs incurred in storing the fog cannons prior to 1 March 2017 (the statement of agreed facts before the trial judge stipulated that the insurer had indemnified some but not all of the storage costs incurred prior to 1 March 2017. These are referred to below as ‘the unpaid storage costs’). It is not now in dispute that neither of those claims could be characterised as claims under the indemnity for the loss of the fog cannons. How much of the $425,000 represented those claims? The answer to this question the parties never agreed.

12    This lacuna in the settlement they had reached now led the parties to have different views of the extent of the insurer’s rights of subrogation. Although this is a simplified account of the dispute which arose, the insured took the view that the insurer had indemnified it for the loss of the fog cannons only to the extent of $200,000 and that no part of the $425,000 was to be characterised in that way. The insurer, on the other hand, characterised the whole of the $425,000 as having that character (although this would appear to imply that it would have indemnified the insured for some $625,000 under a policy with a limit of cover of $500,000).

13    Both parties thought it appropriate that they should share the legal costs of pursuing FP Shipping. Where the parties fell down, however, was in ascertaining what the costs sharing agreement between them should be. It is not necessary to chart the precise terms of this debate but it turned in part on the different views the parties had about the extent of the insurer’s rights of subrogation (ie $200,000 versus $500,000). The parties therefore did not reach agreement on a costs sharing arrangement and the insured conducted the litigation against FP Shipping at its own expense.

14    I return to that litigation shortly. The parties’ inability, however, to agree on whether, and if so to what extent, the global sum paid under the Deed was to be characterised as an indemnity payment condemned them to future disagreement when the time came to work out how any monies recovered from FP Shipping were to be shared between them. By then, questions of subrogation no longer mattered because the insured had conducted the litigation and recovered a judgment sum. Instead, the issue had become the closely related question of the extent of the insurer’s right to recoup from the insured a portion of any monies recovered from FP Shipping.

15    In fact, on 13 November 2019 the insured obtained a judgment against FP Shipping in its favour in the sum of $863,758.70. This reflected the invoice value of the fog cannons ($738,615.40), freight costs ($16,526.94) and interest up to judgment ($108,616.36). It also recovered costs against FP Shipping, on a standard basis up until 15 July 2019 and thereafter on an indemnity basis following an offer of compromise served 11 July 2019. The insured has received this money from FP Shipping.

16    It is not in dispute therefore that the insured has received from the insurer two payments. These are the initial payment of $200,000 being the insurer’s view of the value of the loss suffered and the $425,000 payment under the Deed. Together these total $625,000 and when this is added to the $738,615.40 received from FP Shipping for the invoice value of the fog cannons, the insured has now received considerably more than their CIF value which was only $770,095.58.

17    The picture is more complex, however, than this simple statement implies. The insured incurred costs in pursuing the insurer in the first Federal Court proceeding as well as some costs in the County Court proceeding (although its actual expenditure in that case consisted only of the difference between its actual costs in that proceeding and the costs it recovered from FP Shipping). There is of course also the question of the unpaid costs of storing the fog cannons prior to 1 March 2017. Because it is unclear how much of the $425,000 is to be apportioned to those non-indemnity matters it is correspondingly difficult to be dogmatic about whether the insured has, in fact, been overcompensated. The reality is that on every issue the earlier failure of the parties to agree on an allocation of the $425,000 as between indemnity and non-indemnity claims now blocks any easy answer.

18    Nevertheless, the fact that the insured recovered $738,615.40 from FP Shipping for the invoice value of the of fog cannons has led the insurer to the view that the insured has suffered no loss at all and that it should return to it the $625,000 it has been paid. The insured now accepts that the insurer is entitled to recoup the $200,000 payment from it but on the question of how the $425,000 is to be treated, the parties remain trapped in their instinctive posture of disagreement. The present proceeding was commenced to resolve this issue. Pending its outcome the funds recovered from FP Shipping in the County Court litigation are being held in a solicitor’s trust account.

19    The trial judge concluded that it was in fact possible to apportion the $425,000 to an extent. He approached the matter by observing that cl 2(a) provided for the settlement of the four disputes by the payment of $425,000 and that cl 2(e) provided releases in relation to all aspects of each of those disputes: [82]. He accepted that the parties had not dealt with the disaggregation of the $425,000. Two of the disputes were of a kind which his Honour felt could not possibly be characterised as falling within the scope of the indemnity in the policy for the loss of the fog cannons. These were disputes constituted by the claim for the costs of the first Federal Court proceeding and the claim for the unpaid storage costs accrued before 1 March 2017. Neither party took issue with this conclusion. There was a dispute about the quantum of unpaid storage costs claimable by the insured but this turned on the operation not of the indemnity for the loss of the fog cannons but on the separate term of the policy dealing with reimbursement for such costs.

20    More completely, his Honour treated the claim constituted by the first Federal Court proceeding as having to it three elements: (a) an element relating to the claim for the loss of the fog cannons; (b) an element relating to pre-judgment interest on that claim; and (c) a claim for the insured’s costs of the proceeding. His Honour thought that (a) and (b) were intimately related to the claim under the indemnity but he also found, and it is not challenged on appeal, that the claim for the costs of the proceeding was not to be characterised as a claim on the indemnity.

21    The trial judge therefore identified two aspects of the insured’s claims referred to in cl 2(a) which could not be claims on the indemnity: the unpaid storage costs prior to 1 March 2017 and the costs of the first Federal Court proceeding. His Honour then turned to the question of apportionment of the global sum of $425,000. He did not seek directly to ascertain which part of the $425,000 was to be allocated to the two non-indemnity disputes. Rather, his Honour utilised an additional piece of information which was available to him. This information was that these claims both had ascertainable upper limits. In the case of the costs of the first Federal Court proceeding it was an agreed fact at trial that the insured’s legal costs as at the date of the Deed were $277,260.16. In effect, the trial judge reasoned that it could not reasonably be inferred that the parties would have understood the insurer to have settled the claim for the insured’s costs of the first Federal Court proceedings by paying the insured a sum which exceeded what those costs actually were.

22    The trial judge did not accept the insurer’s submission that it was appropriate to consider what the taxed or assessed costs might have been for that would not have served the purpose for which his Honour was deploying the figure, namely, as a theoretical maximum: [127].

23    The trial judge approached the unpaid storage costs in the much same way. Before the trial judge the position of this sum was slightly more complex than that of the agreed legal costs. Agreed Fact 10 referred both to the unpaid storage costs of $39,648.72 and to a further amount of $8,679.28 allegedly due by the insurer but not pressed by the insured. From these two figures the trial judge derived the sum of $30,969.42 by subtracting the latter from the former. In doing so, a two cent arithmetical appears to have crept in as the actual difference is $30,969.44. In fact, the explanation may simply be that the trial judge used the figure of $30,969.42 because this was the amount agreed by the parties at the date of settlement to represent the value of the storage claim. In any event, this arithmetical discrepancy was not the subject of complaint by either party and may be disregarded. The trial judge then rejected the insurer’s submission that a lower figure for storage costs should be used instead of this figure. Here the insurer’s argument was that the insured was only entitled to recover the costs of temporarily storing the goods while inspections were underway to ascertain whether they could be repaired or sold. The trial judge rejected this because, once again, it was not germane to the exercise upon which he had embarked, namely, the ascertainment of the maximum figure which could possibly be allocated to this dispute.

24    The trial judge then combined these two sums – $277,260.16 and $30,969.42 – to arrive at a total of $308,229.58 which his Honour reasoned represented the maximum amount the parties could possibly be taken to have agreed to settle the two non-indemnity claims. Since these were the only elements of the claims in cl 2(a) that were not within the principal indemnity in the policy, this allowed his Honour to conclude that the difference between that sum and $425,000 (being $116,770.06) represented the minimum conceivable amount paid pursuant to the indemnity. In fact the difference is $116,770.42 but, again, the parties do not cavil with the arithmetic in that regard. His Honour then reasoned that whilst the insured and insurer might well theoretically have intended some higher sum to be apportioned to the indemnity claims, no such intention could be inferred from the available material. The fact that the Deed did not provide any further mechanism for apportionment was, at the end of the day, the insurer’s problem and it could do no better than $116,770.06.

The Provisions of the Deed

25    The recitals to the Deed were in these terms:

A.    On 24 April 2014, Vero issued to Technology Swiss a combined cargo policy with policy number MTO107078461 for the period 24 April 2014 to 24 April 2015 providing marine cargo insurance cover for goods shipped at or from ports and or places in Australia to ports and/or places in the World (the Policy).

B.     On or about 6 December 2014, Technology Swiss shipped a consignment of Fog Cannons (Fog Cannons) comprising 6 FC30SS model fog cannons, 3 FT30SS model fog tubes and 5 FC408033 fog cannon models (the Consignment) from Melbourne, Australia to Bangkok, Thailand (the Carriage).

C.     During the Carriage the Consignment was damaged and on 29 January 2015, Technology Swiss made a claim under the Policy for $500,000 (the Insurance Claim).

D.     Vero accepted liability to indemnify Technology Swiss but denied liability for the quantum of the Claim (the Denial).

E.     Following the Insurance Claim, Technology Swiss made a claim against Vero from Vero [sic] for monthly storage costs of the Consignment in Thailand (the Storage Costs Claim).

F.     On or about 28 August 2015, and on a without prejudice basis, Vero indemnified Technology Swiss for Euro 127,500 (the Indemnity Payment).

G.     On various dates from on or about 28 August 2015 to the date of this deed, Vero has on a without prejudice basis made payments to Technology Swiss of monthly storage costs for the Consignment in Thailand.

H.     On 3 September 2015, following the Denial and the Indemnity Payment, Technology Swiss commenced proceedings against Vero in the Federal Court of Australia pursuant to proceedings numbered NSD959/2015 (the Proceedings).

I.     Vero Deny liability for the Insurance Claim and in the Proceedings except to the extent of the Indemnity Payment (the Dispute).

J.     The parties have agreed to settle the Dispute as more fully set out in this Deed.

26    Clause 2, under the heading ‘Payment and Release’ set out the settlement monies. Clause 2(a) is set out above but it is convenient to set it out again at this point:

(a)    Technology Swiss agrees to accept $425,000 (the Settlement Monies) from Vero in full and final settlement of the Insurance Claim, the Storage Costs Claim, the Proceedings and the Dispute.

27    Clause 2(c) provided:

(c)     Vero agrees to make payment to Technology Swiss of the storage costs it incurred for the Consignment in Bangkok, Thailand from 1 March 2017 until the date of the execution of this Deed by Vero (Storage Costs Settlement Monies).

28    Clause 2(e) contained a release in these terms:

(e)    Technology Swiss hereby releases, forever discharges and holds harmless Vero its servants, agents, and officers from and against all actions, claims, suits, causes of action, and demands of every kind which it now has or may at any time have, or which, but for the execution of this Deed it would or might have had against Vero arising from the circumstances recited in this Deed, the Carriage, the Insurance Claim, the Storage Costs Claim, the Proceedings, and the Dispute.

29    Clause 2(f) provided relevantly:

(f)     The parties agree to keep the terms of the settlement, the circumstances recited in this Deed, and the Deed confidential, subject to the rights of disclosure:

…

(3)    If reasonably necessary pursuant to the prosecution of a claim by either party in relation to the carriage of, or damage to, the Fog Cannons.

30    Clause 3 contemplated discontinuance:

3.     Discontinuance

Within 7 days of receipt of the Settlement Monies and the Storage Costs Settlement Monies, Technology Swiss will prepare and file a Notice of Discontinuance, discontinuing the proceedings on the basis that each party bear their own costs.

31    Clause 11 provided for subrogation:

11.    Subrogation

Vero’s rights (and Technology Swiss’ obligations) arising under the “Subrogation Clause” in Section 5 of the Policy and the general law of subrogation, are preserved.

Debates Concerning the Treatment of the Whole Sum of $425,000

32    The insurer submitted that it was entitled to recoup the whole of the $425,000 because it had paid that amount in good faith believing itself to be discharging its obligations of indemnity under the policy. It pointed to authorities that hold an insurer entitled to be subrogated where it has paid the insured even though it may have had no actual liability to do so under the policy so long as it has done so in a bona fide belief that it was paying under the policy: Sydney Turf Club v Crowley [1971] 1 NSWLR 724 (‘Sydney Turf Club’); King v Victoria Insurance Company Ltd [1896] AC 250 (‘King’).

33    On the other hand, the insured submitted that it was entitled to retain the whole of the $425,000 and correlatively the insurer to recoup none of it. The submission was that cl 2(a) provided for a global sum which was not expressed to be in discharge of the obligation of indemnity under the policy. Clause 2(a) was to be seen as creating an entirely new entitlement in the insured to the receipt of the sum of $425,000. A payment by the insurer pursuant to this new right could not be a payment under the indemnity in the policy.

34    The trial judge was not disposed to accept either of these views. He did accept that the entitlement conferred by cl 2(a) to the receipt of the $425,000 was indeed for a global sum and that the Deed did not provide any machinery for its allocation between the four disputes. But that was not the end of the matter. He also accepted the insured’s submission that a right of subrogation would arise when payment is made even if it is not legally required under the policy so long as it is honestly intended to be in satisfaction of a loss under the policy. He found as a fact that the insurer had paid the $425,000 believing its actions to be in satisfaction of its obligations under the policy.

35    He did not accept, however, that this entitled the insurer to recoup all of the $425,000. This was because he identified a feature of the present litigation not present in the authorities establishing that principle. This was the fact that the dispute between the parties was as to the extent of the indemnity. I do not think that would ordinarily matter in a case where the only claim made and settled was the claim under the indemnity. But where there were several claims settled by the global sum only some of which were related to the indemnity and where the insured itself had an interest in the litigation against FP Shipping because it was under insured, this entailed some unfairness if the bona fide intentions of the insurer alone were to be brought to account. The trial judge therefore applied this principle at [108]:

From King and Sydney Turf Club, and recognising the purpose of the equity based on the principle of indemnity, the conception of payment under the policy in circumstances where there has been a dispute about coverage can be articulated as follows: Was the payment (and in what amount) made in such circumstances as to lead to the conclusion that the parties to the insurance policy and to the dispute honestly and bona fide treated the payment (whether or not disputed or compromised) as a payment representing a reduction of the loss covered by the policy and so indemnity under the policy, and so negate any proposition that the payment was unrelated to the policy and voluntary or that it was related to some other consideration bargained for that is not capable of characterisation as indemnity under the policy.

36    He then went on to conclude that it could be inferred that at least $116,770.06 of the $425,000 was referable to the indemnity claim.

37    I do not think the insurer’s submission that it should be entitled to the whole of the $425,000 can be sustained. The situation before the Court is not governed by Sydney Turf Club or King. Neither case involved a settlement in a global sum which included within it in a disaggregated way claims which were within the indemnity and claims which were not. The trial judge was correct to conclude that they did not provide the answer in this case.

38    As the trial judge correctly observed the doctrine of subrogation (and by extension recoupment) arises to give effect to the equities between the parties: see also, JD Heydon, MJ Leeming and PG Turner, Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies (5th ed, LexisNexis, 2015) at 387 [9-290]. An assessment of those equities in this case must include the fact that the parties had a dispute as to the coverage afforded by the indemnity which they have never resolved and which now lies submerged beneath the global sum upon which they agreed. This Court cannot now raise that dispute from the depths to resolve it but it would be inequitable between the parties to permit the outcome of the insurer’s recoupment action to turn entirely on the views of only one side to that dispute. The dictates of equity require the understandings of both parties to be brought to account to the extent that they are mutual and ascertainable. The trial judge did not err in so reasoning.

39    I have explained the trial judge’s approach to the ascertainment of the sum of $116,770.06 above. He did not think that either party could reasonably be taken to have intended the settlement for the costs of the Federal Court proceeding or the storage costs to have exceeded the actual amount of those costs as at the date of the Deed. Those actual costs totalled $308,229.58 from which it followed that the non-indemnity claims must lie in the range of $0 to $308,229.58. Since the sum of the non-indemnity claims and the indemnity claims had to be $425,000 it followed that the same logic implied that the indemnity claims must lie between $116,770.06 and $425,000.00.

