Federal Court of Australia

Koolan Iron Ore Pty Ltd v Infrassure Ltd (No 2) [2023] FCA 1654

ORDERS

THE COURT ORDERS THAT:

1.    The parties must file a minute of consent orders reflecting these reasons and dealing with costs or, if necessary, competing minutes by 4.00 pm AWST on 22 February 2024.

2.    The matter is listed for mention at 9.00 am AWST on 29 February 2024.

3.    Liberty to apply in respect of paragraphs 1 and 2.

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

TABLE OF CONTENTS

REASONS FOR JUDGMENT

JACKSON J:

I.    INTRODUCTION

1    The applicant, Koolan Iron Ore Pty Ltd is a subsidiary of Mount Gibson Iron Limited, a mining company that is listed on the Australian Securities Exchange (ASX). Koolan operates an open cut iron ore mine on Koolan Island, off the Kimberley Coast of Western Australia. At the relevant times the mine comprised the Main Pit and the Acacia East Pit (ACE). Part of the mine was separated from the ocean by a seawall. On 24 October 2014 there was a slump in the seawall, which was followed by a further slump on 8 November 2014 and then, on 25 November 2014, the catastrophic failure of the seawall and the inundation of the Main Pit (the Incident). This prevented Koolan from operating the Main Pit for a period of time. The Main Pit was dewatered and mining in that pit recommenced in 2018.

2    The respondent, Infrassure Ltd is part of a group of insurers known as a Market who indemnified Koolan under a Material Damage and Business Interruption insurance policy (Policy). Infrassure's share of any liability under the Policy was 7.5%.

3    Koolan claimed under the Policy for the physical damage to the mine resulting from the failure of the seawall and for the resulting business interruption. The claim in respect of physical damage was settled in June 2016. The claim for business interruption was also settled in July 2017, in relation to all insurers in the Market other than Infrassure. These reasons determine the remaining disputes between Koolan and Infrassure.

4    Infrassure does not dispute that Koolan suffered some loss resulting from the interruption to the operation of the mine, and nor does it dispute that it is liable to indemnify Koolan for loss of that kind. The dispute is about the quantum of Koolan's claim. On 10 June 2021, Infrassure paid Koolan its calculation of its share of the indemnity due as a result of the business interruption loss, $801,832. Koolan, however, alleges that Infrassure is liable to indemnify it for $8,491,337, and also that it is liable for interest under s 57 of the Insurance Contracts Act 1984 (Cth).

5    The approximately $7.7 million difference between the parties is explicable by a number of issues about the construction of the Policy, how Koolan would have operated the mine if the seawall had not failed, and whether certain adjustments to the claim should be allowed. The most significant issue is whether Koolan has established that, if the seawall had not failed, it would have changed its mine plan, so that from March 2015 it would have mined specified volumes of iron ore at a lower cost, and so on a more profitable basis, between then and 23 October 2015. That is the end date of the Indemnity Period on which the parties are agreed, being the 12 months starting on the date of the first slump in the seawall.

6    By its originating application, Koolan seeks a declaration that it is entitled to be indemnified by Infrassure under the Policy for 7.5% of Koolan's calculation of the business interruption loss. It also seeks declarations as to the proper construction of the Policy. It claims judgment in the sum of $8,491,337 plus interest under the Insurance Contracts Act and costs (that sum does not, however, take into account the amount of $801,832 that Infrassure paid Koolan just before trial).

7    The trial took place during the COVID-19 pandemic, by video link from locations in Perth, Sydney and Brisbane, and included witnesses appearing from Hong Kong and Christmas Island.

8    The Policy and the parties' submissions are replete with capitalised defined terms and acronyms. These reasons will not swim against that tide. Terms defined in provisions of the Policy that are set out below will be used throughout these reasons without further defining them.

9    Given the complexity and disparate nature of the issues, it is not possible to state the outcome succinctly at this point. The parties agreed that when these reasons are delivered, they will confer in an attempt to agree the amount of Infrassure's remaining liability, if any.

II.    THE POLICY

10    Before describing the issues in more detail it is convenient to set out the key terms of the Policy. Its identifying details are Material Damage and Business Interruption Insurance policy bearing Unique Market Reference/policy number Q10592513/01 on policy wording with endorsements bearing number B0621CMSMG0513.

11    The Policy wording is standard wording that was issued by the Insurance Council of Australia and National Insurance Brokers of Australia in 1987. In fact, cases and other materials reviewed below suggest that wording of this kind has been in use in the United Kingdom and other insurance markets for a century. It has been used in a wide range of commercial operations and was not specifically prepared for use in the mining industry.

12    The relevant terms are found in Section 2 of the Policy, headed 'Business Interruption'. The indemnity clause is as follows:

In the event of any building or any other property or any part thereof used by the Insured at the premises for the purpose of the Business being physically lost, destroyed or damaged by any cause or event not hereinafter excluded (loss, destruction or damage so caused being hereinafter termed Damage) and the Business carried on by the Insured being in consequence thereof interrupted or interfered with, the Insurer(s) will, subject to the provisions of this Policy including the limitation on the Insurer(s) liability, pay to the Insured the amount of loss resulting from such interruption or interference in accordance with the applicable Basis of Settlement.

13    The total amount claimed from the Market was below the limitation on liability referred to here.

14    The Basis of Settlement is then set out. It contains four items. Only Item 1 and Item 4 are relevant to the dispute. Item 1 provides as follows:

The Insurance under this item is limited to loss of Gross Profit due to: (a) Reduction in Turnover and (b) Increase in Cost of Working and the amount payable as indemnity thereunder shall be:

(a)    In respect of Reduction in Turnover

the sum produced by applying the Rate of Gross Profit to the amount by which the Turnover during the Indemnity Period shall, in consequence of the Damage, fall short of the Standard Turnover,

less any sum saved during the Indemnity Period in respect of such of the charges and expenses of the Business payable out of Gross Profit as may cease or be reduced in consequence of the Damage.

(b)    In respect of Increase in Cost of Working

the additional expenditure necessarily and reasonably incurred for the sole purpose of avoiding or diminishing the reduction in Turnover which, but for that expenditure, would have taken place during the Indemnity Period in consequence of the Damage, but not exceeding the sum produced by applying the Rate of Gross Profit to the amount of the reduction thereby avoided;

less any sum saved during the Indemnity Period in respect of such of the charges and expenses of the Business payable out of Gross Profit as may cease or be reduce[d] in consequence of the Damage.

15    Item 1(b) can be labelled 'Increased Costs of Working' (ICW). It is unclear why the final sentence just quoted is not indented to Item 1(b) like it is to Item 1(a). Koolan submits that the fact that this 'savings' clause appears twice in identical terms appears to be a typographical error, and that nothing turns on it. I agree. The item means the same if the savings clause appears at the end of Item 1 and if it appears at the end of both Item 1(a) and Item 1(b) individually.

16    Item 1 then makes provision for a reduction of the amount payable in certain circumstances which are not relevant.

17    The term 'Gross Profit' is defined as follows:

GROSS PROFIT:

the amount by which:-

(a)    the sum of the Turnover and the amount of the Closing Stock and Work in Progress shall exceed

(b)    the sum of the amount of the Opening Stock and Work in Progress and the amount of the Uninsured Working Expenses as set out in the Schedule.

NOTE

The amounts of the Opening and Closing Stocks and Work in Progress shall be arrived at in accordance with the Insured's normal accountancy methods, due provision being made for depreciation.

18    There are no 'Uninsured Working Expenses' (UWEs) set out in a schedule to the Policy. However, it ended up as common ground that when the UWEs are not specified in the schedule, they are simply the variable costs of producing Turnover (or Output, as to which see below).

19    Other terms used in Item 1 are defined as follows (italicisation in original):

TURNOVER: the money (less discounts, if any allowed) paid or payable to the Insured for goods sold and delivered and for services rendered in course of the Business at the Premises.

INDEMNITY PERIOD: the period beginning with the occurrence of the Damage and ending not later than the number of months specified in the Schedule thereafter during which the results or the Business shall be affected in consequence of the Damage.

…

REDUCTION IN TURNOVER: the amount by which the Turnover during a period shall, in consequence of the Damage, fall short of the part of the Standard Turnover which relates to that period.

20    As already indicated, the Indemnity Period here is 12 months. Following this is a provision (or set of provisions) that is central to Koolan's primary claim. It is framed as a group of definitions but, as will be seen, it also has substantive effect:

I will call the provision found in the right-hand column above the adjustments clause.

21    There is an option in the following terms for the Insured to replace the 'Turnover' with 'Output':

At the option of the Insured the term 'Output' may be substituted for the term 'Turnover' and, for the purpose of this Policy, 'Output' shall mean the sale and/or invoice value of goods manufactured and/or processed by the Insured in course of the Business at the Premises. Provided that only one such meaning shall be operative in connection with any one event involving Damage.

