FEDERAL COURT OF AUSTRALIA

Tropical Reef Shipyard Pty Ltd v QBE Insurance (Australia) Ltd (No 2) [2010] FCA 1093

REASONS FOR JUDGMENT

Introduction

1                                             This case involves several claims by the insured, Tropical Reef Shipyard Pty Ltd (TRS), under two policies of insurance issued by QBE Insurance (Australia) Ltd (QBE).  The policies, entitled “Instant Profits Insurance – Cash Flow Insurance – Simplified Business Interruption Insurance”, are intended to protect the assured against “weekly loss of Turnover suffered … if the Business is interrupted or interfered with due to … property … having sustained … loss or damage”.  QBE seeks to bring the claims to an end through a summary judgment application under s 31A of the Federal Court of Australia Act 1976 (Cth).  The application is brought on the basis that “TRS have not pleaded, and it should be inferred that it cannot advance, an arguable claim of a loss of Turnover established consistently with the operation of the Policies”. 

Background

2                                             The summary judgment application relies for its success on the proper construction of the policies.  That is a task that has already been undertaken.  On 16 June 2009 I directed under O 29 of the Federal Court Rules that four questions relating to the construction of the policies be determined before trial.  The policies are relevantly in identical terms, apart from the period of cover and the sum insured.  Each question required an aspect of the meaning of the policies to be ascertained.

3                                             The principal issue in dispute concerned the meaning of the insuring clause.  That clause provides that “for each week we [QBE] will pay an amount based upon Weekly Calculations not exceeding the Weekly Sum Insured each week in respect of loss of Turnover suffered by you [TRS] during the Indemnity Period”, such payment to “be made every seven days whenever practicable”.  “Weekly Sum Insured” is defined to mean “the sum insured for each week which you have selected and which appears in the Schedule.  All calculations shall be on a weekly basis”.  The sum insured in the Schedule for the first policy is $201,000 and for the second it is $183,900.  “Turnover” is defined to mean “money paid or payable to you for goods sold and for services rendered”.  It is agreed on both sides that loss of Turnover is calculated by subtracting actual weekly Turnover from Actual Average Weekly Turnover for each week. Actual Average Weekly Turnover is defined as “the Actual Average of the Turnover for the twelve (12) months preceding the commencement date of the interruption”.

4                                             Three incidents are alleged to have caused damage to a slipway used by TRS to slip vessels to enable it to provide repair and maintenance services.  The damage to the slipway is said to have interrupted the business operations of TRS resulting in it suffering a loss of weekly Turnover for which it makes claim under the policies.

5                                             As it turns out, there was not a loss of Turnover in each week during the indemnity period covered by each policy.  In some weeks TRS’s actual Turnover exceeded its Actual Average Weekly Turnover.  In that circumstance, according to QBE, the appropriate method for determining the amount of cover is:  (1) calculate the weekly loss of Turnover for each week by subtracting the applicant’s actual weekly Turnover from Actual Average Weekly Turnover; (2) place that amount in a nominal running account; (3) if the balance in the nominal running account is positive at the end of the year of indemnity, that amount (up to the Weekly Sum Insured) is the loss which is covered and when the amount is paid, it must be deducted from the nominal running account. 

6                                             The fourth question which was reserved for determination was asked in order to test QBE’s approach to the calculation of loss.  That question, and its answer, was as follows:

Question 4:

Upon the assumption that:

(a)        the Actual Weekly Turnover and Average Weekly Turnover figures pleaded in Annexures D, G and H to the Applicant’s Claim are correct (as corrected by paragraphs 21-23 of the Supplementary Report of Stephen Munro Gibson dated 10 June 2009);

(b)        the allegations pleaded in paragraphs 1, 2, 4 to 15, 22 to 26, and 32 to 36 of the Applicant’s Claim are established;

(c)        the Respondent has paid a total sum of $2,000,000 to the Applicant in respect to the claims made in the proceedings; and

(d)        the Applicant’s claims pursuant to the 2005 renewal (as defined in paragraph 5 of the Applicant’s Claim) and the 2006 renewal (as defined in paragraph 8 of the Applicant’s Claim) are as pleaded in Annexures D, G, H and I to the Applicant’s Claim (as corrected by paragraphs 21-23 of the Supplementary Munro dated 10 June 2009);

upon the proper construction of the 2005 renewal and the 2006 renewal, is the Applicant entitled to any and if so what amount under the 2005 renewal and/or the 2006 Renewal in respect to loss of Turnover under the said policies?