40    The insurer attacked this reasoning submitting that it was erroneous because inter alia the trial judge had in effect applied the principle of construction that in cases of ambiguity an insurance policy is to be construed against an insurer. Here the argument was that what in fact could be discerned from the Deed was not that the parties mutually intended the sum of $116,770.06 to represent the indemnity claims. Rather, it was that the indemnity claims lay in the range of $116,770.06 to $425,000. There was no more reason to alight on the figure of $116,770.06 than there was to alight upon any other figure in that range.

41    I would reject this argument for two reasons. First, the trial judge’s apportionment was not concerned with the construction of cl 2(a) or the Deed. He was quite clear that the terms of the Deed did not allocate any of the $425,000 as between the four disputes. His identification of the sum of $116,770.06 was not the result of a process of construction. It was rather a process of identifying the mutually held intentions of the parties for the purpose of assessing the extent, if any, of the right of recoupment. The premise of the insurer’s argument – that the trial judge was construing the Deed – is not made good. Secondly, whilst it true that the trial judge’s reasoning leads to the conclusion that the indemnity claims must in theory lie in the range of $116,770.06 to $425,000 the question was what had the insurer managed to prove on the balance of probabilities? The only figure which could be demonstrated to that standard was $116,770.06. Every figure above that sum could be met with an argument that some lower figure was equally likely.

42    For its part the insured submitted that the trial judge had impermissibly disaggregated a global sum and that the global sum could not be characterised as a payment pursuant to the indemnity in the policy. It drew attention to Wellington Insurance Co Ltd v Armac Diving Services Ltd (1987) 38 DLR (4th) 462 (‘Wellington’) which it submitted was decided in circumstances very similar to the present case. I do not accept this submission. In Wellington an insurer made a payment to the insured on the basis that it was not being paid pursuant to the indemnity but rather to bring an end to proceedings and as a public relations gesture. It was held that no right of subrogation arose in those circumstances. In my view, this decision is distinguishable for the same reason that Sydney Turf Club and King are distinguishable. It is simply not addressed to a situation where there has been a payment of a global sum in settlement of both claims which are within the indemnity and claims which are not.

43    Turning to the specifics of the insured’s submission: as to the first contention, the trial judge did not suggest that the disaggregation occurred under the terms of the Deed. Rather, he was seeking to ascertain the extent of the insurer’s right of recoupment and was doing so by identifying what the parties at a minimum must have understood the payment to represent. Viewed from that perspective, his Honour was doing no more than what often happens in a revenue context where it is sometimes necessary, if possible, to allocate some element of a global sum to capital or revenue. In that context, it is well established that a single payment or receipt of a mixed nature may be apportioned amongst several heads to which it relates if an inference as to the intention of the parties can properly be drawn from the agreement itself or the surrounding circumstances: McLaurin v Federal Commissioner of Taxation (1961) 104 CLR 381 at 391 per Dixon CJ, Fullagar and Kitto JJ; Allied Mills Industries Pty Ltd v Commissioner of Taxation (1989) 20 FCR 288 at 313 per Bowen CJ, Lockhart and Foster JJ. I do not accept therefore the insured’s submission that these authorities establish that apportionment is not possible. Quite to the contrary, they appear to provide an additional justification for his Honour’s approach. There is no need therefore to consider either the insurer’s submission that this argument had not been pursued at trial or its contention that the authorities in question do not apply outside the revenue context.

44    The insured’s second contention was that the payment of the $425,000 had been made pursuant to cl 2(a) and could not therefore have been paid pursuant to the indemnity in the policy. This was said to be because the Deed recorded the fact that the insurer denied all liability to pay the insured any more than the $200,000 it had already paid. There is no doubt that this is correct as Recital I was explicit in recording that the insurer denied ‘liability for the Insurance Claim and in the Proceedings except to the extent of the Indemnity Payment (the Dispute)’. But that recital defined the extent of the disagreement as ‘the Dispute’ and Recital J then recorded that the ‘Dispute’ was to be settled ‘as more fully set out in this Deed’. I do not think that one can infer from Recital I that the operative terms of the Deed are therefore to be read as supporting either party’s’ view as to whether the payment of the $425,000 was to be seen as being pursuant to the indemnity or not. That was the dispute between the parties immediately before the execution of the Deed. What they agreed in the operative provisions of the Deed was that the dispute was to be resolved on the terms of the Deed. The insured’s submission impermissibly seeks to give life to the dispute settled by the Deed when it is clear that the dispute was to be resolved but only on its terms. The one matter the parties did not expressly agree upon in the Deed was whether the four disputes referred to in cl 2(a) were within the indemnity.

45    In any event, I have already indicated that the process by which the trial judge determined that the indemnity claims had to be at least $116,770.06 was a reflection of the mutually held and ascertainable intentions of the parties. Both took issue with particular numerical elements along the path which led to that figure which I will deal with shortly. For present purposes, however, the point is that one arrives at the insured’s submission with the knowledge that a minimum amount for the indemnity claims can be identified within the sum of $425,000. Having determined that allocation is possible for that reason, can the argument be accepted that the allocated sum – let it be assumed, $116,770.06 – should be characterised as having been paid not pursuant to the indemnity in the policy but instead pursuant to cl 2(a)?

46    I would not be disposed to accede to this argument either. The payment in cl 2(a) is not just a payment; it is, as it explicitly says, a payment ‘in settlement’ of the four claims. Further, insofar as the minimum sum of $116,770.06 is concerned, this is a sum which must at least have been paid in settlement of the claim under the indemnity. So one has a payment of a sum in settlement of the claim under the indemnity. The mechanics of the settlement are a covenant to pay in cl 2(a) (strictly a covenant to receive – nothing turns on this) coupled with a release by the insured of further claims on the insurer under the indemnity: cl 2(e). So viewed, it is clear that what the parties were seeking to do was bring their dispute about the extent of the insurer’s liability to the insured to an end by settling it. The disputed rights under the policy were replaced with new rights under the Deed.

47    The insured is of course correct that the right of subrogation (or as here, recoupment) will usually require a payment which is made under the indemnity in the policy. But this is not an absolute rule as King and Sydney Turf Club both demonstrate. Where the rights and obligations under the indemnity in a policy have merged in a judgment or in a deed which settles those rights as between the parties, it is true to say that new rights and obligations have been created which supplant those which obtained under the policy. However, it would be unthinkable that an insurer who has been successfully sued on a policy to judgment and who has then satisfied the judgment would not be entitled to exercise rights of subrogation because the payment had not been made under the indemnity in the policy but rather under the judgment. If this were so every insurer would run the risk in defending proceedings on a policy of losing any entitlement to subrogation if unsuccessful. Such an outcome cannot be correct and I therefore accept that a right of subrogation arises when an insurer pays a judgment obtained against it in acquittal of an insured’s rights of indemnity under a policy. Having done so, I am unable to distinguish that situation from one where the parties settle their dispute in a deed of settlement rather than by means of a judgment. I do not accept therefore that the fact that the payment was made pursuant to cl 2(a) rather than the indemnity can have the consequence that no right of subrogation or as here, recoupment, arises.

48    The insured’s argument is not advanced by observing as it did at [13] of its written submissions that the parties could have provided a superior mechanism for ascertaining which parts of the $425,000 were to be attributed to the indemnity. No doubt this is true. But the fact that a better method can be imagined has no rational bearing on whether the logic applied by the trial judge was sound.

49    Nor do I accept the insured’s submission that his Honour had impermissibly taken into account the subjective intention of insurer in arriving at the conclusion that apportionment was possible. It is true that the trial judge did refer to the evidence of the insurer’s claims manager that she had intended that the whole of the $425,000 was for the purpose of indemnity but his Honour was explicit in concluding that this was irrelevant to the question of apportionment: [122]. This submission therefore is founded upon on a wrong premise.

50    I do not accept the insured’s submission that the payment of the $425,000 was reasonably explicable without reference to payment by way of indemnification. The basis of this argument was that the release contained in cl 2(e) had relieved the insurer ‘from the conduct of the proceedings’. It is unclear by this submission whether the insured was referring to the insurer’s conduct of its own defence in the first Federal Court proceeding or to some putative conduct of the proceedings in the County Court. Neither is persuasive. If the submission was directed to the conduct of the County Court proceeding against FP Shipping then, according to the submission, the effect of the release was to add another element into what was bargained for when it was agreed the insurer would pay the insured the sum of $425,000. If this is the argument, it is bereft of substance. Clause 11 of the Deed preserved the insurer’s rights of subrogation under section 5 of the policy and the general law. It is not necessary to set these out because whatever else one might possibly say the insurer had no obligation to conduct the litigation against FP Shipping. If it indemnified the insured it had an entitlement to conduct that litigation in the insured’s name but there was never any obligation on it to do so. The obligation therefore alleged by the insured to have been released by cl 2(e) did not exist.

51    On the other hand, if the submission refers to the fact that the discontinuance relieved the insurer of the costs involved in the further conduct of the first Federal Court proceeding the submission is even less attractive. What legal obligation or right of the parties, on this view, was released by cl 2(e)? There are only two candidates: a legally enforceable obligation on the insurer to conduct its own defence or a corresponding right in the insured. Both contentions are sufficiently rebutted by their articulation. A variant of this argument was that the insurer received the benefit of the discontinuance of the proceedings which ‘had obvious value to the respondent above and beyond the exposure of the appellant to the respondent’s monetary claims’. Clause 2(a) is explicit in saying that the sum of $425,000 was to be paid in full and final settlement of, amongst other matters, the first Federal Court proceeding. Whatever the obvious value of the discontinuance of the proceeding above and beyond its monetary claims was, it is hard to discern why that is not the precise subject matter of this aspect of cl 2(a).

52    Next the insured submitted that cl 2(e) released matters which went beyond its claim for interest, storage, costs and the pleaded indemnification claim. Here the point was that the payment of the sum of $425,000 was at least in part referable to the insured’s costs of retaining ownership of the fog cannons and being responsible for their disposal. Since the argument is couched in terms which suggest that an obligation of the insurer or a right of the insured was released, a proper assessment of the submission is aided by a delineation of what the precise rights or obligations involved might have been. If the insured’s costs of retaining ownership of the fog cannons was something released by cl 2(e) this can only mean that but for the release the insurer would have been responsible for the costs of the insured retaining ownership of the fog cannons. Only two such costs of ownership were identified by the insured. The first was storage costs presumably after the date of the Deed. The second was the fact that the insured would be responsible for the disposing of the fog cannons (presumably an activity which would require the expenditure of money). Again, the premise of the argument can only be that but for the release the insurer would have been responsible for either matter. The insured identified no provision of the Policy, however, imposing such an obligation on the insurer nor any other legal principle which would result in its imposition. The submission cannot, absent such an explanation, be accepted for no legal obligation has been identified as having been released by cl 2(e).

53    In those circumstances, neither party’s submission about the need to treat the $425,000 as a sum entirely for its benefit can be accepted.

Debates about Particular Figures

54    The parties then raised particular disputes about the figure the trial judge arrived at.

55    I do not accept the insurer’s submission that lesser figures should have been used in calculating the total of the non-indemnity claims or the insured’s submission that an amount for pre-judgment interest should have been deducted from the $425,000 in determining the quantum of the indemnity claims.

56    Dealing first with the insurer’s submissions, which were threefold. First, no element for the costs of the first Federal Court proceedings should have been included because the Deed, properly construed, suggested that the parties had agreed that they would bear their own costs. So much followed from cl 3.

57    Because of the stage which the first Federal Court proceeding had reached when the case was settled, the filing of a notice of discontinuance which did not include a statement that each party was to bear its own costs would result in the party filing the discontinuance being liable for the other party’s costs of the proceeding: r 26.12(2)(b) combined with r 26.12(7) of the Federal Court Rules 2011 (Cth) (‘FCR’). In order to prevent that automatic effect of the rules it was necessary for the discontinuance to say in terms that each party would bear its own costs.

58    I do not think cl 3 contains a promise by both parties that each would bear their own costs. What it contains is a promise that the insured would file a notice of discontinuance in those terms. Can it be implied from the promise to file a notice in that form that the insured was agreeing with the insurer that it would bear its own costs of the first Federal Court proceeding? I do not think so. The statement that the parties would bear their own costs, in the context of FCR rr 26.12(2)(b) and 26.12(7), was merely a statement that there should be no order that the insured should pay the insurer’s costs of the proceedings. Such an agreement throws no light on nature of the settlement contemplated in cl 2(a).

59    The insurer’s second submission was that it is wrong to use the total amount of the insured’s costs to calculate the total of the non-indemnity claims and instead what should be used is the likely amount of those costs after taxation or assessment on a party and party basis. The problem with this submission is that it overlooks the nature of the exercise being undertaken. That exercise is the ascertainment of the maximum amount the parties could possibly have decided to attribute to the non-indemnity claims. Unless maximum figures are used it is not logically possible to deduce the minimum figures implied for the indemnity claims. For example, the fact that the insured’s taxed costs might be $150,000 is not inconsistent with the parties having attributed some higher figure in the settlement for that element. The only amount which one can rationally say could not be exceeded is the amount of the insured’s actual costs.

60    The insurer’s third submission was that it is wrong to use the amount of the actual storage costs and that a lesser amount, taking into account that it was only liable for storage for a reasonable period, should have been utilised. This submission founders for the same reason.

61    Turning then to the insured’s position, it submitted that in assessing the indemnity claims the trial judge had failed to deduct an amount for pre-judgment interest. I do not think this is correct. The trial judge did not directly seek to ascertain the range in which the indemnity claims lay. Rather he determined the range in which the non-indemnity claims had to lie and deduced from it the range for the indemnity claims. Recasting the submission to reflect what the trial judge actually did it becomes a contention that the trial judge ought to have included the pre-judgment interest among the non-indemnity claims. Put another way, the insured seeks to subtract from the sum of $116,770.06 a further amount for pre-judgment interest.

62    The submission is not persuasive even when recast correctly. At [116] his Honour accepted that the claim for pre-judgment interest was inextricably tied to the claims under the policy. The insured relied upon a passage at [129] where his Honour said:

If the process of ascertainment of mutual intention by inference or implication is to eliminate from the payment of $425,000 such extant claims as could not possibly be referable to the damage to the goods and pre-judgment interest therefor (both of which were recovered from the carrier) it is necessary to deduct from $147,739.84 the storage claim agreed by the parties to amount to $30,969.42 as at the date of settlement, leaving a sum of $116,770.06 as the part of the sum of $425,000 inferentially or implicitly necessarily paid as indemnity by way of compromised claims for damage to the cargo, and interest thereon. No greater sum can be concluded to be the mutual intention of the parties, in the absence of words of appropriation in the deed or other facts leading to a different compelling inference or implication. I reject the proposition of Vero that, in this process and at this stage, I should limit or deny any deduction for the storage claim by some evaluation of the worth of the suing and labouring claim to this extent. The claim was there; it was bona fide. I am not asked to decide the extent of the valid invocation of the suing and labouring clause. The only task available to the Court is to assess what can necessarily be seen to be the mutual intention of the parties as to the funds or part thereof.

63    As this makes clear, the trial judge was not seeking to ascertain the amount of the indemnity claims. He was seeking to ascertain the amount of the non-indemnity claims. Given the finding at [116] that the pre-judgment interest claim was tied to the indemnity claims it was inevitable that it could not be included amongst the non-indemnity claims. That is all that [129] says. For completeness, I would note that no argument was mounted in relation to pre-judgment interest on the storage costs (which would probably be a non-indemnity claim).

Other Suggested Errors

64    Finally, I reject the insured’s argument that the trial judge had impermissibly used communications passing between the parties after the date of the Deed, 1 June 2017, to construe it for three reasons. First, in arriving at the figure of $116,770.06 the trial judge was not construing the Deed but was rather seeking to ascertain the scope of the equity of recoupment by reference to what could reasonably be attributed to the parties’ mutual intentions. Principles of contractual interpretation were irrelevant to that exercise. Secondly, even assuming they were somehow relevant it is clear that the trial judge did not use the material in the way alleged. At [133] his Honour said this:

I am fortified in my conclusion that at least the sum of $116,770.06 was mutually intended as a payment for damage to the goods by TS’ approach to the possible cost sharing agreement. Its conduct manifested a recognition by way of admission that at least such sum was recognised as an indemnity under the policy. As later conduct it cannot assist in the construction of the deed; but it is conduct which can assist in supporting by later admission a conclusion as to earlier inferred or implied intention.