22    Koolan has taken that option in relation to the present claim. From now on, therefore (with one exception to be explained below), these reasons will substitute 'Output' in place of 'Turnover', without marking the substitution with square brackets or in any other way.

23    Item 4 of Section 2 is as follows:

The insurance under this item is limited to increase in cost of working (not otherwise recoverable hereunder) necessarily and reasonably incurred during the Indemnity Period in consequence of the Damage for the purpose of avoiding or diminishing reduction in Output and/or resuming and/or maintaining normal business operations and/or services.

This item is subject to a sublimit of $7,500,000.

III.    THE ISSUES

24    The pleadings are in broad terms only. It is preferable to focus on the way that the issues emerged from the written outlines of opening submissions, supplemented by written closing submissions, filed on behalf of each of the parties. Also, to a large extent the details of Koolan's claim appeared in certain claim spreadsheets prepared on its behalf in order to quantify the claims under the several alternatives that are about to be explained.

25    The issues are described here in a relatively brief, introductory way. It will be necessary to go into the parties' cases in more detail when I come to resolve the issues in Sections V and VI below.

EMP or RMP

26    The main issues in this case revolve around the mine plan for the Main Pit. In broad terms, a mine plan for open cut mining sets out which parts of the pit will be excavated, and when. Mining companies are constantly making, implementing and revising plans of that kind. As at October and November 2014, when the seawall failed, Koolan was working to a mine plan that came to be called the 'existing mine plan' or EMP.

27    As has been seen, the amount of indemnity under Item 1 of the Policy is calculated by reference to the amount by which the Output during the Indemnity Period (24 October 2014 to 23 October 2015), fell short of a concept labelled 'Standard Output'.

28    The Rate of Gross Profit is then applied to that shortfall (the Reduction in Output) as an essential step in the calculation of the indemnity. But both Standard Output and Rate of Gross Profit are subject to the adjustments clause included in the provision which has been quoted at [20] above. The main issues concern the mine plan on which the adjusted Standard Output and adjusted Rate of Gross Profit should be based.

Would Koolan have adopted the RMP?

29    At the heart of the case are Koolan's contentions that:

(a)    the above provisions require Output to be calculated by reference to the mine plan which would have been implemented had the relevant Damage not occurred; and

(b)    here, if the seawall had not failed, from 1 March 2015 Koolan would have mined according to a different mine plan from the EMP, known as the 'revised mine plan' or RMP.

30    Importantly, the RMP was not proposed, let alone adopted or implemented, before the seawall failed. In circumstances explained below, it was proposed for the purposes of the insurance claim.

31    These contentions give rise to issues of construction and issues of fact. As far as construction goes, according to Koolan, the Policy provides for indemnity based on a hypothetical calculation because of the requirement in the adjustments clause to make adjustments to the Rate of Gross Profit and Standard Output so that the resulting figures are 'as nearly as may be reasonably practicable the results which but for the Damage would have been obtained' during the relevant period. So if the Court determines as a matter of fact that Koolan would have adopted the RMP during the Indemnity Period, the Policy requires the adjusted figures to reflect that.

32    Infrassure disputes that construction. It submits that the provisions of the Policy set out in Section II above start with a presumption that the Output in the Indemnity Period would have been the same as the Standard Output, that is, the Output for the 12 months immediately before the date of the Damage. Infrassure says that a similar presumption is the starting point for calculating the Rate of Gross Profit. Infrassure contends that these presumptions mean that the Insured must prove its Standard Output and Rate of Gross Profit on the basis of historical facts at the end of the Indemnity Period. Hypothetical possibilities such as the RMP may not be taken into account for the purposes of the adjustments clause.

33    As for issues of fact, the main one, which took up the bulk of the evidence, is whether Koolan would indeed have changed to the RMP as from 1 March 2015 if the seawall had not failed. Infrassure says that the course of events and Mount Gibson's internal and external communications leading up to the Incident (and beyond) show that Koolan would not have adopted the RMP, but would have continued to mine on the basis of the EMP.

To what extent would the EMP or the RMP have been achieved?

34    There are also issues in this case about the extent to which the mine plan or plans - whichever they would have been - would have been achieved. These issues revolve around what are called the 'physicals', namely, the forecast amounts for total ore and waste that would have been mined, the total material moved or TMM, and the quantities of ore that would have been extracted.

35    On the assumption that Koolan would have continued to mine according to the EMP, Infrassure submits that Koolan consistently fell short of its plans in the past, so the Court should conclude that it would have fallen short if it had continued with the EMP. Koolan, however, points to new equipment and other productivity improvements which, it says, mean that it would have had the capability to achieve the targets in the EMP had it mined according to that plan. But if the Court finds that it would have fallen short, the parties are agreed that the Court should find that Koolan would have achieved 91% of the EMP.

36    If the Court finds that Koolan would have mined according to the RMP, Infrassure submits that Koolan has failed to discharge its onus of proving the amount of ore that would have been mined under the RMP, so that its claim must fail entirely. Its submissions in support of that were directed, not to whether Koolan was capable of mining and processing the amounts shown in the RMP, but whether it had established that it would have developed the particular mine schedule on which it relies for the physicals under the RMP. Infrassure submits that Koolan has not done so, because the personnel involved and the software package used would have been different. Koolan submits that all it has to show is that it had the capability to mine the amounts contemplated under the RMP, and it has established that, even if it used different software and different personnel.

37    Alternatively, if the Court is prepared to make a finding that Koolan would have achieved the physicals in the RMP up to a certain level, Infrassure submits that Koolan would have fallen short by a similar margin to the shortfall against target for FYE 2014 (this judgment will use the convention 'FYE' to designate financial year ending on 30 June in the relevant year), that is, 17%.

38    There are four other issues which are not as significant as the EMP or RMP issue in their monetary impact, and so may be called subsidiary issues.

ICW-UWEs

39    In broad terms, Items 1(b) and 4 provide indemnity for additional expenditure during the Indemnity Period that was incurred for the purpose of avoiding or diminishing the Reduction in Output that would otherwise have occurred in consequence of the Damage. Koolan has included in its claim spreadsheets, for each of the alternatives (RMP, EMP and 91% EMP), a figure labelled 'Increased Cost of Working - UWE's'. At a conceptual level, the figures (which differ between the spreadsheets) were derived in the following way.

40    Koolan has calculated the Rate of Gross Profit which it says it would have achieved had the seawall not failed, in mining certain volumes from both the Main Pit and ACE. But because the seawall did fail, the company in fact mined a lower volume of ore, from ACE only. The actual costs it incurred in order to mine that ore were higher than the costs would have been if one were to assume that the same Rate of Gross Profit applied to the actual Output. Koolan says that the difference reflects increased costs which it incurred in working ACE as a consequence of the failure of the seawall.

41    Infrassure disputes these 'ICW-UWEs' amounts. It submits that Koolan has not established that the actual expenses meet any of the criteria in Item 1(b), alternatively Item 4. Infrassure says that Koolan was required to identify specific work that was required to avoid or diminish any Reduction in Output, and to cost that work. These things Koolan has not done. Infrassure also submits that on the evidence, Koolan has not established that any additional expenses were necessarily and reasonably incurred for the sole purpose of avoiding or diminishing the Reduction in Output consequent on the Incident.

42    In relation to additional expenditure under Item 4, Koolan says this allows it to claim additional costs as a last resort if its claim under Item 1(b) fails. But Infrassure submits that Item 4 only applies to additional costs 'not otherwise recoverable' under the Policy, and costs in the nature of those claimed by Koolan are recoverable under Item 1(b), even though Koolan has failed to prove its case under that item.

Stock on Hand

43    At the time of the Damage, Koolan had on hand 358,981 tonnes of iron ore which had been mined and was stockpiled (Stock on Hand). Koolan subsequently sold that ore, at prices that were lower than the prices it would have achieved had the Damage not occurred. That is because the failure of the seawall led to a delay in shipments, which in turn led to lower prices in a falling price environment. There was a pause in shipping from Koolan Island from November 2014 and shipments did not resume until January 2015. All this is common ground. But the parties are in dispute as to whether that shortfall in sale value is the subject of indemnity under the Policy.

44    As will be explained in more detail when I come to determine the issues that arise under this heading, in Section VI below, Koolan has claimed, in effect, the Rate of Gross Profit on the difference between the price that would have been realised on the stockpiled ore had it been sold in a world where the Incident had never occurred, and the price that was in fact realised for that ore.

45    Koolan also bases its claim, in the alternative, on the adjustments clause, or on a salvage sale clause in the Policy, which will be set out in Section VI.

46    Infrassure says none of that is permissible under the Policy, essentially because Koolan has elected to base its claim on Output, that is ore produced during the Indemnity Period, rather than Turnover, being revenue from ore sold during that period. Infrassure also takes issue with the applicability of the salvage sale clause.