Answer: The Applicant is entitled to loss of Turnover under:

(a)        the 2005 Renewal for the weeks ending 12 April 2007 to 25 October 2007 in respect to the September 2006 Incident;

(b)        the 2006 Renewal for the weeks ending 22 February 2007 to 5 April 2007 and 1 November 2007 to 14 February 2008 in respect to the November 2006 Incident;

calculated in accordance with the methodology identified in the reasons for judgment, subject to proof of the loss of Turnover and the causal connection required by the terms of each of the policies.

7                                             The effect of this answer was to reject QBE’s approach to the calculation of loss of Turnover.  The reasons which were delivered explain why:  Tropical Reef Shipyard Pty Ltd v QBE Insurance (Australia) Ltd [2009] FCA 1088.  In those reasons I said (at [14]):

The cover provided by the policy makes clear that “for each week [the respondent] will pay [the applicant] … in respect of loss of Turnover” (emphasis added).  This means the calculations are to be made on a weekly basis.  This position is reinforced by the introduction to the policy, which speaks of indemnity “in respect of weekly loss of Turnover”.  In addition where a loss arises, it must be paid within “seven days whenever practicable”.  In other words the policy terms provide for indemnity for losses incurred on a week by week basis.  Those losses must be calculated by reference to weekly figures not on an annual, or some other, basis.  In the calculation of weekly loss of Turnover, there is nothing to support the introduction of a “running account”.  It is true that the result may be seen as a windfall gain.  But it is only a windfall if the applicant’s position is considered on an annual basis.  It is not when analysed with the words of the policy in mind, which, as I have said, looks at the applicant’s position on a weekly basis.

8                                             I went on to say (at [15]) that, having regard to that construction, the issues that remained to be resolved at trial were “(a) whether there is a causal connection between the incidents and the loss claimed and (b) whether Turnover, and therefore Actual Average Weekly Turnover, ought be calculated by reference to total invoiced sales or cash receipts, or a combination of both, plus work in progress”.

The Full Court

9                                             QBE was dissatisfied with the construction I had placed on the policies.  It sought leave to appeal from my answer to Question 4:.  In the course of refusing leave the Full Court made two observations that are presently relevant.  First, they said (QBE Insurance (Australia) Ltd v Tropical Reef Shipyard Pty Ltd [2009] FCAFC 161, [28]) that at the trial I am not bound by the answers to the separate questions and “can again consider the questions of construction, cognisant of all the facts as found or admitted”.  Second, they said (at [29]) that “[a] consideration of the fundamental issues of proof of loss and causation … may impinge on [the] final resolution of [the] construction question.  If they do impinge, the primary judge is not bound by his answer to Question 4”.

10                                          It is difficult to know what to do with the first of these observations.  Doubtless the Full Court had in mind that decisions on questions raised under O 29 are interlocutory in character (Dunstan v Simmie & Co Pty Ltd [1978] VR 669), the decision not being a judgment which puts an end to the action (In Re Chinery (1884) 12 QBD 342).  Hence the judge has the ability to reconsider any issue that has been dealt with.  As the High Court said in Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc (1981) 148 CLR 170, 178, “a court must remain in control of its interlocutory orders”. 

11                                          But, as the cases show, a judge cannot simply reconsider what he/she has found on an interlocutory application whenever he/she wishes.  The circumstances in which a judge can (or should) reopen an issue (apart from applications dealing with matters of simple procedure) are relatively limited.  While the circumstances are not closed, ordinarily what is required is either (1) new material or new evidence not reasonably available when the order was made; (2) a material change in circumstances; or (3) some other exceptional circumstance: P Dawson Nominees Pty Ltd v Australian Securities and Investments Commission (No 2) 255 ALR 466, [49].

12                                          I accept, as Heydon JA put it while a member of the NSW Court of Appeal in Nominal Defendant v Manning (2000) 50 NSWLR 139, [46] that the general rules regarding when a judge should reconsider an interlocutory application fall under the overarching principle that the court should do what justice requires in the circumstances of the case.  On the other hand, the reluctance the court has to allow a matter of substance to be reargued has a proper foundation.  The foundation was explained by Hayne JA (as he then was) in D A Christie Pty Ltd v Baker [1996] 2 VR 582, 602.  Unless a tight rein is kept on applications to reopen an issue already disposed of, he said there is the prospect of conflicting decisions, the possibility of a party being vexed by successive applications and the risk that an application may be “hawked” from judge to judge until a judge is found who is willing to accede to a particular argument.  On this approach, the occasions on which separate questions will be reheard will be few. 