65    The insured did not attempt to explain what aspect of this reasoning was incorrect other than to say that it was. It seems to me, with respect, to be orthodox. Thirdly, even if the trial judge had been construing the Deed and even if his reliance on the material was contrary to principles of contractual interpretation, it is clear that he derived the sum of $116,770.06 from the agreed facts that were put before him. Any error would therefore be an immaterial one, a point which is reasonably obvious from the opening words of [133] which make it clear that this matter was being used as check on a conclusion which had already been reached.

66    The appeal and cross-appeal should both be dismissed. I agree with the orders proposed by Derrington J in relation to the issue of costs.

Associate:

Dated:    17 September 2021

REASONS FOR JUDGMENT

JAGOT J:

67    The primary judge did not err in concluding that the insurer, Vero, was entitled to recoup from the insured, TS, the amounts paid by the insurer to the insured as a payment in reduction of the insured’s loss by way of indemnity. The primary judge did not err in determining the character of the payment made ($425,000 pursuant to a deed of settlement between the insurer and insured (the Deed)) by reference to the objectively determined mutual intention of the insurer and insured with respect to the payment. The primary judge did not err in ascertaining the mutual intention of the insurer and insured as to that part of the payment of $425,000 made in reduction of the insured’s loss by way of indemnity. Accordingly, the primary judge’s order of 12 February 2021, which reflects the reasons for judgment in Technology Swiss Pty Ltd v AAI Limited trading as Vero Insurance [2021] FCA 95 (J) and is to the effect that “[Vero] is entitled to recoupment from such funds in the sum of $316,770.06 as representing payments under the policy for the purposes of the doctrines of subrogation and recoupment of Euro 127,500 (agreed to be $200,000) and $116,770.06”, is not to be disturbed.

68    The relevant facts and issues are set out in the reasons for judgment of each of Perram J and Derrington J. I agree with their processes of reasoning, which expose why Vero’s appeal and TS’s cross-appeal should be dismissed. As their reasons indicate, the competing positions of Vero and TS reflect a long-standing and apparently irreconcilable divergence of views. After their entry into the Deed, the parties were unable to agree to a cost sharing agreement about the proceeding for recovery by TS against the freight forwarder in the County Court of Victoria. The proceeding below and the appeal and cross-appeal are a continuation of this dispute.

69    Vero’s position is too extreme because it contends that the entirety of the payment of $425,000 it made to TS under the Deed is subject to the right of recoupment when cl 2(a) of the Deed records that the payment was made “in full and final settlement of the Insurance Claim, the Storage Costs Claim, the Proceedings and the Dispute”. The Insurance Claim was defined as TS’s claim for $500,000 under the policy of insurance. The relevant principle is that the right of recoupment attaches only to payments made by the insurer to the insured by way of indemnification of the insured (that is, to reduce the insured’s loss) purportedly or actually under the contract of indemnity.

70    TS’s position is too extreme because it contends that apart from Vero’s payment of the $200,000 to TS, which was expressly made by way of indemnification, the entirety of the payment Vero made under the Deed was intended to discharge obligations under the Deed and, thereby, was not made by way of indemnification. TS relied, in particular, on recital I of the Deed, which provides that Vero denies liability for the “Insurance Claim and in the Proceedings except to the extent of the Indemnity Payment (the Dispute)”. Recital I, however, cannot be considered in isolation from the operative provision in cl 2(a) referred to above. Further, a payment an insurer makes in good faith to settle a claim under a policy of insurance, ordinarily, will be intended by the insurer to be by way of indemnification.

71    The real issue, which the primary judge correctly identified at J [76], was how the payment of $425,000 was to be treated given that the $425,000 was an undifferentiated sum said, in cl 2(a), to be in full and final settlement of not only the Insurance Claim, but also the Storage Costs Claim, the Proceedings and the Dispute, as those terms are defined in the Deed.

72    The exercise that the primary judge undertook was to identify the objective mutual intention of the parties as to which part of the $425,000 was a payment by way of indemnity and thereby subject to the right of recoupment. This approach reflects principles properly derived from the authorities as to the nature of the right of recoupment, adapted to the facts of the present case in which the payment made was one undifferentiated sum by reference to four categories described as the Insurance Claim, the Storage Costs Claim, the Proceedings and the Dispute.

73    Wellington Insurance Co Ltd v Armac Diving Services Ltd (1987) 38 DLR (4th) 462, on which TS relied, was clearly distinguishable. In Wellington Insurance the insurer expressly disavowed any intention of the payment being made by way of indemnification under the policy of insurance. As a result, no right of recoupment in the insurer arose. The primary judge was right at J [97] to characterise Wellington Insurance as a case which confirmed that the relevant question is “whether it can be taken (whether from express words or inferred or implied from the circumstances) that the payment or some part of it was mutually intended to be an indemnity for the insured loss and in that sense be under the policy”.

74    The primary judge was also correct to observe at J [99] that King v Victoria Insurance Company Limited [1896] AC 250 confirmed that the right of recoupment in the insurer arises even if the parties believe, wrongly, that the policy of insurance applies and the insurer pays intending the payment to be by way of indemnity under the policy. As the primary judge also noted, however, the “circumstances of bona fide settlement of insurance claims is wider than” a payment under a mistaken belief that it is by way of indemnity under a policy.

75    The requirements for the right of recoupment to arise are that there must be a policy under which there is a right of indemnity, a claim made under the policy, and a payment made by the insurer to the insured in good faith intended to reduce the insured’s loss. Such an intention may exist if: (a) the insurer and insured wrongly believe the policy applies and the payment is being made under it (as in King), (b) the insurer and insured disagree about the application of the policy, or (c) (as in the present case) the insurer and insured disagree about the extent to which it provides indemnity. As the primary judge put it at J [104]:

If the parties are in dispute as to the extent of response of a policy there is no reason in equity or in principle why moneys paid in a bona fide compromise of a claim made under the policy should not be able to be treated as giving rise to the equity of subrogation to the extent that the payment can be seen as mutually intended to reduce the loss claimed under the policy of indemnity, by acceptance in the compromise of the insured’s claim, even if the primary position of the insurer (which may in fact be correct) is that it is not liable to the extent claimed and to the extent paid under the compromise. It is difficult to see why the same conclusion should not apply to the compromise of a dispute as to whether the policy responds at all, at least to the extent that the payment can be seen as ex gratia, the insurer reserving its rights. This expression of the matter conforms with how Jacobs JA (with whom Mason JA (as the Chief Justice then was) and Manning JA agreed) expressed the matter in Sydney Turf Club v Crowley [1971] 1 NSWLR 724 at 730:

If an insured claimed to be indemnified by one insurer and that insurer disclaims liability, but honestly and by way of ex gratia payment with reservation of his rights pays the amount of the claim, then he is entitled to be subrogated to the rights of the insured against the real insurer.

76    The reference to an ex gratia payment in Sydney Turf Club v Crowley [1971] 1 NSWLR 724 at 730, understood in context, cannot mean a payment not intended to be made under the policy to reduce the insured’s loss. This is apparent from the fact that the payment was said to be a payment of “the amount of the claim”. That is, an insurer may make a payment intending it to be by way of indemnification under the policy even if the insurer’s primary position is that the policy does not respond to the loss that is the subject of the claim or (as in the present case) does not extend to the full amount of the loss claimed.

77    The principle which the primary judge applied to identify that part of the payment made under the Deed subject to the right of recoupment, being that part of the payment made on the basis of a mutual intention that it be by way of indemnification under the policy, correctly reflects the equitable foundations and nature of the right of recoupment. Where, as in the present case, the insurer and insured disagree about the extent to which the policy responded to the claim, the necessary determinant of the extent of the equitable right of recoupment must be the (objectively ascertained) mutual intention of the parties with respect to the nature of the payment made by the insurer. In respect of ascertaining mutual intention, the primary judge said (at J [107]):

The equities of subrogation and of recoupment depend upon substance and not form, and upon the practicalities of application of commercial good sense and right behaviour, including the duty of good faith. The question of the meaning of legal instruments of compromise is important, but may not be comprehensively determinative.

78    Given the terms of the Deed in respect of the payment of the $425,000 in the present case, those principles were to be applied to the following question as the primary judge identified at J [117]:

… can [it] be concluded that the payment (or any part of it) can be seen as treated by the parties as a payment representing an indemnity under the policy as a bona fide compromise of a claim under the policy …

79    The primary judge resolved this question on the facts relevant to the objectively ascertained mutual intention of the parties, particularly as manifested by the terms of the Deed, in accordance with the substance (not the form) of the Deed, commercial good sense and right behaviour, including the duty of good faith. That process of resolution was founded on properly derived principle. The parties’ further challenges to the primary judge’s determination on the facts of the extent to which the payment by Vero of the $425,000 was to be characterised as a payment by way of indemnity under the policy should be rejected for the reasons given by each of Perram J and Derrington J.

Associate:

Dated:    17 September 2021

REASONS FOR JUDGMENT

DERRINGTON J:

Introduction

80    This matter concerns the apportionment between an insurer, AAI Limited trading as Vero Insurance (Vero), and its insured, Technology Swiss Pty Ltd (TS), of the proceeds of a recovery action brought by the insured against a third party freight forwarder for damage to its goods. Prior to that action, there was a dispute as to the extent of Vero’s admitted liability to indemnify TS in respect of its loss under a cargo policy. Vero had acknowledged its liability in an amount of $200,000 which it paid. The disputation was eventually settled with Vero paying TS a further sum of $425,000 and the terms of the settlement were recorded in a settlement deed. The action against the freight forwarder, Famous Pacific Shipping (Vic) Pty Ltd (FP Shipping), was successful, and damages in the sum of $863,758.70 were recovered in respect of TS’s loss.

81    Vero and TS disputed their respective entitlements to such proceeds which is the subject of this action. In general terms, the learned primary judge held that Vero was entitled to be subrogated to 59% of the recovery proceeds with TS entitled to 41%. Significantly, Vero’s entitlement was capped at the amount of $316,770.06 which his Honour determined had been paid by way of indemnity. That amount comprised of the initial payment of $200,000 and $116,770.06, the latter being the portion of the $450,000 paid under the deed which was identified as having been paid as indemnity. Both Vero and TS have appealed the primary judge’s orders.

82    For the reasons which follow, both the appeal and cross-appeal should be dismissed. The learned primary judge was, with respect, plainly correct to identify that a right to subrogation arises when an insurer has undertaken by a policy of insurance to indemnify the insured, the insured has made a claim on the policy, and the insurer has made a payment to the insured in respect of the loss for which the latter has claimed the indemnity. His Honour was also correct to observe that it is immaterial to the existence of its right to subrogation that the insurer had not accepted that it was obliged to indemnify the insured, that it had denied its liability to do so or, indeed, that it was not actually so obliged as a matter of law.

83    Having identified the correct principles, the learned primary judge construed the terms of the settlement deed between Vero and TS and identified the mutual intention that a proportion of the lump sum paid under it was in respect of the insured’s claim for indemnity rather than for other reasons. It followed that Vero was entitled to be subrogated to the proceeds of TS’s action against FP Shipping in respect of the sum of that amount ($116,770.06), in addition to the amount of $200,000 which was expressly paid by way of indemnity.

Background

84    The matter proceeded before the primary judge on a statement of agreed facts drawn from the material which the parties had produced. Consequently, on the appeal, there were no relevant disputes of a factual nature.

85    On 29 April 2014, TS as the insured and Vero as the insurer entered into a contract of marine insurance in the form of a combined cargo time policy for the period from 24 April 2014 to 24 April 2015 at 4.00pm. It provided for a relevant indemnity of $500,000 for any one conveyance or location. The basis of the valuation was cost, insurance and freight (CIF) plus 10%, with an excess of $250 for each and every loss.

86    On or about 6 December 2014, TS shipped a consignment of fog cannons from Melbourne to Bangkok, the CIF value of which was $770,095.58. The contract of carriage was entered into with FP Shipping as freight forwarder, and the ocean carrier was CMA CGM with the goods to be carried on board the ship CMA CGM Quartz. During the course of the voyage, the goods were damaged consequent upon their shifting whilst stowed, apparently as a result of inadequate strapping. They were insured goods under the policy.

87    In late January 2015, TS submitted a claim to Vero in respect of the damage sustained.

88    The claims manager handling the file at Vero, Ms Kong, considered that the actual value of the fog cannons was not clear, though the claimed CIF value was noted as being $770,095.58.

89    On or about 20 May 2015, Vero acknowledged its liability for indemnity in respect of the claim, subject to quantification. By an email of the same date, it advised TS to mitigate its loss by acting as a prudent uninsured in respect of the storage of the goods in order to avoid any further charges.

90    From about July 2015, Vero had formed the view that the goods could be repaired at a cost of €127,000 (approximately $200,000). It offered to pay this amount to TS less the $250 policy deductible and this remained its position as to the quantum of its liability.

91    Conversely, TS claimed that the goods were a constructive total loss (CTL) and, on 3 June 2015, gave Vero written notice of abandonment of the goods for the purposes of s 68 of the Marine Insurance Act 1909 (Cth) (Marine Insurance Act).

92    On 12 August 2015, TS commenced proceedings in this Court against Vero, although they are not the current proceedings.

93    It claimed that the goods were a CTL which was founded upon an estimated cost of repair of between €539,974.45 and €756,310.01 due to the fact that they had to be transported to Italy for any necessary repair work. Although TS made an alternative claim for the cost of repairs, it alleged that the combined costs would exceed the value of the goods and that the purchaser would not accept repaired goods in any event.

94    In those proceedings, TS claimed for storage fees on the basis that the policy required it to take all reasonable measures to avoid or minimise further loss or damage to the goods, and provided that reasonable costs so incurred would be reimbursed. As it was, the goods remained stored in Bangkok from January 2015 until May 2018.

95    By its defence, Vero admitted its liability to pay the cost of repairs and storage, but relied on s 87 of the Marine Insurance Act and Pt 3, s 4.2 of the policy. On that basis, it pleaded that it was entitled to reduce its liability for total or partial loss rateably and in the proportions of 70.2%:29.8% (calculated on the basis of a CIF value $711,250 and the policy limit of $500,000). On this basis, it asserted its liability was limited to $351,000 if the goods were a CTL (being 70.2% of $499,750) or €89,505 (being 70.2% of €127,500) if a partial loss.

96    On 28 August 2015, it paid TS €127,500 (agreed to be the equivalent of $200,000) pursuant to the policy as indemnity for TS’s loss.

97    Subsequently, on 2 November 2015, it offered to indemnify TS with respect to the storage costs and to pay a further $50,000 to settle the claim.

98    On 8 December 2015, it paid a further sum of $26,000.03 in respect of storage costs and again offered a further $50,000 to settle the claim. That offer was rejected.

99    Further negotiations occurred and a mediation was conducted. The meditation position papers were tendered in evidence before the primary judge and are referred to later as required. On 1 June 2017, sometime after the mediation, the matter settled and the parties entered into a settlement deed (the Deed) under which Vero agreed to pay $425,000 to TS. There is no evidence before the Court of the negotiations between the mediation and the entry into the Deed. It was titled “Deed of Release” and its terms are of pivotal importance to the resolution of the issues on appeal.

100    The recitals to the Deed were as follows:

A.    On 24 April 2014, Vero issued to Technology Swiss a combined cargo policy with policy number MTO107078461 for the period 24 April 2014 to 24 April 2015 providing marine cargo insurance cover for goods shipped at or from ports and or places in Australia to ports and/or places in the World (the Policy).

B.    On or about 6 December 2014, Technology Swiss shipped a consignment of Fog Cannons (Fog Cannons) comprising 6 FC30SS model fog cannons, 3 FT30SS model fog tubes and 5 FC408033 fog cannon models (the Consignment) from Melbourne, Australia to Bangkok, Thailand (the Carriage).