47    There is also a factual issue about when the Stock in Hand was in fact sold. Koolan says it should be treated on a 'first in first out' basis, so that it will have been sold within two months of when shipping resumed. Infrassure submits that it should be taken to have been sold throughout the entire Indemnity Period. This potentially matters because of fluctuations in the iron ore price over the relevant period. But it only matters potentially, because if Koolan's primary approach is correct, the aggregate Output during the Indemnity Period is the basis of the calculation, and the times at which any particular ore was sold will not be relevant.

Foreign exchange

48    Mount Gibson sells most of its product at prices denominated in United States dollars, but it reports its financial results in Australian dollars. So any decline in the US dollar relative to the Australian dollar will adversely affect those results.

49    In order to hedge against that risk, in FYE 2015 and FYE 2016 Mount Gibson entered into forward foreign currency contracts, whereby it agreed to deliver an amount of US dollars in return for Australian dollars at a conversion rate fixed in advance. If the US dollar was low against the Australian dollar compared to the fixed conversion rate, then Mount Gibson would experience a gain (because under the contracts it would receive more Australian dollars than it would have, had it not hedged). Conversely, if the Australian dollar was low, Mount Gibson would experience a loss.

50    In either case, the gain or loss would need to be reflected in Mount Gibson's accounts. Mount Gibson's accounting practice in reporting these gains or losses was to allocate them to its operating subsidiaries pro rata against the percentage of revenue which the subsidiary earned.

51    During the Indemnity Period, Mount Gibson reported losses on the forward foreign currency contracts. Infrassure submits that these losses should reduce the amount of adjusted Standard Output that Koolan uses to calculate the indemnity, as well as the Rate of Gross Profit that is applied to the Reduction in Output that is derived (in part) from that adjusted Standard Output.

52    Koolan disputes this. It says that the foreign exchange losses have nothing to do with the Incident and that they are a mere accounting entry made at 'head office' level.

Redundancies

53    The interruption to mining operations at the Main Pit resulted in Koolan making a number of employees redundant. Koolan has thereby saved those employees' salaries or wages and other employment costs, and it accepts that this reduces its claim, under the 'savings' provision in Item 1(a). But in order to achieve those savings, redundancy payments were made. Koolan contends these should be netted off from the savings. Infrassure contends that the Policy does not permit or require this.

Interest

54    In addition to the above issues, Koolan claims interest under s 57 of the Insurance Contracts Act. That section provides that the insured is entitled to interest commencing on the day as from which it was unreasonable for the insurer to have withheld payment of an amount for which it is liable under the contract of insurance. Regulation 38 of the Insurance Contracts Regulations 2017 (Cth) prescribes an interest rate of 3% more than the mean of the 10 year Bond yields over the relevant period, rounded down to the nearest quarter of 1%.

55    Koolan claims that the date from which interest should run is 31 August 2017, which is one month after all the other insurers in the Market considered themselves to have been possessed of enough information to settle Koolan's business interruption claim. Infrassure takes issue with this, but only if Koolan fails in its RMP claim. In that event, Infrassure points out that Koolan only advanced the alternative EMP claim in early 2020. So if the Court does reject the RMP claim, it will have vindicated Infrassure's decision not to settle on the basis of that claim in 2017.

56    It is worth noting that the interest claim is what gives this Court jurisdiction over the matter. Because the applicant seeks interest pursuant to s 57 of the Insurance Contracts Act, jurisdiction arises under s 39B(1A)(c) of the Judiciary Act 1903 (Cth), which relevantly provides that the original jurisdiction of the Court includes jurisdiction in any matter arising under any laws made by the Commonwealth Parliament. A matter will arise under an Act if the Act or a provision within it establishes a right or duty asserted by the parties: see Rana v Google Inc [2017] FCAFC 156; (2017) 254 FCR 1 at [18]; R v Commonwealth Court of Conciliation and Arbitration; Ex parte Barrett (1945) 70 CLR 141 at 154. As set out by Allsop CJ in National Australia Bank Limited v Nautilus Insurance Pte Ltd (No 2) [2019] FCA 1543 at [96]:

… a substantial claim for interest is based on a right granted by s 57 of the Insurance Contracts Act. The provision is a code for the right to claim interest: NRMA Insurance Ltd v Tatt (1989) 94 FLR 339.

57    Given federal jurisdiction is attracted in relation to a matter in relation to the interest claim, that jurisdiction is not limited to the questions incidental to the aspect of that matter which attracted the federal jurisdiction. Rather, the jurisdiction extends to the resolution of the whole matter: Nautilus at [81]; see also, Re Wakim; Ex parte McNally [1999] HCA 27; (1999) 198 CLR 511 at [135]; Philip Morris Inc v Adam P Brown Male Fashions Pty Ltd (1981) 148 CLR 457 at 475; Fencott v Muller (1983) 152 CLR 570 at 603. Here, the matter encompasses the entirety of the dispute between the parties.

List of issues

58    After the end of the trial my Chambers settled with the parties a list of the issues to be determined, as explained more fulsomely in the discussion above. The list is as follows (slightly modified to ensure consistency in the use of defined terms):

RMP and EMP

1.    If the seawall had not slumped on 24 October 2014 and 8 November 2014 and failed on 24 November 2014 (together, the Incident), would the applicant have worked the mine:

a)    according to

i)    the EMP particularised in para 20A(b) of the Further Amended Statement of Claim, from 24 October 2014 to 28 February 2015; and

ii)    the RMP constituted by the Reforecast Mine Plan found at tab 11 of the Court Book, the Hypothetical Board Paper found at tab 467 of the Court Book and the Reforecast Life of Mine Plan found at tab 476 of the Court Book, from 1 March 2015 to 23 October 2015; or

b)    according to the EMP from 24 October 2014 to 23 October 2015?

2.    If the outcome of the previous issue is (a), on the proper construction of the Policy referred to at para 8 of the Further Amended Statement of Claim, are the Rate of Gross Profit and Standard Output as adjusted according to the adjustments clause permitted or required to be calculated on the basis of that outcome?

3.    To what extent would the applicant have achieved the forecasts/targets contained in the mine plan(s) to which the applicant would have worked in the Indemnity Period had the Incident not occurred?

ICW-UWE

4.    Is the applicant entitled to the items claimed as 'Increase Cost of Working at ACE' (UWE's) in Appendix G of the Reissued Third Supplementary expert report of John McKenzie, referenced in paragraph 13 of the report (CB 42a)

a)    under Item 1(b) of Section 2 of the Policy; or

b)    to the extent that the answer to a) is 'no', under Item 4 of Section 2 of the Policy (up to the $7.5 million sub-limit)?

Stock on Hand

5.    Regarding the Stock on Hand on Koolan Island as at 24 October 2014, is the applicant entitled under the Policy to indemnity:

a)    under Item 1(a) of Section 2 of the Policy for diminution in the value of the Stock on Hand as a result of the Incident; or

b)    under the salvage sale clause; or

c)    not at all?

6.    If the applicant is not entitled to indemnity for the diminution in value under Item 1(a) of Section 2 of the Policy, or is entitled only to indemnity in accordance with the salvage sale clause, when and over what period of time should the Stock on Hand be taken to have been sold?

Foreign exchange

7.    Should the calculation of the indemnity factor in, either when determining the value of the Standard Output and the value of the actual Output during the Indemnity Period or as a saving, foreign exchange losses which were allocated to the applicant in its financial statements in respect of the Indemnity Period and foreign exchange losses that would have been allocated to the applicant if the Incident had not occurred?

Redundancies

8.    Is the applicant entitled to deduct the cost to it of redundancies that were necessary as a result of the Incident from savings in employment costs attributable to the Incident?

Interest

9.    From what point in time, if at all, should the respondent pay the applicant interest under s 57 of the Insurance Contracts Act 1984 (Cth)?

59    After one more preliminary section dealing with the witnesses, I will structure these reasons by reference to this list of issues.

60    As already foreshadowed, the parties agreed, and I accept, that the most convenient course to take will be for me to express my opinion as to how each of the issues is to be determined, and then leave it to the parties to seek to reach agreement as to the quantitative impact of those determinations on Koolan's claims. There is a degree of interaction between the way the issues will be resolved, so it was not possible to present an agreed set of figures at trial (or even competing sets of figures). If the parties are unable to reach agreement as to the quantum of the claim after considering these reasons, it may be necessary to conduct a further hearing or to resolve the areas of disagreement on the papers.

IV.    THE WITNESSES

61    There were 11 lay witnesses, all of whom were called by Koolan. One of the lay witnesses was Mark Davidson, a loss adjustment consultant who prepared Koolan's indemnity claim as presented to the Market. The rest of the lay witnesses were present or former employees or officers of Koolan or Mount Gibson. Five of those lay witnesses, including Mr Davidson, were not required for cross examination, so their statements were admitted into evidence without any oral testimony. In what follows, all excerpts from witness statements exclude evidence ruled or agreed to be inadmissible which, in some circumstances, has required editing of those excerpts.