13                                          In the instant case, notwithstanding the hint given by the Full Court, no party has sought to have the construction question revisited.  One might assume that the parties are of the view (as I certainly am) that there exists no grounds for taking that course.

14                                          In this connection I have not overlooked the Full Court’s reference to several insurance texts, which it has implied may lead to a different outcome.  The texts included Colinvaux’s Law of Insurance (8th ed, 2006) [22-39], where the following passage appears: 

Under a typical business interruption policy the assured will be entitled to recover for defined financial losses which he has suffered in the “indemnity period”, which is a fixed period, often 12 months, running from the date on which the peril insured against has occurred.  There is very little English authority on this type of insurance, although it is commonly assumed that the indemnity period is to be treated in isolation so the fact that the assured is able to make good his losses following the expiry of the indemnity period does not give the insurers any right to reclaim their payment. … The principle is, therefore, that if losses are made good in the indemnity period, then the insurers are entitled to bring those gains into account, but the insurers may not do so if the losses are made good outside the indemnity period.

Another text is Riley on Business Interruption Insurance (8th ed, 1999) [247], which states:

If the turnover is reduced for a period and then, still as a result of the Incident, the sales in subsequent weeks or months exceed the corresponding pre-Incident amount the deferred turnover would be brought into the calculation of the claim for benefit of the insurers.

15                                          What appears in these texts is, in substance, the position that was put by QBE when the O 29 questions were argued.  It is a position which I held was untenable on the proper construction of the policies.  Under the policies the relevant “indemnity period” or “period” is the week in which loss is said to have been suffered, not the period during which the policy is current.  Put another way, nothing in the texts referred to by the Full Court causes me to change my mind.  In any event, it is not appropriate for me to reconsider the issue; a party dissatisfied with my conclusions must appeal the issue to the Full Court.

16                                          This brings me to the second point raised by the Full Court, which is the proposition that the construction of each policy may be affected by the evidence that TRS will lead to prove causation and loss.  This, as I see things, is a fundamental departure from the accepted cannons of the construction of contracts.  In construing a contract a court is entitled to look not only to the written instrument but also to evidence of the objective factual background known to the parties at or before the making of the contract, including evidence of the genesis and, objectively speaking, the aims of the transaction.  In England one of the leading discussions about the process of construction is to be found in the speech of Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society (No 1) [1998] 1 WLR 896.  In Australia the authority most often cited is Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337.

17                                          But, in both England and Australia, it is well understood that what occurs after the contract has been made cannot be considered on construction issues.  In James Miller & Partners Ltd v Whitworth Street Estates (Manchester) Ltd [1970] AC 583, 603 Lord Reid explained:  “I must say that I had thought that it is now well settled that it is not legitimate to use as an aid in the construction of the contract anything which the parties said or did after it was made.  Otherwise one might have the result that a contract meant one thing the day it was signed, but by reason of subsequent events meant something different a month or a year later”.

18                                          It seems that the Full Court has a different view.  It indicated (at [29]) that “fundamental issues of proof of loss and causation” may affect the final resolution of the construction question.  But it seems tolerably clear that the Full Court made this observation (1) although the point was not put by any party; and (2) in the absence of the citation of authority, which would require it to reach the opposite conclusion.  In these circumstances the approach I am bound to adopt is that “fundamental issues of proof of loss and causation” cannot affect the construction of the policies.

QBE’s Application

19                                          Now, returning to QBE’s application, it contends that the manner in which TRS has formulated its claim for recovery must fail.  Here it is necessary to examine more precisely how, in its most recent statement of claim (its third attempt), TRS puts its claim for loss.  It pleads that there are four steps involved.  

20                                          The first step is to identify the date of the commencement of interruption. 

21                                          The second step is to calculate Actual Average Weekly Turnover for the 12 months preceding the date of commencement of interruption.  That involves, first, determining the total quantum of Turnover and second, allocating it to a particular week.  TRS says the total quantum of Turnover is properly determined by reference to sales invoices raised less an adjustment for credit notes issued.  It allocates Turnover to a particular week utilising one of two methodologies:  (1) where labour hours can be identified, a formula is applied to allocate Turnover based on the proportion of actual labour hours for a particular week to total labour hours; and (2) if labour hours cannot be identified, for jobs with a value greater than $10,000 Turnover is allocated uniformly to weeks based on start date and end date of the job as recorded in TRS’s records and for jobs with a value less than $10,000 Turnover is allocated based upon the invoice date. 