C.    During the Carriage the Consignment was damaged and on 29 January 2015, Technology Swiss made a claim under the Policy for $500,000 (the Insurance Claim).

D.    Vero accepted liability to indemnify Technology Swiss but denied liability for the quantum of the Claim (the Denial).

E.    Following the Insurance Claim, Technology Swiss made a claim against Vero from Vero [sic] for monthly storage costs of the Consignment in Thailand (the Storage Costs Claim).

F.    On or about 28 August 2015, and on a without prejudice basis, Vero indemnified Technology Swiss for Euro 127,500 (the Indemnity Payment).

G.    On various dates from on or about 28 August 2015 to the date of this deed, Vero has on a without prejudice basis made payments to Technology Swiss of monthly storage costs for the Consignment in Thailand.

H.     On 3 September 2015, following the Denial and the Indemnity Payment, Technology Swiss commenced proceedings against Vero in the Federal Court of Australia pursuant to proceedings numbered NSD959/2015 (the Proceedings).

I.    Vero Deny [sic] liability for the Insurance Claim and in the Proceedings except to the extent of the Indemnity Payment (the Dispute).

 J.    The parties have agreed to settle the Dispute as more fully set out in this Deed.

101    Clause 2 of the Deed was entitled “Payment and Release” and made provision for the making of a number of payments by Vero. By cl 2(a), TS agreed to accept a further payment from Vero as follows:

(a)    Technology Swiss agrees to accept $425,000 (the Settlement Monies) from Vero in full and final settlement of the Insurance Claim, the Storage Costs Claim, the Proceedings and the Dispute.

102    By cl 2(c), Vero agreed to pay a sum on account of the further storage costs which TS had incurred:

(c)    Vero agrees to make payment to Technology Swiss of the storage costs it incurred for the Consignment in Bangkok, Thailand from 1 March 2017 until the date of the execution of this Deed by Vero (Storage Costs Settlement Monies).

103    For its part, TS provided a full release in respect of claims which it might have maintained against Vero:

(e)    Technology Swiss hereby releases, forever discharges and holds harmless Vero its servants, agents, and officers from and against all actions, claims, suits, causes of action, and demands of every kind which it now has or may at any time have, or which, but for the execution of this Deed it would or might have had against Vero arising from the circumstances recited in this Deed, the Carriage, the Insurance Claim, the Storage Costs Claim, the Proceedings, and the Dispute.

104    Clause 3 made provision for the discontinuance of the then extant Federal Court proceedings between TS and Vero:

3.    Discontinuance

Within 7 days of receipt of the Settlement Monies and the Storage Costs Settlement Monies, Technology Swiss will prepare and file a Notice of Discontinuance, discontinuing the proceedings on the basis that each party bear their own costs.

105    By cl 11, Vero’s rights of subrogation against the freight forwarder were preserved:

11.     Subrogation

Vero’s rights (and Technology Swiss’ obligations) arising under the “Subrogation Clause” in Section 5 of the Policy and the general law of subrogation, are preserved.

106    The policy also contained provisions dealing with the insured’s rights of subrogation:

Subrogation clause

You agree to comply with the requirements set out in Part 1, Section 10 – Claims Procedures. When we settle a claim, we may endeavour to pursue recovery rights against the carrier or any other third party who caused loss or damage to the goods. You authorise us to act in your name in such recovery action, and undertake to give us reasonable assistance in such actions.

107    The question of Vero’s liability under the policy for the costs of storing the damaged fog cannons in Bangkok assumed some importance in this matter. The factual underpinning of that issue was agreed between the parties in the statement of agreed facts:

The total cost of the Storage up until the Deed of Settlement (executed on 1 June 2017) was $99,252.77, of which $59,604.05 was indemnified by Vero and $39,648.72 was not indemnified by Vero. As to the unindemnified amount of $39,648.7:

a.     Pursuant to clause 2(c) of the Deed of Release (referred to in paragraph 13 below), Vero agreed “to make payment to Technology Swiss of the storage costs it incurred for the Consignment in Bangkok, Thailand, from 1 March 2017 until the date of the execution of this Deed [being 1 June 2017]”;

b.     The storage costs it incurred from 1 March 2017 until 1 June 2017 were $8,679.28;

c.     Technology Swiss has not pressed for, and Vero has not paid, the sum of $8,679.28 pursuant to clause 2(c) of the Deed of Release. This is not the subject of any claim in these proceedings.

108    By the agreed facts, it was also accepted that TS’s legal costs in connection with the earlier Federal Court proceedings were $277,260.16.

The claim against FP Shipping

109    Following entry into the Deed, Vero and TS attempted to negotiate a cost sharing arrangement for the commencement and prosecution of proceedings against FP Shipping. Various proposals were put forward although none was accepted. Specifically, agreement could not be reached as to the manner in which the proceeds of the action would be apportioned.

110    In the absence of agreement, TS eventually commenced proceedings on about 20 June 2018 in the County Court of Victoria against FP Shipping. By orders made on 13 November 2019, judgment was given in favour of TS in the amount of $863,758.70: Technology Swiss Pty Ltd v Famous Pacific Shipping (Vic) Pty Ltd [2019] VCC 1542 and Technology Swiss Pty Ltd v Famous Pacific Shipping (Vic) Pty Ltd (No 2) [2019] VCC 1826. That sum comprised the invoice value of the fog canons at $738,615.40, freight at $16,526.94 and interest on those sums in the amount of $108,616.36. For reasons which were not explained, TS did not seek to recover from FS Shipping any amount on account of storage costs.

111    On 26 November 2019, the judgment sum was paid to TS’s solicitors. The current proceedings were commenced by TS in the Federal Court’s Insurance List in May 2020.

The proceedings at first instance

112    Before the primary judge, TS initially submitted that the only indemnity payment under the policy was the sum of $200,000, being the agreed AUD equivalent of the €127,500 which Vero had expressly paid by way of an indemnity under the policy. On that basis, it was submitted that the amount to which Vero was entitled from the proceedings of the action against FP Shipping was $166,746.94, being the amount of $200,000 reduced by what was described as an “indemnity shortfall”. TS submitted further that Vero was not entitled to recover anything in respect of the $425,000 payment which it made under the Deed on the basis that it was by way of the settlement of a dispute and not by way of indemnity which was necessary to support subrogation. In the alternative, it submitted that, as it had allocated the $425,000 first to its legal and expert costs and outstanding storage costs, the only amount referable to the indemnity under the policy was $118,257.83.

113    In response, Vero submitted that it was entitled to recoup all sums it had paid under or by reference to the policy in good faith, being the initial payment of €127,500 and the subsequent settlement sum of $425,000. It submitted that the $425,000 ought to be considered as payment for indemnity because it had admitted liability under the policy as well as the obligation to indemnify, and that the only issue in dispute as to its liability to indemnify was the question of the reasonable cost of repair and the quantum of the claim. It argued that the payment it made should be regarded as a payment in good faith and by way of indemnity and that this was sufficient to give rise to a right to subrogation. It sought to rely on the affidavit of its claims officer, Ms Kong, who deposed to those matters. Vero also pointed out that if TS’s primary position were accepted, TS would, in total, receive approximately $1.3 million as compensation for its loss of goods valued at $770,095.58 and, even allowing for the costs of the earlier Federal Court proceedings, it would have a windfall double recovery of approximately $300,000. Finally, it submitted that the costs of the earlier Federal Court proceedings were specifically dealt with in cl 3 of the Deed such that no part of the $425,000 could be said to be attributable to that matter.

The primary judge’s reasons

114    The learned primary judge noted that neither party asked the Court to decide which of Vero or TS was correct in its stand taken in the earlier Federal Court proceedings. That is, TS had claimed a CTL and that it was entitled to a full indemnity up to the insured limit of $500,000, whilst Vero had claimed that its liability to indemnify was limited to €127,500. His Honour also noted that whilst TS had recovered damages from FP Shipping on a total loss basis, it did not follow that Vero’s position as against TS was in any way wrongful. Rather, each party had adopted a bona fide position in relation to the claim. He also noted that putting aside storage costs (for which Vero was liable under the suing and labouring clause above the policy limits), TS was fully indemnified for its loss by the recovery action against FP Shipping. It recovered the full CIF value, pre-judgment interest and freight. It also recovered its indemnity costs from a point well before the hearing. It followed that the subrogation flowing from such indemnity would demand that the amount of $200,000 paid under the policy for repair could be recouped from TS who had received over $700,000 for the invoice value of the goods as a total loss. The overcompensation in that respect was plain, as his Honour identified. The remaining question was how the $425,000 paid under the Deed ought to be treated and, in particular, whether any part of it was paid by way of an indemnity under the policy. He accepted that the terms of the Deed were central to the resolution of these issues.

115    On the question of costs, his Honour held that the parties’ agreement that the earlier Federal Court proceedings should be terminated by consent orders, including their agreement that there be no order as to costs, did not determine their rights inter se as to the apportionment of the $425,000 payment. The consent order to which they agreed was merely the agreed mechanism for putting an end to those proceedings. Consequently, on a proper construction of the Deed, Vero paid an undivided sum to TS for all the claims it was making, including its claim for the costs of the previous litigation, and to free itself from any potential liability in respect of them, all without any attempt to apportion or allocate the sum paid.

116    The primary judge then considered in detail the decision in Wellington Insurance Co Ltd v Armac Diving Services Ltd (1987) 38 DLR (4th) 462 (Wellington Insurance) which he noted had some similarities to the present case. He also considered the decision of the Privy Council in King v Victoria Insurance Company Ltd [1896] AC 250 (King v Victoria Insurance) on which Vero had relied as broadening the scope of the entitlement to subrogation to all payments which were made in good faith and honestly in response to a claim under a policy. Although he did not accept Vero’s submissions as to its breadth, he did note that “subrogation as an equitable principle arises to give effect to the equities between the parties on payment rather than in working out their strict contractual rights”: at [100].

117    He noted (at [102]) that the context of the issue before the Court was the compromise of a dispute between an insurer and its insured of a claim for indemnity where bona fide views were held as to the policy’s operation in the circumstances. In that context, he observed that it would be somewhat startling if there could be no subrogation where the insurer, although possibly correct in its view of the policy, was nevertheless willing to compromise and pay a disputed and compromised sum by settling a bona fide claim made under the policy. He said (at [104]):

… If the parties are in dispute as to the extent of response of a policy there is no reason in equity or in principle why moneys paid in a bona fide compromise of a claim made under the policy should not be able to be treated as giving rise to the equity of subrogation to the extent that the payment can be seen as mutually intended to reduce the loss claimed under the policy of indemnity, by acceptance in the compromise of the insured’s claim, even if the primary position of the insurer (which may in fact be correct) is that it is not liable to the extent claimed and to the extent paid under the compromise. It is difficult to see why the same conclusion should not apply to the compromise of a dispute as to whether the policy responds at all, at least to the extent that the payment can be seen as ex gratia, the insurer reserving its rights. …

118    Subsequently, he observed the practical realities of disputes between insureds and insurers as to the entitlement to an indemnity under a policy and noted the frequent occurrence of insurers resolving claims by the payment of money whilst reserving their rights. These circumstances could give rise to questions whether all or part of such a payment engages subrogation. He articulated the appropriate reasoning in the following manner (at [108]):

From King and Sydney Turf Club, and recognising the purpose of the equity based on the principle of indemnity, the conception of payment under the policy in circumstances where there has been a dispute about coverage can be articulated as follows: Was the payment (and in what amount) made in such circumstances as to lead to the conclusion that the parties to the insurance policy and to the dispute honestly and bona fide treated the payment (whether or not disputed or compromised) as a payment representing a reduction of the loss covered by the policy and so indemnity under the policy, and so negate any proposition that the payment was unrelated to the policy and voluntary or that it was related to some other consideration bargained for that is not capable of characterisation as indemnity under the policy. An obvious example of the latter would be the legal costs of the dispute about coverage; another would be payment for the putting an end to the policy. This articulation conforms with how the Court in Wellington expressed the application of principle to the facts (see [95] above). The payment or some relevant part of it will be treated as representing indemnity under the policy if from the parties’ agreement in all the surrounding circumstances it was the mutual intention of the parties to reduce the loss insured against by the policy, whether derived expressly, impliedly or inferentially.

119    In this way, his Honour posits an apparently objective test as to the parties’ mutual intention in relation to a payment by the insurer to the insured, and as to whether the payment is fundamentally intended to represent a reduction of the insured’s loss covered by the policy, that is, an indemnity. Where the mutual intention with which a payment is made is not expressly identified in a settlement deed, evidence as to that intention “may be taken from all the surrounding circumstances that may reveal inferentially or impliedly the mutual intention of the parties”: at [115].

120    On the above basis, he observed that there was no doubt that Vero was seeking to put an end to the whole litigation but, equally, that the whole of the payment of $425,000 was made for all the claims made and the whole dispute, which was a dispute as to indemnity. He concluded that, unlike the situation in Wellington, it could not be said that the Deed stated that the payment was not being made under the policy but rather merely to bring an early end to the legal proceedings or as a public relations gesture. He refined the issue to whether it can be concluded that the payment (or any part of it) was treated by the parties as a bona fide compromise of a claim for indemnity under the policy, liability for which was denied as to quantum (beyond the earlier payment of €127,500) but not as an issue of indemnity: at [117].

121    With the apparent encouragement and approval of the parties, he considered the negotiations between Vero and TS prior to their entering into the Deed. In particular, he referred to the positions adopted in the preceding mediation. He rejected TS’s submission that none of the $425,000 payment was attributable to reducing TS’s loss by way of indemnity under the policy but equally rejected Vero’s claim that all of it was so attributable. He observed that any insurer in Vero’s position ought, in its compromise with its insured, reveal that it is paying (although under dispute and reserving its position) some sum by way of reduction of the loss insured under the policy: at [124]. However, as the parties did not so allocate or make any division of the $425,000 in the Deed, the Court was required to infer or search for an implication as to what was mutually intended. He identified that as TS had incurred costs in its claim against Vero of $277,260.16, the remainder of $147,739.84 should be seen as payment for claims under or referable to the policy, other than costs. However, from that reduced sum, an amount needed to be deducted in respect of storage costs which were also claimed by the insured. It was agreed that they amounted to $30,969.42, implicitly leaving a sum of $116,770.06 (or, as Perram J has observed, $116,770.42) as that part necessarily paid as indemnity by way of compromise of the claims for indemnity for damage to the cargo, and interest.

122    In that approach, he rejected Vero’s submission that the Court should attempt to evaluate the worth of the claim for storage costs. Vero had submitted that only reasonable costs were allowed and that the amount of $30,969.42 was not shown to be reasonable but merely represented the amount of the insured’s claim. In effect, he concluded that, in the circumstances, he could be satisfied only that the amount of $116,770.06 represented a payment in the nature of an indemnity under the policy, and that position was reached by excluding those amounts which were probably referable to costs or storage claims. He framed the question as follows (at [131]):

… From the terms of the deed of release, set against the facts in which it was entered, and for the purposes of the arising of an equity from the policy and from payment, whether it can be said that any part, and if so what part, can be characterised as a mutually intended (expressly, inferentially or impliedly) payment representing indemnity referable to paying a (disputed) further amount for damage to goods and interest thereon, being claims for which TS was fully indemnified by the carrier.

123    In summary, he concluded that, of the payment of $425,000, the sum of $116,770.06 was a payment made representing an indemnity under the policy. That sum was to be added to the $200,000 (representing €127,500), the total being the amount of Vero’s entitlement to recoup from the sums recovered from the freight forwarder. It was consequently further entitled to its proportionate share of the interest accrued on the sum recovered from FP Shipping.

Vero’s appeal

Ground 1 of Vero’s appeal – the nature of the right of subrogation

124    Vero’s first ground of appeal, that the primary judge applied an incorrect test as to the insurer’s entitlement to subrogation (and recoupment), turns on the nature of that entitlement and the manner in which the principles of subrogation apply in circumstances where the insurer’s payment to the insured is pursuant to a compromise of a claim made upon the policy. At its broadest, its submission was that so long as its payment was made honestly and in good faith in reliance on an obligation to indemnify that was sufficient to enliven its right of subrogation and recoupment. TS submitted that more was required and, in particular, that the payment needed to be made as an indemnity under the policy in order to reduce the insured’s loss in respect of which the claim on the policy was made.