62    There were also two expert witnesses: Koolan called John McKenzie, an accountant with expertise in quantifying business interruption claims, and Infrassure called Michael Potter, a forensic accountant. Mr Potter was Infrassure's only witness. Expert reports from a third person, Craig Tucker, were ultimately not adduced into evidence.

63    Due to the COVID-19 pandemic, each witness who was cross examined gave evidence by video link.

64    I will now give a description of the witnesses who were cross examined, and my overall assessments of the ways in which they gave evidence. I recorded these assessments at the time of the trial.

James Beyer

65    Mr Beyer was the Chief Executive Officer (CEO) of Mount Gibson throughout the period that is material to the present claim.

66    Mr Beyer has a Bachelor of Engineering, Mining from the University of Queensland and a Master of Geoscience, Mineral Economics from Macquarie University. Before coming to Mount Gibson he worked as a mining manager and then general manager at Western Mining Corporation, and subsequently as a general manager and then senior director at Newmont Mining Corporation. He commenced employment with Mount Gibson in November 2011 as its Chief Operating Officer (COO). He was appointed acting CEO shortly after that (due to the resignation of the then CEO) and his appointment became permanent in May 2012. Since October 2018, Mr Beyer has been the Managing Director and CEO of Regis Resources Ltd, a publicly listed gold mining company.

67    Mr Beyer's evidence was central to Koolan's claim and he was cross examined at length. He presented as a highly experienced senior mining executive with a sound grasp of the technical aspects of mining activities, albeit at a level of detail that one would expect of a chief executive who is able to delegate to others.

68    Mr Beyer's manner was relaxed until the cross examination became more directly challenging of his evidence, whereupon he sometimes expressed annoyance or exasperation with the cross examiner. Generally he listened carefully to questions and for the most part did his best to answer them, although on particular points where he was challenged his answers became less helpful. Mr Beyer displayed a modest level of distrust of the cross examiner throughout and was generally astute to discern where a line of questioning was going.

69    That is all unremarkable for a person who was cross examined for two long days, and those observations are not intended by way of criticism. What they reflect, however, is that Mr Beyer did not present as a witness with no stake in the outcome. That is so even though the matters traversed in cross examination involved no criticism of any of the actions he actually took, and no risk of damage to his reputation. After all, most of his evidence went to what would have occurred in a world that never eventuated. Although Mr Beyer has not been employed by Mount Gibson since 2018, it is difficult to imagine how he would have behaved differently in the witness box if he had still been its CEO. Indeed, as will be seen he appeared more partisan than its present CEO, Peter Kerr.

70    That is significant because of the caution which the Court must adopt when assessing testimony about a past counterfactual. The main issue to which Mr Beyer's evidence went was whether Koolan would have mined on the basis of the RMP from March 2015, if the seawall had not failed. His evidence was largely about what he and the board of Mount Gibson (Board) would have done in that hypothetical situation. As discussed below, the courts have long acknowledged the risks that evidence of that kind will be self-serving and that it will be affected by hindsight. In light of the first of those risks, any lack of independence in a witness is particularly significant. It was clear that Mr Beyer was concerned to support Koolan's claim here.

71    I have no reason to think that Mr Beyer gave his evidence other than honestly. But, as is also discussed below, a genuine belief by a witness as to how he would have acted in a hypothetical situation will generally not be enough to persuade the Court that he would have acted in that way. In my view, Mr Beyer's apparent conviction that he would have recommended adoption of a revised mining plan from March 2015 was affected by hindsight and a desire to support Koolan's claim, and in general that reduces the weight I give to his evidence.

Lee Seng Hui

72    Mr Lee is the Chairman of the Board of Mount Gibson, and has been since 19 February 2014. So he was Chairman throughout the period relevant to this claim.

73    Mr Lee has a Bachelor of Laws from the University of Sydney. He is the Chief Executive and an Executive Director of Allied Group Limited, which is listed on the Hong Kong Stock Exchange. He is Chairman of Tian An China Investments Company Limited. He is also, relevantly, a non-executive director of APAC Resources Limited, which is a substantial shareholder of Mount Gibson. Mr Lee has been on the Board since 29 January 2010.

74    Like Mr Beyer, Mr Lee was cross examined at length. For the most part he presented as calm, impartial and objective. He was extremely careful in the manner in which he listened to and answered questions. He professed to avoid speculation, even in relation to uncontroversial matters such as whether one of the reasons a director of Mount Gibson was appointed was because he had 40 years of technical, operational, managerial and corporate expertise.

75    Occasionally, Mr Lee's level of caution about the questions that were being put to him led to unnecessary confusion; for example in the following passage, where the cross examiner asked him about the two slippages in the seawall which preceded the catastrophic failure (ts 288):

So what those two slippages must have revealed to the company and to the board is that there was a pre-existing issue of instability in that southern wall, wasn't - that must be the case, mustn't it?---No. I don't see how you - you - you come up with that conclusion.

Well, isn't it inescapable? Unless there is some internal event that caused it, it must mean an inherent condition in the wall?---I don't see how you - you're - you're saying - let me clarify what you're saying. You're saying that the board knew that there was some - already before these two slippages, that the board knew that there was some instability in - - -

No. No, not before. What it - I'm not suggesting before. That what the incidents revealed to the board is that there must have been a pre-existing instability problem?---I'm - I'm confused. Because you - you are - you are - you are - the way you're - you're asking the question is that you are assuming the board to have realised that there is an instability prior to the instability.

Well, the - - -?---That's not what happened.

Okay. Well, you tell me what happened?--- ..... we tried to - we have - we have suffered a minor ..... we're trying to repair. This is the - you're talking about the - the two slippages.

Yes?---Yes. So we have to repair the two slippages.

Okay. Well, maybe the point you're trying to make is that you had no understanding at the time as to what the causes of those slippages were?---No, I did not.

76    When Mr Lee was taken to records of Board meetings he attended in 2014 and 2015, he disclaimed having any independent recollection of the meeting or Board paper in question, and consistently said 'I rely on the minutes'. He gave evidence of this nature on at least eight occasions. Only on very few occasions did Mr Lee say he had 'a little bit of a recollection of it' (ts 256) or a 'vague recollection' (ts 248). And when the cross examination became more directly challenging, Mr Lee's answers became unhelpful. For example, he professed to have no independent recollection of a Board meeting on 29 April 2015, when he gave evidence in his witness statement about a matter that was recorded in the minutes of the meeting. When confronted with the apparent contradiction between the giving of that evidence and the lack of independent recollection, Mr Lee had no good answer. More generally during cross examination, he tended to repeat or paraphrase what was said in the Board minute or paper that was being presented to him, rather than engage with the question of what he himself could now remember.

77    Given the various executive and board positions Mr Lee occupies, I expect that he has attended many board meetings and seen many board papers. So I accept that his apparent lack of recollection of specific matters was truthful. It did, however, limit the usefulness of his evidence. It amounted to an inability or unwillingness to place himself in the states of mind he held in the relevant parts of 2014 and 2015 and, instead, a tendency to make inferences in hindsight based on the documents that were put to him at the time of preparing his witness statements.

78    Like Mr Beyer, I have no reason to think Mr Lee's evidence was other than honest. But in general I consider it to be reconstruction based on inferences from the written record and on hindsight. That limits the weight I put on Mr Lee's evidence. That is especially so given the risks, already mentioned in connection with Mr Beyer, that evidence about what Koolan would have done had the seawall not failed may be self-serving and affected by reconstruction and hindsight.

Peter Kerr

79    Mr Kerr has been the CEO of Mount Gibson since October 2018. He is a chartered accountant with a work history in a large accounting firm, and then as a mining executive in various roles, including Chief Financial Officer (CFO) and managing director. He joined Mount Gibson as its CFO in 2012 and held that role throughout the period relevant to this claim.

80    Mr Kerr was cross examined for half a day. Although he is Mount Gibson's present CEO, he appeared to be an impartial and disinterested witness, more so than Mr Lee and certainly more than Mr Beyer. He agreed with the cross examiner frequently, occasionally offering explanation or qualification. His answers were generally helpful and at no point did he appear to be approaching the questions with concern about the possible consequences of his answer, or with any intention to be obstructive.

81    I accept Mr Kerr as an honest witness, and his apparent impartiality increases the weight I put on his evidence. In what has no doubt already emerged as a theme, however, it does not follow from those conclusions that the Court should accept uncritically his evidence about what Koolan would have done in the counterfactual scenario where the seawall did not fail.

Andrew Thomson, Brett Morey and Scott de Kruijff

82    These three lay witnesses were not cross examined at length, and it is not necessary to comment on them separately. Mr Thomson was the COO of Mount Gibson during the time relevant to the claim. He now works as a consultant elsewhere, although at the time of the trial he had been engaged to be interim general manager of operations at Koolan Island. Mr Morey was Technical Services Manager at Koolan Island for most of the relevant period, although in 2015 he became Operations Manager at Koolan Island. He still works for Mount Gibson. Mr de Kruijff was General Manager at Koolan Island for most of the relevant period. He does not work for Mount Gibson anymore.