22                                          The third step is to calculate loss of weekly Turnover from the date of commencement of interruption on a “week by week” basis.  This involves two calculations:  (1) calculating actual Turnover for each week (using the same method as step 2); and (2) calculating loss of weekly Turnover by subtracting actual Turnover from Actual Average Weekly Turnover.

23                                          The final step is to apply to each week’s loss of weekly Turnover the “Rating Classification” percentage which is provided for in each policy and then (if applicable) reduce the figure to the maximum Weekly Sum Insured.

24                                          An alternative approach proposed by TRS is to calculate steps 2 and 3 only on the basis of vessels requiring the bottom 15m of the slipway.

25                                          The method by which Turnover is allocated to weeks has been determined by Mr Jackson, a partner of Deloitte Touche Tohmatsu.  The method is explained in some detail in a report which has been exhibited to his affidavit.  The basis for the allocation departing from the invoice date (or credit note date) is, at least according to Mr Jackson, because the date “may not accurately reflect the date on which the revenue was ‘earned’”.  For that reason Mr Jackson has sought to identify alternative methods of allocating Turnover to weeks.  He does not explain (perhaps because he is not a lawyer) how his method of allocation is consistent with the policy dictate that Turnover means money “paid or payable” for goods sold or services rendered. 

26                                          QBE criticises this methodology on the basis that the approach is not what the policy calls for.  I agree.  As will be apparent from my reasons for answering Question 4, Turnover and loss of weekly Turnover are to be determined by reference to what is paid or payable in the relevant period; averaging is not contemplated.  For purposes of calculating the Actual Average Weekly Turnover the relevant period is the 12 months preceding the interruption.  The Actual Average Weekly Turnover is the sum of what has been paid or is payable in that period divided by 52.  The period for the loss of weekly Turnover is, obviously enough, a week.  What is relevant are the amounts paid or payable in each week for which a claim is made.  An amount is “paid” when it is received.  An amount is “payable” when it becomes owing, which is, generally speaking, not until an invoice has been issued.  The expression “paid or payable” does not usually include forward sales until the services are performed and it does not include orders or contracts until an invoice is issued.  This tallies with normal accountancy practice:  see Riley, [39].

27                                          Accordingly, TRS is not able to sustain its claim for lost income as presently formulated.  I do not, however, accept that TRS cannot establish a claim for compensation.  To do so it will have to replead its case in accordance with the following methodology.  First step – identify the date of commencement of interruption.  Second step – calculate the Actual Average Weekly Turnover for the twelve months preceding the date of commencement of interruption.  Third step – calculate the weekly Turnover for each relevant week:  that is for each week in respect of which loss is claimed. I have described how Turnover is to be calculated for purposes of both step two and step three.  Fourth step – calculate the loss of weekly Turnover by deducting weekly Turnover from the Actual Average Weekly Turnover for each week.  Fifth step – establish that any reduction in income is caused by the interruption.  One way of proving causation is to:  (1) identify the vessels TRS was unable to slip and repair in the relevant period; (2) estimate the vessels it lost the opportunity to slip and repair in the relevant period; and (3) determine the value of the work that could have been performed on those vessels and the date or dates upon which invoices for that work would have been issued. There may be other ways to prove causation.  Sixth step – reduce the loss of weekly Turnover by the Rating Classification percentage and (where applicable) reduce the figure to the maximum Weekly Sum Insured.

28                                          While TRS cannot proceed on the case as presently pleaded it should be given the opportunity to yet again seek leave to reformulate its statement of claim.  This is because s 31A “is not activated by mere deficiencies in the pleadings”:  Butorac v WIN Corporation Pty Ltd [2009] FCA 1503, [19]; see also Rogers v Asset Loan Co Pty Ltd [2007] FCA 195, [59].  If TRS does seek and is granted leave to deliver a further amended statement of claim (a matter which must be of some doubt at this stage of the litigation game), it may be able to show a claim that should be allowed to go to trial.

29                                          It is appropriate, I think, to put TRS on terms that it should, within a short period of, say, 28 days, make any further amendment application it wishes to make.  Failing that, or if any proposed application to amend is refused, judgment should be entered in favour of QBE on this part of TRS’s claim.

30                                          As regards costs, although QBE has failed in its application, TRS cannot proceed on its cases as presently pleaded.  In the circumstances the costs should lie where they fall; each party should bear their own costs.

Associate:

Dated:         7 October 2010