The nature of the right of indemnity and recoupment

125    As pointed out by Professor Malcolm Clarke in The Law of Insurance Contracts (6th ed, Informa, 2009) at 1021, the principle of subrogation applies not only to insurers, but extends to others who confer a benefit on another and who then recoup or are entitled to recoup an advantage in respect of which the benefit was granted. A surety is a useful example, as is the indorsee of a bill of exchange. The learned author proceeds to identify that underlying the concept of subrogation in the insurance context is the principle of indemnity with the aim of preventing the insured from being over-compensated consequent upon receiving both the proceeds of any insurance and recovering the same loss from a third party.

126    The foundation of the right of subrogation or recoupment is said to rely upon a rule of equity: Insurance Commission (WA) v Kightly (2005) 30 WAR 380 at 387 [26] per Steytler P (with whom Wheeler and Roberts-Smith JJA agreed) (Kightly). In that case, the principle was applied to prevent the insured from making such double recovery. That was achieved by, inter alia, according the insurer the right “to recover from the insured any benefit received by the insured in diminution or extinction of the loss against which the insured has been indemnified”: at 388 [26]. That general approach can be traced at least as far back as the decision in Castellain v Preston (1883) 11 QBD 380 at 388 per Brett LJ and at 401 – 402 per Bowen LJ.

127    Neither party ventured to identify the underlying rationale for the principle. In common with the English position: Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221 at 231 – 232; there are dicta in Australia which suggest that a right of subrogation exists to prevent the insured’s unjust enrichment at the expense of the insurer: Kightly at 394 [48]; Re Palmdale Insurance Ltd (in liq) (No 3) [1986] VR 439 at 446. However, that sits somewhat uncomfortably with the general position adopted by the High Court that, in Australia, principles of unjust enrichment do not underpin the doctrine of subrogation: see Bofinger v Kingsway Group Ltd (2009) 239 CLR 269 and the discussion in Edelman J & Bant E, Unjust Enrichment (2nd ed, Hart, 2016) at 43 – 45.

128    Nevertheless, there is general agreement that the primary purpose of subrogation is to vindicate the principle of indemnity such that it applies only in relation to contracts of indemnity which have been performed. That is achieved by placing the indemnifying insurer in the position of the insured for the purposes of recovery against another for the loss and according it every right of the insured to recover in respect of the indemnified loss, whether in tort, contract or otherwise: Castellain v Preston at 387 – 388.

The requirement of indemnification of loss

129    The essential issue in dispute in this matter is whether it is necessary for the triggering of a right of indemnity that an insurer’s payment to an insured have the characteristic that it be paid by way of actual indemnity. Here, the $425,000 payment was not specifically stated in the Deed to be by way of indemnity under the policy and the parties were at odds as to how it should be characterised.

130    It is appropriate to mention that no question arose in this case from the fact that the payments made by Vero had not indemnified TS for the totality of its loss. By reason of s 85(2) of the Marine Insurance Act, an insurer who pays for a partial loss is subrogated to all rights and remedies of the insured in respect of the subject matter of the insurance insofar as the insured has been indemnified by such payment.

131    It seems undoubted that payments by an insurer to an insured expressly for the purpose of providing indemnity against an insured loss will give rise to a right of subrogation. The correlative is as stated in Derrington DK & Ashton RS, The Law of Liability Insurance (3rd ed, LexisNexis, 2013) at 3171 – 3172 [13-265]:

But if the insurer’s payment of only part of the indemnity is by way of settlement of the insured's action to enforce the cover, and this is done on the basis that the payment is not made pursuant to the policy but to put an end to the litigation for public relations purposes, then because its subrogated rights stem from its indemnification of the insured, it will acquire no such rights and cannot recover from the insured any part of what he may recover from a third party in reduction of the loss. It is the basis of the payment, which is expressly not by way of indemnity, that is the decisive point of distinction here. To be indemnification, the payment must be made pursuant to the contract of indemnity. Consequently, a payment made under the system of honour policies would also be outside this description.

(Footnotes omitted).

132    Whilst that might be accepted, the question that remains is what payments amount to indemnification from which the right of subrogation stems.

133    The primary judge referred at length to the decision in Wellington Insurance involving, as it did, circumstances not wholly dissimilar from the present. In that case, the insured owned a boat which capsized. It claimed indemnity from its marine insurer which denied liability. Litigation ensued but was settled on terms whereby the insurer paid half of the claimed amount, specifically on the basis that the payment was not being made pursuant to the policy but rather to bring the proceedings to an end and as a public relations gesture. Those proceedings were dismissed by consent as if heard on the merits. Subsequently, the insured obtained judgment against a third party for the totality of its loss and the insurer brought a claim seeking to be subrogated to the money received to the extent of its payment to the insured. The matter came before the British Columbia Court of Appeal which identified the issue as being (at 436):

… whether an underwriter is subrogated to moneys recovered by an insured in respect of a loss, where the underwriter makes partial payment to the insured on the basis that there is no liability for the loss under the policy.

134    Pursuant to the Canadian analogue of s 85(2) of the Marine Insurance Act, the insurer was entitled to subrogation pro-rated to the extent to which it had indemnified the insured. However, the issue was then whether, in fact, the insurer had indemnified the insured for a partial loss?

135    In concluding that it had not done so, the Court rejected its proposition that the question should turn on whether the payment would have been made but for the existence of the policy. Rather, in reliance on the decision of the Supreme Court of Canada in Ledingham v Ontario (Hospital Services Commission) [1975] 1 SCR 332 (Ledingham), it observed that the authorities established that it was the act of indemnification of the insured which gave rise to the right of subrogation and indemnification required that the purpose of the payment was to make good the loss suffered. It explained that indemnification is payment pursuant to a contract of insurance or indemnity because it derives its life and gains its operative force from that contract: John Edwards & Co v Motor Union Insurance Co Ltd [1922] 2 KB 249 (John Edwards) at 254 – 255. The Court accepted the view that the right to subrogation is consequentially inherent in the contract of indemnity and, on payment by the indemnifier, it attaches to and operates upon the insured’s rights including its choses in action.

136    On that basis, the Court readily concluded that the payments made by the insurer in its case were not paid pursuant to the contract of indemnity. It held (at 465):

In the case at bar, the insurer’s payment cannot be said to have been made with the intention of reducing the loss claimed under the policy. The insurer unequivocally denied any liability to pay that loss. The payment made to the insured was not made in partial satisfaction of the claim of loss, but rather in consideration for a complete abandonment by the insured of its claims under the policy. The insured’s action on the policy was dismissed by consent “as if evidence had been heard and judgment pronounced on the merits”.

137    On the facts before that Court, there was a solid basis for concluding that the insurer did not make the relevant payment with the intention of reducing the insured’s loss as a result of the alleged insured event which would have given rise to a right to subrogation, but rather made it merely to bring the litigation to an end. The Court said (at 465 – 466):

In such circumstances it cannot be said that the insurer was intending to make a payment indemnifying the insured for a loss coming within a risk issued by the policy. Rather, the insurer was paying for an agreement by the insured whereby it avoided a possible claim and the cost of litigation. That agreement settled all matters outstanding between the parties arising out of the sinking of the insured’s vessel, including any possible future claim by the insurer for subrogation.

138    It is difficult not to draw from the Court’s reasoning that the touchstone by which the payment was characterised was the intention of the insurer, even if it be its objectively ascertained intention. The Court was not concerned with the presumed intention with which the insured received the payment although, where a settlement deed is entered into, it may well necessarily be coextensive with the insured’s.

139    The decision in Wellington Insurance relies on what is sometimes incorrectly called an exception to the subrogation principle. It is not an exception. It is simply an identification of the circumstances when an essential element of the principle is absent so that it is not triggered.

140    Two further matters arising from that decision are worthy of remark. First, the Court acknowledged that its conclusion amounted to an apparent qualification to the principle that the right of indemnity will exist where a payment has been made honestly with the intention of satisfying a loss suffered by another purportedly pursuant to an obligation to do so, even though it subsequently emerges that there was no such obligation: see the Privy Council in King v Victoria Insurance. Secondly, its reference to Ledingham is important as in that case the Canadian Supreme Court had adopted the observations of Chancellor Boyd in National Fire Insurance Co v McLaren (1886) 12 OR 682 where the nature of subrogation as an equitable principle was explained as follows (at 687):

The doctrine of subrogation is a creature of equity not founded on contract, but arising out of the relations of the parties. In cases of insurance where a third party is liable to make good the loss, the right of subrogation depends upon and is regulated by the broad underlying principle of securing full indemnity to the insured, on the one hand, and on the other of holding him accountable as trustee for any advantage he may obtain over and above compensation for his loss. Being an equitable right, it partakes of all the ordinary incidents of such rights, one of which is that in administering relief the Court will regard not so much the form as the substance of the transaction. The primary consideration is to see that the insured gets full compensation for the property destroyed and the expenses incurred in making good his loss. The next thing is to see that he holds any surplus for the benefit of the insurance company.

141    This identification of equity’s ubiquitous concern with substance as opposed to form is important in the present case, where the intention with respect to the payment of the $425,000 by the insurer was not precisely specified.

142    Before this Court, Vero relied upon the decision in King v Victoria Insurance as supporting the proposition that its entitlement to subrogation existed on a basis broader than might be gathered from the decision in Wellington Insurance. It submitted that, so long as the payment was made by an insurer to an insured honestly and in good faith, the right of subrogation arose. In King v Victoria Insurance, the insurance in question was effected with Victoria Insurance by the Bank of Australasia in respect of a shipment of wool from Townsville to London. The policy provided that cover would commence from the time of the cargo’s loading onto the vessel for shipment to London. In fact, it had been loaded on to a lighter to be transported to the carrier vessel. A storm arose and caused some punts belonging to the Queensland Government to break away from their anchorage and in turn caused the lighter to break her moorings and capsize, with the consequent destruction of the loaded wool. The Bank sought indemnity from Victoria Insurance which paid the sum of £920 under the policy and took a formal assignment of all the Bank’s rights and causes of action against the Government. The Government sought to defend the matter on the basis that, inter alia, the insurer had no right of subrogation because the loss was not within the risks covered by the policy, because the goods had not been loaded onto the carrier vessel. The Privy Council emphatically rejected that proposition, holding that the third party was not entitled to rely upon some element of the settlement between the insurer and the insured for the purpose of defeating the claim against it. It was also noted that it was not alleged that there was anything but perfect good faith in the claim made by the Bank and satisfied by the insurer. It was not correct that, in order to sue for damage done to insured goods, an insurer was obliged to show that, if they had disputed their liability, the insured’s claim against it would have been made good.

143    Subject only to this clarification, there does not appear to be anything in the opinion of the Privy Council which supports the broadening of the principles of subrogation in the manner for which Vero contended. The references at page 254 of the report to the insurer’s having “settled a claim of loss”, and to “the claim made by the bank and satisfied by the insurance company”, reveal that the context in which its observations were made included the factor that the payments had been made by way of indemnity for loss. It may be that the decision confirms that, if that factor is present, then so long as the payment is made in good faith and in respect of a claim made on the policy, there will be no issue in the insurer’s subrogated action against the third party as to the precise entitlements between the insurer and insured.

144    The decision in King v Victoria Insurance was considered in Sydney Turf Club v Crowley [1971] 1 NSWLR 724. In earlier litigation, the Sydney Turf Club (the Club) was sued by a stable hand who was injured when thrown from a pony. The Club held an employers’ indemnity policy with the Australian Jockey Club (the AJC) which was a licensed insurer under the provisions of the Workers’ Compensation Act 1926 (NSW). It also held a public liability policy with GIO, although that cover excluded claims in respect of bodily injury arising out of or in the course of employment. The Club claimed on both policies. The AJC denied liability. Although not admitting liability, GIO accepted service of the writ issued against the Club and undertook the defence of the action without prejudice to its rights in relation to the Club’s indemnity from the AJC. The stable obtained a verdict of $41,225 against the Club for breach of duty to him as an invitee on its premises and GIO indemnified it in respect of that verdict. GIO then commenced an action in the Club’s name against Crowley, as the AJC’s representative, to obtain indemnity under its policy. At first instance, it was found that the stable hand was an “employee” and not within the GIO policy and a verdict was entered for the Club against the AJC. The Court of Appeal disagreed as to the construction of the GIO policy and held that the claim was within its scope, with the consequence that GIO’s remedy against the AJC was for contribution. When considering GIO’s rights of subrogation or contribution, the Court considered the AJC’s argument that GIO could not recover from it through subrogation to the Club’s rights because it was not liable on its policy, honestly believed that it was not liable, and had reserved its rights. Jacobs JA (with whom Mason and Manning JJA agreed) identified that the supposed exception to the general principles of subrogation in King v Victoria Insurance was more apparent than real, stating (at 730):

… If an insured claimed to be indemnified by one insurer and that insurer disclaims liability, but honestly and by way of ex gratia payment with reservation of his rights pays the amount of the claim, then he is entitled to be subrogated to the rights of the insured against the real insurer. King v. Victoria Insurance Co. Ltd…

(Footnote omitted).

145    Mr Cox SC for Vero submitted that this statement of principle reflected the broad manner in which an equitable right of subrogation would arise, including circumstances where there was no actual indemnity because the insurer knew it had no obligation to indemnify and the amount was paid by way of an ex gratia payment.

146    The learned primary judge in the present matter considered Jacobs JA’s observations to be “a principled extension or practical application of Lord Hobhouse’s expression of the matter on the facts in King” and that it has been applied in a number of authorities: at [104] citing ICI Australia Operations Pty Ltd v Workcover Authority of New South Wales (2004) 60 NSWLR 18 at 76 [302] – [304]; Wabbits Pty Limited v Godfrey [2009] NSWSC 1299 [80] – [88]; Advanced Arbor Services Pty Limited v Phung [2009] NSWSC 1331 [71]. However, it should be acknowledged that the obiter dicta in Sydney Turf Club v Crowley was not considered in those subsequent cases in the context of whether the payment by the insurer must be by way of indemnity. With respect to the terms in which Jacobs JA expressed the principle, much is hidden by the use of the words “honestly” and “ex gratia”. If they are intended to mean that a payment made by an insurer may give rise to a right of subrogation even though the insurer did not believe that it had any liability and was not paying to reduce the loss but only by way of a moral obligation or favour, then the scope of the principle referred to in King v Victoria Insurance would undermine the very foundation of the entitlement expressed in John Edwards and Wellington Insurance. None of the authorities referred to above sought to go so far. It is apparent from Ward J’s consideration in Wabbits Pty Limited v Godfrey of the commentary in Meagher RP, Heydon JD & Leeming MJ, Meagher, Gummow & Lehane’s Equity: Doctrines & Remedies (4th ed, Butterworths, 2002) at [9-210] that her Honour did not consider that the element of an intention to indemnify in respect of loss was not required. That commentary is as follows:

A payment made by an insurer reasonably and in good faith and accepted by the insured, but not in truth within the four corners of the policy, will still be regarded as a payment on the policy and as giving rise to the doctrine of subrogation: King v Victoria Insurance Co Limited [1896] AC 250. This is consistent with the view that subrogation arises to give effect to the equities between the parties upon payment rather than in working out strict contractual rights… What is required on any basis is the contract of indemnity plus a payment which if not called for is at least bona fide and reasonable. This approach is consistent with the remarks of Barwick CJ in State Government Insurance Office (Qld) v Brisbane Stevedoring Pty Limited (1969) 123 CLR 228 at 240; [1970] ALR 417 at 423:

It is settled law that an insurer who has paid the amount of a loss under a policy of indemnity is entitled to the benefit of all the rights of the insured in the subject matter of the loss and by subrogation may enforce them. This right of subrogation is inherent in the contract of indemnity. It has been put that it exists as a contingent right from the inception of the insurance. For my part, with respect, I do not find the description “contingent right” appropriate and satisfying. The right of subrogation as it seems to me does not depend for its existence as a right upon the occurrence of a loss under the policy. Its exercise is of course dependent upon the payment of the loss but as a right it exists from the moment of the making of the contract of indemnity. There is therefore no reason why a breach or threatened breach of the right could not be restrained by the insurer before the loss has occurred, though an occasion for such a course will probably be rare.