83    Each of these witnesses answered the questions put to them in straightforward ways, and were prepared to concede points where necessary. Where they did not concede, the reasons they gave were plausible. I consider that each of them gave their evidence honestly and impartially.

John McKenzie and Michael Potter

84    Neither of these expert witnesses was cross examined at length, and they too can be described together. Each was willing to concede points where appropriate. They neither professed expertise they did not have, nor sought to avoid having to engage with points by professing lack of relevant knowledge. Neither crossed the line separating an expert witness from an advocate. In the case of each of them, I accept that their evidence was given with the measure of independence appropriate to expert witnesses.

85    The only attack on the general expertise of either of these witnesses was a submission by Koolan that Mr Potter, a forensic accountant, has no experience in business interruption insurance claims and said in cross examination that he has no expertise in studying mine processing and loading operations. In the end, the basis on which I will resolve the issues below means that I do not need to comment on Mr Potter's business interruption experience. I accept, however, that he did not profess any particular expertise in connection with mining.

86    I will now turn to consider the evidence and submissions relevant to each of the issues and to determine those issues.

V.    EMP OR RMP

Koolan's claim that it would have adopted and achieved the RMP

87    Koolan's primary claim is that, had the seawall not failed, it would have mined according to the RMP from 1 March 2015. As already indicated, the RMP did not exist prior to the seawall failure. It was created for the purposes of the insurance claim. For the purposes of this proceeding, Mr Beyer and Mr Kerr have also prepared a hypothetical board paper (HBP) which, Koolan says, replicates as nearly as practicable the approval process that would have occurred had the seawall not failed. Mr Lee's evidence was that he would have supported the recommendation in the HBP and that he expects that the Board would have approved it. Koolan thus seeks to effectively reconstruct the decision making process and the manner in which a number of variables would have contributed to a decision to implement the RMP.

88    There are two key differences between the EMP and the RMP. Both depend on strip ratios. The strip ratio is the ratio of waste removed to ore recovered, usually measured by volume. The first key difference between the EMP and the RMP is that under the latter, an area at the western end of the Main Pit known as Main West 3 or MW3 would not be mined. That is a high strip ratio area, so if it were not mined, the average strip ratio of the material mined would be considerably less. The second key difference is that only the low strip ratio areas in ACE would be mined.

89    The result, Koolan says, would have been a significant reduction in TMM, and so a significant reduction in the unit cost per tonne of ore produced, due to a reduction in waste tonnes mined. In simple terms, if the unit cost of production of a tonne of ore is higher than the sale price of that tonne, the mine is unprofitable. Reducing the relative amount of waste mined reduces the total cost of mining and thus increases the profitability of the mine per tonne of ore sold. That is why, Koolan says, when the iron ore price is low, there is a focus on mining ore with a lower strip ratio. However, as will emerge below, there can also be good reasons to mine at a high strip ratio.

90    Infrassure's case in response emphasises the hypothetical nature of the RMP as a plan that was produced after the failure of the seawall solely for the purpose of the business interruption claim. It submits that the authorities caution against accepting such evidence, regardless of the credibility of those giving it.

91    Infrassure submits that the hypothetical that Koolan has sought to recreate does not faithfully reflect the true position that would have been reached. It omits to consider alternative options that Mount Gibson had in fact been considering prior to the seawall failure, such as a short term suspension in mining. It also omits other important information, such as the need to announce a significant reduction in reserves if the RMP were adopted.

92    Infrassure also points to Koolan's actual behaviour in an environment of falling prices in the year or so leading up to the failure of the seawall. As at 1 January 2014, the price was over AU$150/dry metric tonne (dmt). By 24 October 2014, when the first slump occurred, it had fallen by over a third, to AU$91/dmt. By the time of the final failure, it was AU$80/dmt, a fall of some 46% from January. But despite that, there is no evidence of Koolan actually changing its mine plan before the failure. Infrassure submits that the price environment was no worse in early 2015, and that the Court should not accept evidence Mr Beyer gave that by early 2015 he would have seen coming an important threshold for Koolan Island, namely that its internal rate of return (IRR) would drop below 15%.

93    Further, Infrassure says that when, in the real world, Mr Beyer was presenting financial forecasts to the Board regarding potential returns from rebuilding the seawall, he was doing so on the basis of the EMP, without proposing or seeking out an alternative mine plan.

94    Infrassure also points to evidence about the time it would have taken to prepare and present the RMP ready for consideration by the Board and submits that Koolan could not have had it ready for approval by late February 2015, the time of the HBP.

95    Infrassure further relies on Koolan's omission to call evidence from any Board member other than Mr Lee. It makes, in effect, a submission about that based on Jones v Dunkel (1959) 101 CLR 298. Infrassure also submits that Mr Lee's hypothetical evidence should not be given any weight.

96    Koolan's preferred alternative case to the RMP is that it would have continued mining according to the EMP, had the seawall not failed. Koolan also has a third alternative, which is that it would have mined according to the EMP but only achieved 91% of budgeted mining performance. Infrassure accepts that the claim should be calculated on that basis.

97    Nevertheless, Koolan's primary case is that, not only would it have mined to the RMP, it would have achieved the figures forecast in it. It points to the fact that the TMM forecast for the RMP, approximately 29 million tonnes (Mt), is 22% lower than the TMM forecast for the EMP for the 12 months following the slump in the seawall, approximately 37.2 Mt. Even if Koolan had only mined 91% of the EMP forecast (about 33.9 Mt), which is the percentage that Infrassure accepts should be applied to the EMP claim, that would still be more than the TMM forecast under the RMP. That TMM is also less than the TMM which Koolan achieved over the 12 months prior to the first slump in the seawall.

98    Koolan also points to six new and three second hand dump trucks that had been delivered to the island just before the slump, to replace the existing fleet of nine, which it says would have brought further efficiencies. It had greater excavator capacity on the island than was necessary to achieve the TMM under the RMP. Also, it was considering an upgrade to the primary crushing unit. All this, it says, means that it would have achieved the RMP, had it adopted it.

99    Assessing these competing cases will require consideration of a range of evidence, both about what did actually occur in connection with mining at Koolan Island during the relevant period, and about what would have happened, on Koolan's case, if the seawall had not failed, as well as an issue about what was permitted under the Policy.

The proper construction of the Policy

100    It is convenient to consider that construction issue first. For the reasons about to be given, I will determine it adversely to Koolan. In theory, I could stop there. In practice, as a trial judge whose conclusion about the proper construction of the Policy may be mistaken, I will not stop there, and will go on to make findings of fact as to whether Koolan would have adopted the RMP, as it says it would have, and the extent to which the company would have achieved whatever plan it mined under.

101    It is true that the agreed statement of issues set out above puts the contractual construction question after the factual question of whether Koolan would have adopted the RMP. Nevertheless, it appears to me that arriving at a proper understanding of the Policy is the logical place to start.

102    The parties' cases as to the proper construction of the Policy have been briefly outlined above at [29]-[32]. According to Koolan, the Policy provides for indemnity which can be based on a hypothetical calculation of the kind that it advances in its primary case, because of the requirement in the adjustments clause to make adjustments to the Rate of Gross Profit and Standard Output.

103    Infrassure submits that on the proper construction of the Policy, it does not permit Koolan's loss to be calculated by reference to the RMP. That is said to be so regardless of whether, as a factual matter, Koolan would have implemented the RMP during the Indemnity Period. That is because, Infrassure submits, the provisions of the Policy start with a presumption that the Output in the Indemnity Period would have been the same as the Standard Output. A similar presumption exists for Rate of Gross Profit, namely that the Rate of Gross Profit for the financial year prior to the Damage would have been the Rate of Gross Profit in the Indemnity Period. In Infrassure's submission, these presumptions are important, because they mean that the parties have agreed on a formula that removes the need for the Insured to prove what its Output and Rate of Gross Profit would have been on a hypothetical basis. Rather, the calculation is made on the basis of historical facts.

104    Infrassure relies on specific words in the adjustments clause, including the word 'adjustments' itself, which it says connotes small changes. These must be 'necessary', meaning, Infrassure submits, that there must be a compelling reason to make them. The 'trend of the Business' and the 'variations in or other circumstances affecting the Business either before or after the Damage' will be, by the time of assessment of indemnity, matters of historical fact. The requirement that the figures thus adjusted represent the results that would have been obtained 'as nearly as may be reasonably practicable' is also, in the words of Infrassure's written opening submissions (para 20), 'an objective recalibration of results by reference to trends, variations or other circumstances affecting the Business'.