147    It is apparent from Barwick CJ’s observations that the touchstone of the right of subrogation is the payment “under a policy of indemnity” or “payment of the loss” and not the mere making of a payment to a person who had suffered loss.

148    In the light of these authorities, the limits of Jacobs JA’s statement of principle in Sydney Turf Club v Crowley are revealed. That is, he was not suggesting that a payment to an insured which was not referable to indemnification against the insured’s loss would give rise to a right of subrogation. The reference to ex gratia must be taken to mean that the insurer believed itself to be free of any obligation to pay but it does not follow that a payment in such circumstances is not intended by way of indemnity. Consistent with the observations of Barwick CJ set out above, Jacobs JA referred to the insurer’s paying “the amount of the claim”. This is still consistent with the possibility that he considered the payment to be one of indemnification rather than a payment wholly unconnected with diminishing the insured’s loss.

149    In summary, the above authorities demonstrate that an insurer’s entitlement to subrogation is underpinned by three quintessential elements: firstly, the undertaking of an obligation to provide indemnity: State Government Insurance Office (Qld) v Brisbane Stevedoring Pty Limited (1969) 123 CLR 228; secondly, a claim by the obligee on the indemnity; and thirdly, a payment for the purposes of reducing a loss through the promised indemnity: BUPA Australia Pty Ltd v Shaw (2014) 18 ANZIC ¶61-989 at 74,546 [57]. As to the first, there is no requirement that the payer insurer be actually liable upon its assumed obligation to indemnify or that it be actually liable to the extent to which payment is made. There must, however, be some assumed obligation to indemnify the payee from which the right of subrogation springs. This requirement would deny a right of subrogation to an officious intermeddler who pays money to a person who has suffered loss, which incidentally reduces the consequences of the loss. However, if a payment is provided in the context of indemnity, it is not necessary to establish that a payment made responded to an actual obligation to indemnify: King v Victoria Insurance; subject to satisfaction of the second and third elements. The obligation to indemnify may well be disputed by the insurer and, indeed, it may well be correct in that respect. Conversely, no right of subrogation can arise where the payer has not assumed any obligation to indemnify the payee at all: Insurance Corp of British Columbia v Teck Metals Ltd [2020] BCJ No 295 [10]; Qureshi (Guardian ad litem of) v Nickerson (1991) 77 DLR (4th) 1; John Edwards at 254 – 255.

150    The second requirement may be more chimerical than real or it may be subsumed within the third. However, the authorities appear to suggest that subrogation arises only by the insurer’s payment in response to an insured’s claim to be indemnified pursuant to the insurer’s policy. It is otherwise difficult to bring within the doctrine of subrogation those cases where an insurer has paid a claim despite it having no actual liability to do so. It is the making of the payment in response to an honest and bona fide claim by a person to whom obligations of indemnity are owed that supports the right of subrogation in circumstances where no actual obligation to pay exists. In cases where the character of a payment is unclear, a payment in response to a claim for indemnity might well be coloured by the claim to which it responds as part of the circumstantial context in which the act of settlement, and its terms, are to be construed. Indeed, that is relevant to the major issue for determination in this appeal as to whether the insurer’s payment was in fact made as an indemnity.

151    The third requirement is that the payment is made for the purposes of reducing the insured’s loss in respect of which the claim is made, i.e., by way of an indemnification of its loss. Where a payment is made for another purpose, such as the compromise of proceedings, and expressly not by way of indemnity, it will not support a subsequent right of subrogation: Wellington Insurance. The purpose for which a payment has been made is to be objectively ascertained from a consideration of the circumstances in which it was made, including but not limited to the terms of any agreement concerning it between the parties. It may be a clear case where the insurer expressly agrees to make the payment in settlement of the claim made upon it. Where there is no such agreement, the circumstances may evidence the required intention such as where the insurer pays the amount of the claimed loss: Sydney Turf Club v Crowley. Whilst it may be that the insurer has no liability to make the payment, the fact that it is made for the purpose of reducing the loss is sufficient. The same may follow though the insurer believes that it has no liability to indemnify. If the payment is made honestly and bona fide for the purpose of reducing the insured’s loss, the right of subrogation will crystallize: Sydney Turf Club v Crowley.

152    These elemental requirements of the right of subrogation appear to be founded more upon the pragmatics of the insurance industry rather than legal purity. As McGarvie J articulated in GRE Insurance Ltd v QBE Insurance Ltd [1985] VR 83 (GRE v QBE) at 101 – 103, an insurer may well pay claims where some level of doubt remains as to its actual liability under a policy, where to take an unmeritorious defence may contravene its obligation of good faith, or where payment of the claim is commercially appropriate. It would undermine an insurer’s ability to settle claims were it required to be completely satisfied of its actual liability to pay before any right of subrogation could arise. As his Honour held, if the insurer acting reasonably and honestly makes a payment in settlement of a claim by way of an indemnity, it will be entitled to be subrogated to the insured’s rights against third parties for the loss. It is not to be treated as making a voluntary payment from which no such right can arise: GRE v QBE at 102. Similar considerations apply to the right of contribution between insurers.

153    It follows that Vero’s submission, that all that is required for a right of subrogation to arise is merely the making of a payment by an insurer honestly or in good faith as part of a commercial settlement simply to remove litigation, cannot be accepted. That approach, which elides any requirement of an intention that the payment is made to reduce the insured’s loss, is at odds with the established authorities. It is also inconsistent with the nature of subrogation as a concomitant of the obligation to indemnify which fully crystallises when the obligor performs an act of indemnification.

154    It follows that the first ground on which Vero founded its appeal should be rejected. The learned primary judge applied the correct test for ascertaining whether a right of subrogation arose.

Ground 2 of Vero’s appeal – what, if any, part of the $420,000 was paid by way of indemnity?

155    In the above authorities, reference has been made to the “insurer’s” intention to indemnify when paying the sum in question. The learned primary judge referred to the parties’ “mutual intention” that the payment be made to reduce the insured’s loss although that might naturally be thought to subsume the insurer’s intention. In the majority of cases, such a distinction will be immaterial. The insurer will pay in response to a claim for indemnity and the respective intentions with which any payment is made and received will coincide with the consequence that the payment is properly characterised as having been made by the insurer by way of indemnity.

156    The circumstances of this case present a more complex issue since the parties disagree as to a payment’s purpose. In particular, where they have engaged in litigation such that the insured has an additional claim for its costs incurred in securing an indemnity, any payment by the insurer might be directed and allocated towards either the indemnity or the claim for reimbursement of costs in respect of the litigation between them. As the primary judge pointed out, the arrangements which might be reached in the compromise of a claim upon a policy and associated litigation are myriad. Disputes between insurer and insured may involve several claims, only some of which may relate to the pure issue of indemnification under the policy. Any written agreement in resolution of the dispute may be neither necessarily nor appropriately capable of precisely identifying the purposes for which a payment or payments is made. Indeed, it may be that the parties, with an eye to recovering from a third party, will each seek to ascribe a particular character to a payment or a part of it and, when no agreement can be reached, the matter may be left in vague and uncertain terms.

157    There are established principles for ascertaining which of a number of extant obligations a payment has discharged. They were usefully set out in the recent decision of White J in the Full Court decision of WorkPac Pty Ltd v Rossato (2020) 278 FCR 179 at 236 [256] – [257] (they were not the subject of debate on appeal to the High Court: [2021] HCA 23) and in Caltabiano v Electoral Commission of Queensland (No 1) [2010] 1 Qd R 100 in the Queensland Court of Appeal. These authorities identify the initial question to be the intention with which the payment was made by the payer and accepted by the payee. However, those cases concern circumstances where a person who owed several debts or obligations to another made a payment without any explicit allocation to a specific debt. In this case, the payment was made pursuant to the terms of the Deed in which the parties reached some agreement as to their purpose. That being so, the intention with which the payer’s payment was made is concordant with the parties’ mutual intention as derived from the terms of that deed, as understood in any relevant surrounding circumstances. In its written submissions on this second ground, Vero accepted that the characterisation of the payment of $425,000 involved the identification of the “mutually inferred or implied intention” of the parties, and that was accepted by TS.

158    Vero’s first submission was that the amount of $425,000 referred to in cl 2(a) of the Deed was not intended by the parties to include any payment to TS in respect of its costs of the erstwhile Federal Court proceedings. This submission was based upon cl 3, which provided that TS would prepare and file a notice of discontinuance in those proceedings providing that each party would bear its own costs. It seems to have been accepted by the parties that this had been done.

159    In relation to this issue, the primary judge had found (at [79] – [80]) that cl 3 merely provided a method of disposing of the proceedings and was not intended to deal with TS’s claim as against Vero that the latter ought to pay its costs of that action. As to this, Vero submitted that the surrounding circumstances known to each party were that each had incurred substantial costs in the litigation to that point and that the settlement had sought to maintain each parties’ respective positions as to their respective asserted merits. So, the submission went, when considered in its context, cl 3 was the manner in which the parties conclusively agreed that each would be unable to recover their costs of the proceedings from the other. Thereupon, it was submitted that the primary judge ought to have found that the agreement that “each party [would] bear their own costs” applied to all cost questions between them and that excluded the attribution of any part of the sum of $425,000 to the repayment of TS’s costs.

160    There is some argument for these submissions for the parties could have agreed that there would be no order as to costs. Further, because the parties reached consensus that their agreement in relation to costs would be solemnly captured in the terms of a consent order which, when filed and made, would foreclose any future dispute between them on that issue: see generally Bailey v Marinoff (1971) 125 CLR 529; Bucic v Arnej Pty Ltd (No 4) [2019] VSC 527. However, whilst the making of the orders would prevent the parties from further disputing any entitlement to costs, nothing prevented them from agreeing on terms upon which they might be paid outside the formal orders of the Court. Here, the Deed was made prior to the filing of the notice of discontinuance and the notice was to be filed within seven days after the payment of the $425,000. In that way, the filing of the notice might more accurately be seen as merely dispositive of the proceedings rather than being a method of fashioning the rights of the parties, inter se. It might be also observed that had the notice filed not dealt with the question of costs, a presumption would have arisen that the discontinuing party would pay the other party’s costs of the proceedings: Federal Court Rules 2011 (Cth), r 26.12(7). Further, as the disposition of the action was by a notice of discontinuance, which did not involve an order of the Court, it is less appropriate to speak in terms of no order as to costs having been made and more appropriate to speak in terms of each party’s bearing its own costs since TS had been compensated for that component within the total amount of the settlement, reflected in the Deed.

161    As the primary judge correctly held, the context of the Deed included cl 2(a) which provided that TS accepted “$425,000 (the Settlement Monies) from Vero in full and final settlement of the Insurance Claim, the Storage Costs Claim, the Proceedings and the Dispute”. The expression “the Proceeding” was defined in the recitals as the “proceedings against Vero in the Federal Court of Australia pursuant to proceedings numbered NSD959/2015”. Those proceedings included TS’s claims against Vero for costs. On that basis, the operative effect of cl 2(a) included the settlement of TS’s claims against Vero in those respects, together with the separately identified claim under the policy and the claim for storage costs. Its overall effect was, as the primary judge observed, that Vero agreed to pay an undissected sum to free itself from any liability under the policy in respect of the claims made, including those in the proceedings which encompassed a claim for costs. Although not an interpretive tool of great significance, assistance can be derived from what the parties have failed to expressly agree. Here, there is some relevance in the absence in cl 2(a) of any exception in relation to the costs of the Proceedings. Had it been intended that the payment in cl 2(a) was to exclude any claim for costs, it would not have been difficult for the parties to have made it clear: DA Constable Syndicate 386 v Auckland District Law Society (2010) 16 ANZIC ¶61-850; Technology Holdings Limited v IAG New Zealand Limited (2009) 15 ANZIC ¶61-786; Body Corp No 205963 v Leuschke Group Arch (in liq) (2009) 15 ANZIC ¶61-804; GPS Power v Gardiner Willis & Associates (2001) 11 ANZIC ¶61-482; Orica Australia v Limit (No 2) (2011) 16 ANZIC ¶61-877.

162    The structure of the Deed further supports the above conclusion. Clause 2 is the obvious substantively operative clause and, within that, cl 2(a) deals with the essential agreement between the parties. The remaining sub-clauses are in the nature of machinery or buttressing provisions. In a not dissimilar manner, clauses 3 through 11 are machinery provisions or secondary to the substantive cl 2(a). Viewed in that way, Vero’s submission that cl 3 should be read as operating to carve-out of cl 2(a) an agreement in respect of the costs of the Federal Court proceedings is unappealing. There is an insufficient foundation for reading into the clear words of cl 2(a) any implied proviso relating to the unquantified costs incurred by TS in pursuing its action against Vero.

163    It is worthy of comment that before the primary judge the parties tendered evidence of their negotiations leading to the execution of the Deed, including correspondence advancing settlement offers as well as mediation position papers. Specifically, TS relied upon correspondence forming part of those negotiations in which Vero’s lawyers had stated that its client’s “offer of $425,000 is inclusive of interest and costs”. It appears that TS sought to draw the inference that because at that point in time Vero was prepared to make its offer inclusive of interest and costs, that intention necessarily remained unaltered until entry into the Deed. There were no submissions made to this Court as to the legitimate use to which these materials might be put and no distinction was sought to be made by the parties between statements of negotiations and background facts. In the absence of any substantive submissions, it is appropriate to apply the observations of Heydon and Crennan JJ in Byrnes v Kendall (2011) 243 CLR 253 (at 284 – 285 [98] – [99]):

[98]    Contractual construction. The approach taken to statutory construction is matched by that which is taken to contractual construction. Contractual construction depends on finding the meaning of the language of the contract — the intention which the parties expressed, not the subjective intentions which they may have had, but did not express. A contract means what a reasonable person having all the background knowledge of the “surrounding circumstances” available to the parties would have understood them to be using the language in the contract to mean. But evidence of pre-contractual negotiations between the parties is inadmissible for the purpose of drawing inferences about what the contract meant unless it demonstrates knowledge of “surrounding circumstances”. And in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd this Court said:

“It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe.”

[99]    One reason why the examination of surrounding circumstances in order to decide what the words mean does not permit examination of pre-contractual negotiations is that the latter material is often appealed to purely to show what the words were intended to mean, which is impermissible. The rejected argument in Chartbrook v Persimmon Homes Ltd was that all pre-contractual negotiations should be examined, not just those pointing to surrounding circumstances in the mutual contemplation of the parties. The argument purported to accept that contractual construction was an objective process, and that evidence of what one party intended should not be admissible. But other parts of the argument undercut that approach. Mr Christopher Nugee QC submitted: “The question is not what the words meant but what these parties meant … Letting in the negotiations gives the court the best chance of ascertaining what the parties meant.” It would have been revolutionary to have accepted that argument.

(Footnotes omitted).

164    In the instant matter, TS relies upon the correspondence referred to above for the purposes of evidencing Vero’s subjective intention in entering into the Deed and not to establish any relevant objective background fact on which a court might rely for the purposes of construction. However, given the above conclusion, it is not necessary to take this matter further.

165    By an alternative submission, Vero asserted that if cl 3 were not to operate as a proviso to cl 2(a), the costs which should be deducted from the figure of $425,000 should not be calculated as TS’s costs of the proceeding on an indemnity basis. That submission was advanced in a number of different ways. The first is that the apportionment of the $425,000 should occur by way of assuming that Vero would indemnify to the full extent of its obligation, taking into account the amount of $200,000 agreed as having been paid by way of indemnity. As the policy limit was $500,000, it was submitted that it should be assumed that a further $300,000 was paid by way of indemnity, leaving the sum of $125,000 to be apportioned to costs. The second is that as in its mediation position paper TS had claimed costs which were roughly equal to one quarter of the total amount claimed, the same ratio should be applied to the apportionment of the amount paid under the Deed with the consequence that Vero is entitled to recoup $318,750 of the $425,000. The third is that it should be inferred that the parties had intended that TS was entitled to costs on a party/party basis and that the amount should be the subject of assessment should any disputation arise.

166    None of these submissions should be accepted. They are, as was submitted on behalf of TS, pure conjecture and speculation and unsupported by any textual or contextual considerations. The second proposition not only proceeds upon a contravention of the parol evidence rule as to the construction of written instruments, it seeks to infer to TS some subjective intention derived from its mediation position paper, which continued to the time of entry into the Deed, that its costs would remain at a consistent proportion to the amount of its claim. There is no basis for that, and it is illustrative of the perils of seeking to derive an objective contractual intention from statements made in the course of antecedent negotiations.

The resolution of the apportionment issue

167    The issues raised by Vero in Ground 2 of the appeal can be resolved in accordance with the principles discussed in relation to Ground 1 above, that is, by ascertaining what portion of the $425,000, if any, was paid for the purposes of indemnifying TS in respect of its loss.

168    As cl 2(a) is clearly intended that the payment was to be in settlement of all of a number of matters being “the Insurance Claim, the Storage Costs Claim, the Proceedings and the Dispute”, it follows that it provides for payment by Vero to TS directly pursuant to the former’s obligation to indemnify and to satisfy TS’s claim to indemnity. It specifies that the payment is made to settle the proceedings in which a claim was brought to enforce the indemnity in the policy, and to settle the Dispute, which is the disputed obligation to indemnify. In these latter respects, the settlement sum is further paid in respect of the obligation to indemnify, albeit indirectly because it settles the proceedings and the overall dispute.

169    Mr Braham SC for TS submitted that none of the $425,000 could be attributed to Vero’s obligation to indemnify under the policy because that obligation had been replaced by the obligation under the Deed. That submission assumed that its performance of the Deed somehow replaced its performance of its obligation to indemnify in accordance with the policy, although no reason was given as to why that might be so in the circumstances which were present. Whilst it is within the ability of the parties in such a situation to agree that a payment is in respect of only a particular obligation or has a particular character which replaces an obligation to indemnify: see Wellington Insurance: it is equally open to them to create an obligation, the performance of which also satisfies pre-existing obligations. There is no reason why the Deed in this case was not of the latter kind. Such an arrangement is the natural settlement of disputed obligation unless there is some indication of an express characterisation to the contrary and such an indication is absent here, where it might well have been expressed had it been intended. In cl 2(a), the parties recognised the existence of a claim for indemnity under the policy and expressly agreed that the payment made by Vero would be in satisfaction of it. Far from overriding and negating Vero’s policy obligation to indemnify in respect of TS’s claim, the Deed specifically provided for payment in satisfaction of it.

170    In the alternative, Mr Braham SC submitted there was no payment pursuant to the obligation to indemnify because the payment “was on the promise contained in the deed which resolved a claim for indemnity, as well as other claims, swept all of those corresponding rights and liabilities up, and resolved them by a promise to pay a fixed sum”. Again, that submission involves a misreading of the Deed and should be rejected. The claim for indemnity was not resolved by any promise to pay. Clause 2(a) clearly provides that it is the insured’s acceptance of the payment of $425,000 which settled the claims including the claim for indemnity (the Insurance Claim). It is true that by cl I of the Deed’s recitals, Vero denied its liability for the Insurance Claim, save to the extent to which it had made the payment of $200,000. However, that denial does not prevent it from paying an amount in reduction of TS’s claimed loss and the statement in cl 2(a) that payment was in satisfaction of the Insurance Claim should, as the primary judge found, provide greater evidence of the payment’s nature.

How should the payment be apportioned in this case?

171    The learned primary judge observed that in the apportionment process the Court is concerned with the substance over the form of the party’s instrument, a proposition with which Mr Braham SC for TS agreed. In that respect, his Honour held that some relevant part of the payment should be treated as representing indemnity if that was the parties’ mutual intention. In ascertaining whether that is so, the terms of the agreement between the parties will be of some primary importance although not necessarily decisive: Commissioner of Taxation v CSR Ltd (2000) 104 FCR 44 at 57 [61] and 60 [69].

172    Here, although the sum of $450,000 was paid in respect of the indemnity, the claim for the litigation costs and the claim for storage costs, the parties were aware that TS’s costs were substantially less than $425,000 and they had accepted in the statement of agreed facts that they were $277,260.16 as at the date of the Deed. They had also agreed that the unpaid storage costs as at that date were $30,969.42. The process adopted by the primary judge in these circumstances was that there was an available inference that once TS’s uncontroversial legal costs and storage costs were taken into account, the parties must have mutually intended that the remaining amount was attributable to a settlement of the dispute as to indemnity under the policy in respect of the cargo claim. He indicated that was $116,770.06, being $425,000 less $277,260.16 for legal costs, and less a further $30,969.42 for storage costs.

173    Mr Cox SC for Vero submitted that this approach was erroneous and involved a transition from ascertaining whether the payment was an indemnity to ascertaining whether the parties treated a payment as an indemnity. That distinction referred to is indeed present, but it is necessary to make because they are different though successive subjects, determinable by reference to different facts. Once it was determined that the total payment did include a component that amounted to indemnity, it was necessary to turn to the other consideration to determine how the unallocated total was to be allocated.

174    As an alternative, accepting for convenience the approach of ascertaining the intention with which the payments were made, Mr Cox SC submitted that different intentions as to allocations could be identified. He submitted that the Court should infer that, as the policy limit was $500,000, the parties must have intended that Vero’s payments were to satisfy its obligation to indemnify to that amount and any remainder should be considered as a payment in respect of costs. On this reasoning, it was submitted, the initial payment of $200,000 and $300,000 of the $425,000 were paid by way of indemnity and the remaining $125,000 was paid in respect of costs. As has been explained above, that approach fails to pay due or any regard to the terms of cl 2(a) which expressly provided the sum was payable in respect of the claim, the proceedings, the storage costs and the dispute. The context affords no basis for giving precedence to the indemnity, nor indeed to the storage and litigation costs. Nevertheless, as the articulation below of the primary judge’s approach demonstrates, the practical effect of that approach is to give precedence to the full reimbursement of the litigation and storage costs.

175    He further submitted that the intention which should be inferred was that only $106,250 of the $425,000 was a payment in respect of costs and the rest was for the purposes of indemnification because TS’s mediation position paper had identified the ratio of its litigation costs to the claim for indemnity was about 1:3. It was submitted that the payment of $425,000 should also be so apportioned. Again, there is no foundation for that approach in the terms of the Deed, it is contrary to the competing more persuasive inference, and it is also a matter of mere speculation.

176    Finally, he submitted that it ought not to be assumed, as did the primary judge, that the parties agreed that Vero would pay TS’s costs on an indemnity basis and it is more likely that the parties should be taken as having agreed upon payment on a party/party basis. In partial support of this, he referred to TS’s mediation position paper although, as discussed above, those antecedent statements of intention are not relevant to the identification of the parties’ relevant mutual intention. Moreover, this submission too involved a fair degree of speculation and it also misunderstood the primary judge’s approach.

177    When the purpose and method of the primary judge’s calculations are kept in mind, it is apparent that his approach was entirely correct. On the limited information provided by the terms of the Deed and the surrounding circumstances, it was satisfactorily possible to identify only the sum of $116,770.06 (being $425,000 less $227,260.16 and less $30,969.42) as payment for indemnity. There was insufficient evidence to support a conclusion that any lesser amounts were intended to be paid in respect of TS’s legal costs or storage costs. This approach did not, as was submitted by Vero, assume a position against it in relation to costs. It was merely by a process of elimination that an amount capable of being attributable to the indemnity could be identified and, apart from the positive features which support the conclusions reached, Vero bore the onus of proving that less than the full amount of the storage costs should be adopted for the process of allocation.

178    It follows that Vero’s second ground of appeal also fails.

Grounds 3 to 5 of Vero’s appeal – the approach for ascertaining the parties’ mutual intention

179    Vero’s third to fifth grounds of appeal were to the effect that the primary judge erred in the manner in which he ascertained the parties’ mutual intention. It was submitted that he took an approached which prejudiced the insurer and that this was revealed by his Honour’s comment at [118] that:

… Can it be concluded that some part of the payment could only sensibly and conformably with the parties’ behaviour be seen to be mutually treated as, and so be characterised as, a payment representing an indemnity under the policy for disputed, but accepted in compromise, sums claimed?

180    It was submitted that this statement and similar comments in paragraphs [124] and [136] of his Honour’s reasons revealed an approach which imposed upon an insurer an obligation to identify in any settlement agreement the amount which is paid by way of indemnity in order to secure the right to subrogation. This was said to be an example of interpreting the agreement contrary to the interests of one party and, like the contra proferentum rule, should only be used as one of last resort: McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 at 602 [74].

181    This submission fails for the reasons referred to above. The primary judge was plainly not applying any such rule of construction but, in circumstances of minimal information where there was no specific allocation of the settlement sum, merely identifying by a process of elimination that portion of it which could be attributable to an indemnity. Put simply, absent that approach, no part of the $425,000 could be regarded as demonstrated to be attributable to an indemnification by Vero.

182    Mr Cox SC submitted that the trial judge’s approach seeks only to identify the minimum amount which could be referable to an indemnity and, conversely, an approach based on the maximum of that amount could have been pursued. The difficulty with this approach is that it was for the insurer to establish its entitlement to subrogation and, in doing so, it was to demonstrate by acceptable implication the amount paid to the insured by way of indemnity. In the circumstances of the limited materials available, a finding could have been made only by reference to that part of the settlement sum which could not be said to have been paid for legal or storage costs. Again, there was no error by the primary judge on this issue.

The relevance of equitable principles

183    Vero also submitted that the concept of subrogation is subject to equitable principles which permit the Court to adjust the entitlements of the parties despite the terms of an agreement entered into in good faith. It was said that in achieving the objective of preventing the insured from obtaining double recovery, it was possible to alter the outcome based on “broader equitable principles”. The effect of this was that the Court could adjust the mutual intentions of the parties in appropriate circumstances. Support for this proposition was sought to be derived from the decision in Kightly. In that case, K had recovered from an insurer an amount of $70,557.30 in respect of various losses including medical, rehabilitation and travel expenses and loss of income which he sustained as a result of suffering injury. He then recovered $135,000 from a third party for damages consequent upon the suffering of the injury although no part of the settlement amount was attributed to any particular loss or expense which he had incurred. The insurer relied on its right of subrogation and sought recoupment of the amount which it had paid to K under the policy. The Western Australian Court of Appeal (Steytler P, with whom Wheeler and Roberts-Smith JJA agreed) held that the insurer was entitled to recover some amounts in respect of the payments which it had made. However, this case is of little assistance in the context of the present discussion. There, the insured had been indemnified in respect of the various expenses and the question was whether he had received from the third party tortfeasor damages in respect of those indemnified expenses. The insured’s action against the third party did not go to trial and it was settled without any breakdown of the loss for which the sum of $135,000 was paid. The settlement agreement also released the third party from all further claims with the consequence that the insurer’s rights to recover in respect of the sums indemnified were prejudiced. It was held that this conduct by the insured gave rise to a claim by the insurer for equitable compensation from the insured in a sum equal to the amount paid by way of the indemnity. Importantly, the Court seemingly considered that it was unable to ascertain whether the funds received by the insured from the third party were in respect of the losses which the insurer had indemnified. Indeed, that was the basis of the conclusion that the insured had prejudiced the rights of the insurer.

184    There is nothing in Kightly which comes anywhere near to suggesting that, when the parties have entered into a compromise settlement, involving an adjustment of various rights within the total result, the Court should alter and adjust their agreement in the name of equity of the kind discussed. Once they have agreed, they have made and attributed the law, and relevant equity, inter se. All that remains for controversy is the meaning of their agreement, and the party who claims that it provides it with a certain benefit must establish the claim by justifying it through a persuasive construction which prevails over alternative constructions. In reaching a conclusion, the Court must use what material is available to it. If the meaning is obscure, it must use and decide according to that material, but always in the constraint of the parties’ express intention as revealed in the agreement, and not by the application of equitable considerations which might have applied, absent the agreement. Then, in the construction process of weighing the competing meanings advanced, the Court will have reference to the available material, including where appropriate the surrounding circumstances. In this, if a party, such as one in the position of Vero, claims that a factor should have influence, it should demonstrate that it is present, that is, relevantly to this point, that equity should somehow intervene to influence the meaning of what was written. In one respect, this involves showing that it was not already taken into account in the parties’ agreement.

185    In this case, Vero has pointed to nothing to justify any admission of equity as a factor in the process of construction. This is consistent with its failure to advance any factor which would have accorded the learned trial judge the opportunity to address the allocation of the settlement by reference to the indemnity component and required him to depend on the remainder process by subtracting the sums which could be allocated to the litigation and storage costs. It might be added that had the trial judge not performed his careful analysis to reach a construction which provided some return to Vero, the only alternative open was that the Deed and the surrounding context was insufficient to indicate any allocation so that, being unable to show the amount to which it was entitled by way of subrogation, its claim must have failed. This is not a novel situation: it occurs also when a plaintiff proves the defendant’s liability but does not adduce sufficient evidence on which the quantum of damages can be assessed and awarded. This is not a criticism of Vero’s failure to advance a feature which demonstrated the amount of the indemnification. They were not there. Its only error is to argue against the decision which followed the correct and only available result.

186    Reliance was also placed on the decision in GRE v QBE and, particularly, the observations of McGarvie J (at 103) where his Honour said:

I regard the conclusion that Q.B.E. has a right to contribution in respect of payments beyond its rateable proportion as making explicit what is already implicit in the law, to use Professor Peter Brett’s expression: An Essay on Contemporary Jurisprudence, 1975, pp. 55-8. A right depending on justice and equity will not be awarded where it would bring about injustice. In particular circumstances it would be open to a court to deny or limit the right, if justice required that.

187    In reliance on this, Vero submitted that equity should look to the substance of the settlement and not to its form such that one party is not to be fixed at the minimum entitlement and one at the maximum. However, for the reasons explained above in relation to Vero’s reliance on Kightly, that submission must also be rejected.

188    There is nothing in Grounds 3 to 5 of the appeal which provides any justification for adjusting the learned primary judge’s conclusion as to the allocation of the amount which the parties intended was paid in respect of the indemnity.

Ground 6 of Vero’s appeal – quantum of storage fees

189    By this ground, Vero submitted that the primary judge failed to undertake an assessment of the quantum of storage costs which were deducted from the $425,000. It submitted that the policy provided for the payment of the reasonable costs incurred under the sue and labour clause, being the expenses for the temporary storage of goods whilst the parties conducted inspections to ascertain whether they could be salvaged, repaired or sold in the damaged state. It submitted that it had put in issue the amount of the reasonable storage claims and that the resolution of that issue required an application of cll 2(c) and (d) of the Deed. On its case, the primary judge erred by deducting from the amount of $425,000 the storage cost claim ($30,969.42) when the parties had expressed an intention to deal with that issue separately, or his Honour should have made an assessment of the actual amount payable in accordance with the terms of the sue and labour clause.

190    There is some undoubted ambiguity in the Deed in relation to the storage costs. In the recitals, it is agreed that:

Following the Insurance Claim, Technology Swiss made a claim against Vero from Vero [sic] for monthly storage costs of the Consignment in Thailand (the Storage Costs Claim).

191    Although cl 2(a) provided that the payment of $425,000 was in full and final settlement of, inter alia, the Storage Costs Claim, cll 2(b), (c) and (d) provided:

(b)    Within 14 days of execution of this Deed Technology Swiss, Vero will make payment of the Settlement Monies to Technology Swiss by electronic funds transfer into the account:

Account name:            Technology Swiss Pty Ltd

Bank:                           Commonwealth Bank of Australia    

BSB:                            ******

Account number:         ********

(c)    Vero agrees to make payment to Technology Swiss of the storage costs it incurred for the Consignment in Bangkok, Thailand from 1 March 2017 until the date of the execution of this Deed by Vero (Storage Costs Settlement Monies).