105    In Infrassure's submission, there is no overarching principle of insurance law that displaces or modifies the basis of settlement of a claim agreed on by the parties: Brescia Furniture Pty Ltd v QBE Insurance (Australia) Ltd [2007] NSWSC 598 at [405]. That means, it says, that any requirements arising from what Koolan calls in its submissions 'the indemnity principle' must yield to the terms of the Policy. So, for example, if an interruption to the business of a mine leads to a deferral of production, not loss of production, because the resource remains in the ground and can be extracted later, the insurer nevertheless has to pay based on the proposition that the production has been lost during the Indemnity Period, and so is liable to give more than a complete indemnity, if that were judged over the life of the mine.

106    In contrast to the adjustments permitted under Infrassure's construction of the Policy, Koolan's RMP claim, Infrassure submits, constitutes a 'major rewriting of their business plan which, in fact, did not occur in the indemnity period' (ts 64).

107    Koolan makes several points in response to this. First, it does not accept that the RMP was a wholesale rewriting of the EMP. All the RMP would have done, Koolan says, is to remove MW3 from the EMP and remove a high strip ratio (11:1) area of ACE so that the remaining orebody mined had a low strip ratio of 3:1.

108    Koolan appeared to submit that Infrassure's construction of the Policy was of uncertain application because, for example, it was not clear whether Infrassure would have accepted that only one of those changes would have been within the parameters of the indemnity provided under the adjustments clause or if, for example, a change from a strip ratio of 11:1 to 8:1 rather than 3:1 would have been acceptable.

109    Second, Koolan says that there is no warrant to read any requirement into the adjustments clause that the adjustments that are to be taken into account must be small. In fact, Koolan submitted that the word 'adjust' here should be understood to have the same meaning as it does in the widely used insurance term of 'loss adjuster', simply meaning assessing how much should be paid for a claim.

110    Third, Koolan submits that the words in the adjustment clause referring to the 'trend of the Business' cover the trend of businesses that constantly review and revise their mining plans to take account of both matters that are within their control, such as costs, and matters that are not within their control, such as the iron ore price and currency exchange rates.

111    Fourth, Koolan submits that, taken in context, the adjustments clause, in providing for 'trends in the Business' and for 'variations in or other circumstances affecting the Business either before or after the Damage or which would have affected the Business had the Damage not occurred', is referring to the top two risks affecting Koolan's business, namely the market price of iron ore, and exchange rates. Koolan says that those two matters directly and fundamentally affect how any iron ore producer goes about its business on a daily, monthly and yearly basis. These would have driven change from the EMP to the RMP.

112    Above all, Koolan emphasises the concluding words of the adjustments clause, which require the figures adjusted in accordance with it to 'represent as nearly as may be reasonably practicable the results which but for the Damage would have been obtained during the relative period after the Damage'. This, counsel for Koolan submitted in opening, expresses an 'overriding intention' albeit 'within the confines of the clause' to ensure that Koolan 'is indemnified as nearly as can be for what it has been deprived of … in terms of business interruption by the failure of the seawall'. In these circumstances, he submitted, the Policy requires Koolan to prove a hypothetical which, he accepted, 'we can never know for certain would have eventuated but for the seawall failure' (ts 26).

General principles of construction

113    Contracts of insurance are to be construed according to the same principles of construction that are applied to commercial instruments in general: Swashplate Pty Ltd v Liberty Mutual Insurance Company trading as Liberty International Underwriters [2020] FCAFC 137 at [58]. In construing an insurance policy, as with other instruments, preference is given to a construction supplying a congruent operation to the various components of the whole: Wilkie v Gordian Runoff Limited [2005] HCA 17; (2005) 221 CLR 522 at [16].

114    In Onley v Catlin Syndicate Ltd as the Underwriting Member of Lloyd's Syndicate 2003 [2018] FCAFC 119 at [33] (Allsop CJ, Lee and Derrington JJ), the Full Court summarised 'the well-established principles concerning the construction of policies of insurance as commercial contracts' as follows (citations removed):

Necessarily, a policy of insurance is assumed to be an agreement which the parties intend to produce a commercial result as such, it ought to be given a businesslike interpretation being the construction which a reasonable business person would give to it. The contract is naturally enough interpreted, in a temporal sense, as at the date on which it was entered into. The Courts frequently have regard to the contextual framework in which a contract is formed, to the extent to which it is known by both parties, to assist in identifying its purpose and commercial objective. It goes without saying that a construction that avoids capricious, unreasonable, inconvenient or unjust consequences, is to be preferred where the words of the agreement permit.

115    However, the imperative to arrive at a 'businesslike' or commercial interpretation of a contract must not be taken too far. An interpretation is commercial if it is not commercially absurd: Rockment Pty Ltd t/a Vanilla Lounge v AAI Limited t/a Vero Insurance [2020] FCAFC 228; (2020) 282 FCR 561 at [54] (Besanko, Derrington and Colvin JJ), citing HDI Global Specialty SE v Wonkana No. 3 Pty Ltd [2020] NSWCA 296; (2020) 104 NSWLR 634 at [54], [124]-[125].

116    In Rockment at [56] their Honours said:

Therefore, references to a commercial result are not intended to invite a consideration of the actual financial consequences for each of the parties of a particular construction in the events which have occurred by the time that a dispute arises. Such inquiries would quickly descend into an assessment with hindsight as to what a fair and reasonable contract might provide given the circumstances that have unfolded. It would be contrary to the very certainties that the law of contract seeks to provide as to the allocation of risks, rights and obligations, if the meaning of agreements were to be adjudicated by reference to such an imprecise foundation.

117    To the above may be added certain points specific to the construction of insurance contracts which were made by Kirby J in Johnson v American Home Assurance Company (1998) 192 CLR 266 at 272-276. While his Honour was in dissent, his statements of principle have been applied in numerous subsequent authorities, for example: Todd v Alterra at Lloyds Ltd (on behalf of the underwriting members of Syndicate 1400) [2016] FCAFC 15; (2016) 239 FCR 12 at [42]; Dalby Bio-Refinery Ltd v Allianz Australia Insurance Limited [2019] FCAFC 85 at [18]. Insofar as they are relevant here, they include:

(1)    While the Court should give the words of the policy their ordinary operation, 'it should be an operation which takes into account the commercial and social purposes of an insurance policy': American Home Assurance at [19(1)].

(2)    Account must be taken of the fact that insurance policies are often written in an international market, where particular words and phrases are elucidated by courts in different jurisdictions. Settled interpretations of commonly used language will not be disturbed without good reason: American Home Assurance at [19(2)].

(3)    '… [A] fair and reasonable construction should be adopted which would take into account the variety of persons entering an insurance contract and the entitlement of such persons to know the bargain which they have secured': American Home Assurance at [19(4)] (footnote removed).

118    In AIG Australia Limited v Kaboko Mining Limited [2019] FCAFC 96 at [43] (Allsop CJ, Derrington and Colvin JJ) summarised how definitions are to be deployed in the construction of contracts (citations removed):

… [I]t must be recognised that usually definitions do not have substantive effect. They are not to be construed outside of the operative provisions to which they apply. Where there is an issue as to the proper construction of an operative provision in a commercial instrument then the provision should be read by inserting the definition into the provision. The same principles as to construing definitional provisions as stated in the context of the proper construction of statutes apply to the construction of commercial instruments.

Business interruption policies

119    Turning to the kind of business interruption policy which is in issue here, in Financial Conduct Authority v Arch Insurance (UK) Ltd (Hiscox Action Group intervening) [2021] UKSC 1, Lords Hamblen and Leggatt (with whom Lord Reed agreed) described how such policies work (referring to clauses such as the adjustments clause as 'trends clauses'):

253    The standard method used in business interruption insurance to quantify the sum payable under the policy takes an earlier period of trading for comparison purposes. In most wordings this is the calendar year preceding the operation of the insured peril. A 'standard turnover' or 'standard revenue' is derived from the turnover of the business in this period. This figure is then compared with the actual turnover or revenue during the indemnity period. The results of the business in the comparator period are also used to derive a percentage of turnover that represents gross profit. The rate of gross profit is then applied to the reduction in turnover to calculate the recoverable loss. Increase in the cost of working during the indemnity period is also typically covered.

254    Whilst the basic comparison between the turnover of the business in the prior period and in the indemnity period will produce a rough quantification of the lost revenue, there may be specific reasons why a higher or lower figure would be expected for the indemnity period apart from the operation of the insured peril. For example, the general trend in the business may be such as to make it likely that there would have been increased or decreased turnover during the indemnity period in any case compared with the previous year. Equally, there may be specific reasons why the turnover during the prior year was depressed, such as a strike that affected the business, or why it would be expected to have been depressed anyway during the indemnity period, such as a scheduled strike. The purpose of the trends clause is to provide for adjustments to be made to reflect 'trends' or 'circumstances' such as these. The aim is to achieve a more accurate figure for the insured loss than would be achieved merely by a comparison with the prior period and to seek to arrive at a figure which, consistently with the indemnity principle, is as representative of the true loss as is possible. The adjustment may work in favour of either the policyholder or the insurer, but it is meant to be in the interests of both.