(d)    Within 14 days of receipt by Vero of the storage costs invoices for the Consignment in Bangkok, Thailand from 1 March 2017 until the date of the execution of this Deed by Vero and receipt by Vero of evidence of payment of these storage costs invoices by Technology Swiss, Vero will make payment of the Storage Costs Settlement Monies to Technology Swiss by electronic funds transfer into the following account:

Account name:            Technology Swiss Pty Ltd

Bank:                           Commonwealth Bank of Australia    

BSB:                            ******

Account number:         ********

192    Further, by cl 3, TS was obliged to file a notice of discontinuance within seven days of the receipt of, inter alia, the “Storage Costs Settlement Monies”.

193    In Vero’s written submissions, it was said that the primary judge dealt with the storage costs in his analysis of cl 2(a) and it should have been considered separately and by reference to cl 2(c), although this was not further developed. His Honour concluded that the storage costs referred to in cl 2(a) were those incurred by TS in respect of the period to 28 February 2017, and that cll 2(c) and (d) dealt with those incurred after that date. The primary judge’s conclusion in this respect should be accepted and no substantive argument was advanced to suggest it was in error. On that basis, those submissions do not identify any error in the primary judge’s interpretation of the Deed in this respect.

194    In oral submissions to this Court, all that Vero relied upon in relation to the storage costs was that, in making the deduction which he did, the primary judge erred in not calculating the actual reasonable costs of storage. For the purposes of this argument, Vero had accepted that some portion of the $425,000 was paid in respect of the storage costs, which was appropriate given the clear words of cl 2(a). Ultimately, the essential issue became whether the primary judge should have made an independent assessment of the amount which would have been payable for reimbursement under the policy consequent upon TS’s compliance with its obligations under the sue and labour clause.

195    Again, the answer to this is found in the preceding discussion as to the proper approach to the task which confronted the primary judge in ascertaining the mutual intention of the parties as to the amount paid as an indemnity to the extent that it could be detected from the Deed and any relevant surrounding circumstances. He was not required to attempt to identify some middle ground between them. The Deed represented the agreed resolution of the insured’s claims and was not intended to be a precise calculation of the parties’ distinct rights under the policy. The primary judge interpreted the Deed in its context. That context included their mutual knowledge of the maximum amount of the claims in respect of legal and storage costs. The significant point here is that there was no evidence of the storage costs as calculated under the sue and labour clause at the time of entry into the Deed. All that was known was the amount claimed by TS at that time. There was nothing in the Deed or the surrounding circumstances which suggests the parties intended that the portion of the $425,000 paid in respect of storage costs was an indeterminate amount yet to be determined by a court pursuant to the terms of the sue and labour clause. The only mutually known fact at that time was the amount of TS’s claim for those components. It was the only relevant fact known to the primary judge for this task. The question might be rhetorically asked – what argument could Vero properly advance to suggest that the allocation should have been otherwise than as found? Yet this was an essential feature of the construction required to support Vero’s claim as to the quantum of the indemnity allocation. It follows that the only relevant information as to the quantum of storage costs was the amount TS claimed, and it was only after deducting that amount that any confidence could be reached as to the amount paid as an indemnity.

196    No error was shown in the primary judge’s approach in this respect and this ground of appeal fails also.

Conclusion on Vero’s appeal

197    From the foregoing, it necessarily follows that Vero’s appeal should be dismissed.

TS’s Cross-Appeal

198    Although much of the substance of TS’s cross-appeal has been dealt with in the course of the consideration of Vero’s appeal, it is appropriate to make particular reference to a number of specific matters raised in it.

Ground 1 of TS’s cross-appeal – payments which also discharge disputes

199    By Ground 1, TS submitted that “a payment by an insurer on an agreement to settle multiple claims is not amenable to recoupment by the insurer, because it is not payment discharging a promise of indemnity, and subsequent recovery by the insured does not contradict the assumption on which the payment was made”. In substance, Mr Braham SC’s submission was that whenever an insurer and an insured disagree as to the validity or extent of an insured’s claim upon a policy and enter into an agreement to resolve the dispute, including any related litigation which had ensued, any payment made by the insurer in furtherance of the settlement cannot be treated other than as a payment to resolve the complex dispute and, as such, cannot be a payment by way of indemnity. He submitted:

… the central issues in this appeal are resolved by observing that the payment of $425,000 was not paid pursuant to an indemnity promise, but was paid pursuant to a promise in a settlement deed to pay the amount of $425,000.

This, so the submission went, was the result of the parties’ replacing the obligation to indemnify under the policy with an obligation to pay the settlement amount.

200    It was submitted that this proposition was consistent with the decision in Wellington Insurance, although nothing of that nature can be derived from that decision, as the preceding discussion discloses. There is no general principle that any time a payment is made to settle a dispute which involves litigation, the payment cannot be also in respect of an antecedent obligation which was in issue in the litigation. As the primary judge held in this case, the $425,000 payment was, in part, intended by the parties to constitute Vero’s performance of its obligation under the policy to indemnify in respect of the claimed loss.

201    Mr Braham SC also submitted that one way an insurer might preserve the right of subrogation was to include in any settlement deed “an undertaking to make a payment pursuant to the policy of a certain amount of a payment in the nature of an indemnity payment for loss in a certain amount”. However, that is effectively the construction given to the Deed in the present case by the primary judge by the usual rules of construction to ascertain the parties’ intention. There was no discernible intention in the Deed that the parties intended that all prior rights and obligations “merged into the deed” so that their individual characterisation were lost, as Mr  Braham SC submitted, or somehow lost their characters by their respective inclusion in the composite Deed. Rather, the fact that the parties recognised that payment of the $425,000 was in settlement of TS’s claim under the policy strongly excludes it. Similarly, the fact that TS covenanted to release Vero in respect of all claims under the policy militates against any such construction.

202    Otherwise, the discussion above as to the nature of payments made by way of indemnity sufficiently disposes of TS’s initial submission.

203    The second part of Ground 1 of the cross-appeal was that the primary judge erred because there was “no basis for characterising any part of the Settlement Sum as an indemnity payment”. The submissions advanced in relation to this have also been substantially dealt with previously in these reasons and there is no need to repeat them. It suffices to observe that none of the submissions revealed any error in the primary judge’s conclusion as to the mutual intention of the parties as to the purposes for which the payment of $425,000 was made, and that one of those purposes was to reduce the loss in respect of which TS sought indemnity under the policy. The mere fact that the payment also brought an end to the proceedings does not detract from that conclusion, rather it enhances it. The proceedings were to enforce TS’s claim to indemnification under the policy and, in that respect, the payment in settlement of the proceedings can be also seen as a settlement of the claim.

204    One further submission advanced was that Vero’s payment of $425,000 was in consideration of all TS’s promises contained in the Deed, including the releases. That submission should also be rejected. Putting aside the fact that the agreement was contained in a Deed, the express terms of cl 2(a) provide the amount was paid in full and final settlement of the Insurance Claim and the other identified matters. It is a matter of logical precaution that it should also be spelled out that the party which was receiving payment by way of settlement of disputed claims would clearly acknowledge that the settlement would be to put a clear end to those claims. In a way, this implies that the payment is made and accepted in respect of those claims, which here included a claim for indemnity. TS’s submission on this point wilfully ignores the Deed’s clear words.

205    It was also submitted that in its defence in these proceedings Vero admitted that the sum of $425,000 was paid pursuant to paragraph 2(a) of the Deed such that it could not now be said that it was paid in respect of TS’s claim for indemnification. That somewhat hopeful submission would read a passage in isolation and out of context, and proceeds on the basis that the payment under the Deed could not also be a payment to reduce TS’s loss in respect of which indemnity was claimed. There is no foundation for it and no authority cited nor principle referred to in support of it. In this context, mention should also be made of Vero’s express assertion in its defence that its payment of $425,000 was paid “by way of indemnity under the policy”. There is no foundation whatsoever for the suggestion that the hearing before the primary judge proceeded upon the basis that there was no issue that the settlement sum was only paid pursuant to the terms of the Deed. It is regrettable that this submission was made at all.

206    Although not raised below, a further point advanced on the appeal was that, as the sum of $425,000 was not dissected in proportions referable to the matters which it settled, it is impossible to characterise any part of it as a payment to indemnify TS in respect of its loss. This has been adverted to above. Mr Braham SC for TS submitted that this point was one of general application and was best identified in a number of taxation cases. First, he referred to Allsop v Commissioner of Taxation (1965) 113 CLR 341, where the taxpayer had sued to recover certain permit fees which he had alleged were wrongly received from him by the Commissioner of Motor Transport. He had previously claimed a deduction for taxation purposes in respect of the payment of these fees. By a settlement deed, the taxpayer released the Commissioner for Motor Transport from all claims including claims for certain alleged breaches of the legislation under which the fees were claimed in return for payment of an undissected lump sum which was less than his claim. The Commissioner of Taxation sought to include the amount of the lump sum in the taxpayer’s taxable income as being a refund of the fees, the payment of which had been allowed by way of a deduction. Barwick CJ and Taylor J observed that there were claims released in return for the payment under the deed other than the claim for the return of the permit fees. Their Honours then said (at 351):

But even if they are taken into consideration they would not affect the conclusion that the amount payable was an entire sum paid by way of compromise of all these claims and no part of it can be attributed solely to a refund of the fees paid by the appellant for permits. In these circumstances there is no warrant for regarding the amount paid by him or any part of it as a refund or recoupment to him of any revenue disbursement made in carrying on his business or for regarding it on any other ground as an income receipt.

207    Mr Braham SC also referred to McLaurin v Federal Commissioner of Taxation (1961) 104 CLR 381, where the taxpayer had received a lump sum settlement of a claim against the Commissioner of Railways in respect of damage caused to his land consequent upon a fire. The Commissioner of Taxation assessed a portion of that sum as being assessable income on the basis of figures used by the Commissioner of Railways to formulate the offer made to the taxpayer. In particular, consideration was given to the value of certain hay which had been destroyed by the fire on the basis that the hay was an asset of an income nature. The Court (Dixon CJ, Fullager and Kitto JJ) held (at 390) that no part of the settlement sum could be attributable to the loss of the hay because the settlement was for a lump sum of damages, not composed of agreed constituents, which was offered and accepted in full satisfaction of the entirety of the taxpayer’s causes of action. Moreover, the elemental foundation of the Commissioner of Railways’ offer was not made known to the taxpayer such that there was no basis for identifying any common intention that the payment represented a number of specific parts with a value attributable to each. Importantly, their Honours continued (at 391):

It is true that in a proper case a single payment or receipt of a mixed nature may be apportioned amongst the several heads to which it relates and an income or non-income nature attributed to portions of it accordingly: Texas Co. (Australasia) Ltd. v. Federal Commissioner of Taxation; Rompibon Tin N. L. and Tongkah Compound N.L. v. Federal Commissioner of Taxation; The National Mutual Life Association of Australasia Ltd. v. Federal Commissioner of Taxation. But while it may be appropriate to follow such a course where the payment or receipt is in settlement of distinct claims of which some at least are liquidated, cf. Carter v. Wadman, or are otherwise ascertainable by calculation: cf. Tilley v. Wales, it cannot be appropriate where the payment or receipt is in respect of a claim or claims for unliquidated damages only and is made or accepted under a compromise which treats it as a single, undissected amount of damages. In such a case the amount must be considered as a whole: Du Cros v. Ryall.

(Footnotes omitted).

208    Finally, in this respect, TS relied upon the recent decision in Friend v Comcare [2021] FCA 837. In that case, Comcare had admitted liability to compensate a Commonwealth employee under the Safety, Rehabilitation and Compensation Act 1988 (Cth) in respect of her psychological and physical injuries. She later made a complaint to the AHRC, claiming that she had been discriminated against on the basis of her claimed PTSD and other psychological and related physical conditions. She settled that claim for $1.25 million and entered into a deed of release with the Commonwealth. Comcare then sought to recover compensation previously paid to her and to cease paying further compensation on the basis that the settlement proceeds constituted a recovery of damages in respect of the injury for which she had been and was being compensated by Comcare. Rares J held (at [109] – [110]) that, in the absence of any evidence as to how the settlement was constituted, it could not be said that any part of it constituted damages recoverable by Comcare.

209    With respect, rather than advance TS’s cross-appeal, the above authorities support the approach taken by the primary judge. They demonstrate that resolution of the question of whether any portion of a lump sum payment can be attributed to a particular integer depends on the circumstances of the case including the terms of settlement and the availability of means to dissect it for the purposes of allocation. Rather than suggest a general rule that a lump sum payment cannot be attributed to particular elements, they show that it is only where that is not possible to identify the parties’ mutual intention in relation to the lump sum payment, that no apportionment may take place. The difficulty for TS in this case is that the intention of the parties appeared from the terms of cl 2(a) and the surrounding circumstances known to it and Vero. In particular, the sum of $425,000 was paid in respect of three matters, the storage costs, the costs of the earlier Federal Court action and the claim for indemnity (even if the latter was advanced in multiple ways). Once account was taken of the highest amounts which TS was claiming in respect of the first two elements, the remainder must necessarily have been mutually intended as indemnification of the insured’s loss. This was the approach of the learned primary judge which was entirely correct.

210    The authorities relied upon by TS in respect of this part of its cross-appeal do not support the general principle which it sought to advance. It follows that no error has been shown in the reasons of the primary judge in this respect, quite apart from the fact that this point was not raised at trial, it cannot succeed in any event.

Ground 2 of TS’s cross-appeal – non-inclusion of pre-judgment interest

211    TS further submitted that if the approach of the primary judge was correct, an error occurred in the process by which it was implemented because it did not take into account the totality of the claims which it had made against Vero, in particular the claim for pre-judgment interest. That submission was misconceived. The interest claim was substantially in respect of the amount claimed as indemnity for the loss suffered and was, as the primary judge concluded, inextricably linked to that claim. In that sense, the amount of $116,770.06 was paid to TS in indemnification of its loss including any interest flowing from that loss. The claim for interest was not separate or different from the claim for indemnity such that it needed to be individually accounted for in the process applied by the primary judge. There is no merit in this ground.

212    It follows that Ground 2 of the cross-appeal also fails.

Ground 3 of TS’s cross-appeal – use of post-contractual evidence

213    Ground 3 of the cross-appeal, which was not further advanced in oral submissions, was that the primary judge had erred in relying upon post-contractual conduct in reaching the conclusion that the parties had intended that the sum of $116,770.06 was intended as a payment in respect of the damage sustained to TS’s goods. His Honour had observed (at [133]):

I am fortified in my conclusion that at least the sum of $116,770.06 was mutually intended as a payment for damage to the goods by TS’ approach to the possible cost sharing agreement. Its conduct manifested a recognition by way of admission that at least such sum was recognised as an indemnity under the policy. As later conduct it cannot assist in the construction of the deed; but it is conduct which can assist in supporting by later admission a conclusion as to earlier inferred or implied intention.

214    As is pellucid from the terms of his Honour’s reasons, no reliance was placed on any post-contractual conduct in reaching the identified conclusion. It is totally unremarkable that after explaining a careful process of reasoning which led to a decided result, the Court might incidentally advert to the coincidence of that result with the parties’ later behaviour. Apart from a direct expression, it clearly implies that this was not a feature which played a part in the decision. His Honour had reached it by other means and was merely referring to TS’s conduct in seeking to negotiate the cost-sharing arrangement as being supportive of that. For that reason alone, the ground is without merit and there is no need to consider the correctness or otherwise of the primary judge’s conclusion that the later conduct might be considered as an admission of an earlier inferred or implied intention.

215    Ground 3 of the cross-appeal also fails.

Conclusion on the cross-appeal

216    It follows that none of the grounds raised in the cross-appeal have any merit. The cross-appeal should be dismissed.

Costs

217    Given the potential for several different outcomes to the appeal, the parties requested that they be afforded an opportunity to make submissions on the question of costs after the delivery of judgment. That is appropriate and orders should be made to facilitate the filing and serving of written submissions on that question.

Associate:

Dated:    17 September 2021