120    Observations of Meagher JA (Beazley P and Leeming JA agreeing) in Mobis Parts Australia Pty Ltd v XL Insurance Company SE [2018] NSWCA 342 (Mobis NSWCA) also provide guidance as to how business interruption policies such as the Policy should be read. The wording of the policy under consideration in Mobis NSWCA was substantially the same as the Policy in this case, although the issues in Mobis NSWCA did not directly concern the adjustments (or trends) clause. At [146]-[147] and [149] Meagher JA said:

Turning to the provisions extracted above, which form part of a commercial contract of insurance, the Court must give a businesslike interpretation to 'the language used by the parties' in light of 'the commercial circumstances which the document addresses and the objects which it is intended to secure': McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579 at [22] (Gleeson CJ). As the general object of section 2 of the policy is to indemnify Mobis Australia against loss of its gross profit, the prospect of under- or over-indemnification may colour the meaning of the language used: see Castellain v Preston (1883) 11 QBD 380 at 386 (Brett LJ).

But the indemnity under section 2 is not simply against 'actual loss', unlike that in business interruption wordings generally adopted in the United States, discussed in Riley [as to which see immediately below] at paras 1.10 and 12.14, and in the 'hybrid' policy considered by this Court in Coalex Pty Ltd v Commercial Union Assurance Co of Australia Ltd (1988) 5 ANZ Ins Cas 60-858 at 75,381 (col 2). Rather, the Local Policy contained a formula for the assessment of the insured loss of gross profit, which (as noted at [122] above) qualifies the application of the principle of indemnity insofar as it might be said to depart from perfect indemnification in some contingency: see also Coalex v Commercial Union at 75,380 (col 2). In Henry Booth & Sons v The Commercial Union Assurance Co Ltd (1923) 14 Lloyds LR 114 at 114 (col 2), Greer J explained the object of such a formula thus:

It is the common practice in policies of this sort, in order to prevent lengthy disputes, that there should be an agreed method of ascertaining the loss. Sometimes the assessment of the loss is in favour of the assurance company and sometimes the assured, but it is nevertheless good sense to have a method which can be readily applied without difficulty and without raising a great number of points for dispute.

…

… A reasonable businessperson seeking to understand these lengthy clauses would not begin by assuming that they mean nothing more than the expression 'full indemnity for actual loss to gross profit', and then proceed to enquire whether anything in the language required otherwise. His or her attention would remain fixed on the sense of the language describing the method for ascertaining the loss as coloured by its immediate and commercial context: see Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46]-[52] (French CJ, Nettle and Gordon JJ).

121    These cases are consistent with the useful commentary in Riley on Business Interruption Insurance (11th ed 2021, Sweet & Maxwell) on the business interruption policy generally in use in the United Kingdom, of which the Policy here is an example. Using the example of a fire which causes both physical damage and interruption to a business, the authors, Damian Glynn and Toby Rogers, ask (Riley 1.10):

What method of general application is there to ascertain, for the purposes of protection by insurance, the intangible, often hypothetical, loss of future earnings which is only commencing when the fire engines have driven away on the day of the damage (or shortly thereafter)?

Experience has shown that the proportionate effects of a fire (for example) upon the earning capacity of a business can be readily and accurately measured, in most cases, by comparing the turnover in the months following the damage with that in the corresponding period, in the 12 months preceding it, subject to appropriate adjustments for special circumstances or trends of business …

122    The authors refer to turnover as a 'yardstick' which in general can be used to measure the interruption of trading, subject to making provision for necessary adjustments. Elsewhere they say that 'turnover can be used as the foundation stone to assess the net effect of a fire or other insurance peril upon the earnings of a business' (Riley 1.10). Reduction in turnover is thus 'a reliable guide to and a suitable index for measuring the proportionate effect of the fire upon the earnings of a business' (Riley 1.11). Turnover is also 'the index by which to measure the loss of gross profit' (Riley 1.13). This, the authors say, 'is the basis from which the business interruption insurance transacted in the UK developed' (Riley 1.1).

123    This provision of a formula for loss, Mr Glynn and Mr Rogers write (Riley 2.52):

is a peculiarity which distinguishes a UK business interruption policy from the policies issued for practically all other classes of insurance. It could, like a contract of fire insurance to which it is complementary, omit any reference to the method to be adopted for ascertaining an insured's loss. This would on the face of it be the ultimate in simplicity, a goal towards which insurers are constantly urged to direct their efforts. Business interruption insurance, however, is vastly different from that for material damage which deals with tangible, identifiable forms of property and the material loss sustained in respect of them at a fixed point of time. By way of contrast, a business interruption policy is concerned with something intangible - the effect of damage on trading results which might materialise in the future had the damage not occurred.

The formula set out in the policy is a very flexible one which lends itself to a wide range of post incident circumstances. The key element of the formula is that it specifies a starting point for the calculation of what is a hypothetical situation. That starting point is represented by the pre-incident trading results of the business.

124    In relation to trends or adjustments clauses, which the authors call 'other circumstances clauses', (Riley 2.62, cross references removed) they say:

In the event of a claim, such changes that were likely to impact on the rate of gross profit in any event can be taken into account by application of the provisions of the other circumstances clause. It must be stressed, however, that as with the application of this clause to anticipated turnover, the starting point is the historic margin achieved by the business. Any claimed increases need to be evidenced. In this context the budgeted figures are indicative of expected changes but, on their own, do not constitute evidence of actual changes.

125    Concerning the adjustments clause (Riley 2.63):

Without this clause the policy cannot be regarded as fulfilling the basic principle of an insurance that is to indemnify, because the turnover, charges and profits which would have been realised during a period of interruption are hypothetical and never capable of absolute proof. This clause allows for adjustments to be made to produce as near as is reasonably possible a true indemnity for an insured's loss, albeit within a restricted period, i.e. the maximum indemnity period, subject to policy conditions, limits.

126    However, speaking of attempts to express the adjustments clause in plain English by providing that the policy would pay for any shortfall between the actual post-incident figures and those that the business would otherwise have achieved had the loss not occurred (Riley 2.68, cross reference removed):

In this apparent simplification one vital step was now missing. With the more traditional wording the onus was upon the party seeking to invoke the other circumstances clause to evidence why the results would have improved, or deteriorated, from the same period in the prior year. Without the necessity to relate figures back to past performance, the intangible nature of business interruption claims becomes virtually unworkable. For instance, a policyholder could submit budgeted figures, however aspirational they might be, and expect their claim to be settled on that basis.

It is the rigour of having to reconcile back to the prior year, if requested to do so, that engenders the level of compromise required by all parties to resolve a claim without recourse to alternative dispute resolution or the courts.

127    The proper construction of the Policy is, of course, ultimately a question of law for the Court to determine. But the parties appeared to accept Riley as authoritative commentary and in my view it is appropriate to have regard to it, particularly in light of the need to take account of the fact that the Policy employs standard wording that has been used in the insurance industry in the United Kingdom, and therefore internationally, for up to a century now.

128    These passages from Arch Insurance, Mobis NSWCA and Riley all confirm that the Policy seeks to balance at least two important commercial imperatives, in order to produce a businesslike result. The first is the need for a fair indemnity for the loss that the insured has suffered. The second is the need for the amount of the insurer's liability to be calculated by reference to an agreed formula by reference to an identifiable starting point, so that the process of assessing the trading results of a business in a hypothetical situation that will never occur in reality does not become unworkable.

129    To identify these principles does not answer the question of how the Policy achieves or balances them, on the proper construction of its text. But they do assist in identifying its purpose and commercial objective, including that of the adjustments clause. To the text of the Policy I now turn.

The terms of the Policy in this case

130    The relevant provisions of the Policy are set out at [11]-[23] above. It is Item 1 of the Policy that limits the indemnity, in the way just described, to loss of Gross Profit due to Reduction in Output and Increase in Cost of Working (the latter can be disregarded for the purposes of the present issue).

131    As explained at [17] above, Gross Profit depends on Output less the variable costs of producing the Output (other amounts that are added to and subtracted from Output in the definition can also be disregarded for present purposes).

132    'Reduction in Output' is defined as the amount by which the Output during a period, in consequence of the Damage, falls short of the part of the Standard Output that relates to the period. 'Standard Output' is the Output during the period in the 12 months immediately before the date of Damage which corresponds with the Indemnity Period. If the interruption in Business continues for less than 12 months from the date of the Damage, a period corresponding to that period will be taken as the 'comparator period' referred to in the passage from Arch Insurance. Obviously this is to ensure that matters such as seasonal fluctuations in revenue and profit are reflected in the Standard Output. But in this case, there was no mining at the Main Pit for the entire 12 months after the first slump in the seawall. As a result, the Standard Output is assessed over the preceding 12 months (24 October 2013 to 23 October 2014).

133    Under Item 1(a) the limit on the indemnity is the sum produced by applying the Rate of Gross Profit to the amount by which the Output during the Indemnity Period, in consequence of the Damage, falls short of the Standard Output. 'Rate of Gross Profit' is defined as the Rate of Gross Profit earned on the Output during the financial year immediately before the date of the Damage. It, too, is subject to the adjustments clause. From the amount obtained by applying Rate of Gross Profit to Reduction in Output must be deducted amounts saved in consequence of the Damage; again, this can be disregarded for the purposes of the present issue.

134    Turning to the adjustments clause which is at the heart of the issue between the parties, it is convenient to set it out again, however with added formatting to demonstrate more clearly what I consider is the internal structure and syntax of the provision:

To which such adjustments shall be made as may be necessary to provide

(a)    for the trend of the Business and

(b)    for

(i)    variations in or

(ii)    other circumstances affecting

the Business

(iii)    either before or after the Damage or

(iv)    which would have affected the Business had the Damage not occurred,

so that the figures thus adjusted shall represent as nearly as may be reasonably practicable the results which but for the Damage would have been obtained during the relative period after the Damage.

135    Koolan submits that the clause as a whole is broad and intended to capture a wide range of matters that might affect the Insured. It says that the words 'trend', 'variations' and 'circumstances' are broad and express a clear intention to err on the side of indemnity (ts 513). According to Koolan, there is no need to try to characterise the reason for an adjustment as a 'trend' or 'variation' or 'other circumstance' as long as it meets the broad objective of ensuring that the adjusted figures represent as nearly as may be reasonably practicable the results which would have been achieved during the Indemnity Period had the Damage not been incurred. It gives examples of investing in an expensive revenue-producing machine towards the end of the comparator period or scheduling the purchase for early on in the Indemnity Period, the fall of a major competitor, or the imposition of tariffs on the mining industry as example of things that may constitute a trend, variation or other circumstance.

136    I accept that the words of the clause are broad. As standard wording used in relation to an enormous range of businesses, they are no doubt intended to capture a wide variety of circumstances. But that does not absolve those interpreting and applying the clause from the requirement to be faithful to the text and to ensure that it is the words of the clause that are applied, not some amorphous concept derived from them. I do not accept that the terms centred on 'trend', 'variations' and 'circumstances' are subsumed in the broad objective of representing the results that would have been achieved if the Damage had not occurred. That would make them redundant. As will be seen, in my view this point is central to the proper construction of the adjustments clause.

137    In emphasising the broad objective, Koolan relies on [254] of Arch Insurance as quoted above. It also refers to the use of the word 'indemnity' at several points in the Basis of Settlement (not including the headings, which the parties have agreed are not to be used in the construction or interpretation of terms and conditions - cl 16). But I doubt that takes the argument very far. In the provisions under consideration here, with one exception the word is used solely in the defined term 'Indemnity Period'. The exception is that it is used once in Item 1(a), but that is immediately after saying that the insurance under the item is limited to loss of Gross Profit due to Reduction in Output and ICWs, directing attention to the formula rather than any principle that a perfect indemnity is to be achieved.

Some specific terms in the adjustments clause

138    Before addressing the proper construction of the adjustments clause as a whole, it is convenient to consider certain submissions the parties made about specific words or phrases in it.

Adjustments

139    First, the parties join issue over the use of the word 'adjustments' itself. Koolan submits that there is nothing in the clause that warrants reading it down so that figures for Rate of Gross Profit or Standard Output can only be adjusted by a small amount, say 5% or 15%. Koolan submits that the word simply refers to altering a figure or substituting one figure for another. Koolan points to the common use in the insurance industry and in the Policy itself of the term 'loss adjuster' to describe someone who calculates how much an insurer should pay for a claim.

140    To be fair to Infrassure, while it did submit in opening that the word 'adjustments' connotes small changes, it does not say that there is a numerical limit inherent in the word, as Koolan's submissions imply that it might. Infrassure's ultimate position was that the use of the word is significant because it 'connotes modifications to individual integers in the existing business model rather than a wholesale adoption of a new business plan' (Infrassure's closing submissions or ICS para 308). Infrassure refers to the Macquarie Dictionary meaning of 'adjust' as 'to fit, as one thing to another; make correspondent or conformable; adapt; accommodate: to adjust things to a standard'.

141    With an important qualification, I broadly accept Infrassure's submission. The imperative expressed at the beginning of the clause is to make necessary 'adjustments' to Rate of Gross Profit and Standard Output. That is not the same thing as simply substituting a different figure for either of those numbers. In other words, the adjusted numbers must still be recognisably based on and referable to the actual numbers for Rate of Gross Profit and Standard Output. That is simply inherent in the concept of 'adjusting'. With respect, I do not consider that the common use of the term 'loss adjuster' in the insurance industry advances Koolan's case in this regard. There is no basis in the text or context of the clause to believe that the word is being used in that specialised sense here. Rather, the ordinary meaning of the term must be assigned to it: see Australian Casualty Co Ltd v Federico (1986) 160 CLR 513 at 527.

142    The qualification to my acceptance of Infrassure's submission is that I do not consider it useful to assess whether the changes Koolan proposes can properly be characterised, in Infrassure's words, as a 'wholesale adoption of a new business plan'. It would not be commercially workable to base the operation of the adjustments clause on such contestable descriptions. The relevant limitation imposed by the text of the clause is that described in the previous paragraph. And I consider that Koolan's case observes that limitation; as will be seen, the RMP necessarily involves modifications, albeit significant ones, to the EMP, which lead to changes to components of the indemnity calculation such as the Output of the Main Pit and variable costs. These seem to me to meet the description of adjustments. They may be very substantial adjustments, but as Koolan submits, the clause does not impose any numerical threshold beyond which an adjustment cannot be made. I therefore do not accept Infrassure's submission that the word 'adjustments', when used in the Policy, is confined to small changes only. Hence the resolution of the main issue is not to be found in the parties' contest over that word.

'The trend of the Business'

143    Another word Koolan focussed on is 'trend'. Koolan submitted that in the context of an iron ore producer it could refer to 'the general direction in which mining on Koolan Island moved, developed, changed, unfolded or tended to move, develop, change or unfold, before or after the Damage' (Koolan's closing submissions or KCS para 46, ts 517).

144    I broadly accept that submission. What needs to be construed is not the word 'trend' by itself but the term 'the trend of the Business', as one of the things for which adjustments must be made. The relevant definition of the noun 'trend' in the Shorter Oxford English Dictionary (2nd ed) is 'a general course, tendency or drift (of thought, fashion, behaviour, events etc.); esp a new or increasing tendency. Now also, a fashion'. The trend of a business is therefore apt to describe the direction in which the business is moving, assessed most obviously (but not necessarily or solely) by reference to common metrics such as revenue and profit growth (or contraction).

145    However it is measured, in the adjustments clause a trend is a tendency that is observed and observable at the time of assessment of the loss. It may well be observable from developments before the incident giving rise to the claim and not after, as the incident may have caused an abrupt rupture in whatever trend could have been observed. But the possibility that a trend remains observable after the incident cannot be altogether ruled out. It will depend on the facts.

146    But while I broadly accept Koolan's submission, I do not agree that a trend is to be identified at the very high level of generality in which the submission is couched. By referring to how mining on Koolan Island 'moved, developed, changed, unfolded' as a 'trend', Koolan lays the groundwork for its submission that the change from EMP to RMP meets the description of a trend. But it does not. A trend is not just any change in the business. Nor is it the broadly expressed tendency of the business to change, that is changeability itself. It is, rather, an observable direction in which the business is heading.

147    That direction is likely to be the combination of external and internal factors. For example, an external factor, such as a decline in iron ore prices, may contribute to a downward trend in revenue. An internal programme of ongoing redundancies may contribute to a downward trend in costs. But either way, what is observed is a direction in which a relevant characteristic or metric of the business is travelling. Obviously, the assumption is that the direction of movement can be extrapolated into the Indemnity Period to produce an adjustment to the Rate of Gross Profit or Standard Output. Arguably, a decision to significantly revise the mine plan terminates or reverses a trend. In any event, a change of a mine plan is not itself a trend.

148    Infrassure accepted that the phrase 'the trend of the business' potentially could capture an internal business decision that is implemented before the loss occurs. For the reasons just given, I agree with that to this limited extent: an internal business decision made at that time may result in a trend. For example a decision to expand into a new business line may produce an upward trend in the business's profits and turnover. But in my view, it is inapt to equate an internal business decision with a trend. A trend is in the nature of a tendency or a direction, not something that produces a tendency or direction. A decision is more appropriately characterised as the cause or the source of a trend.

149    I therefore do not accept the examples of asserted trends which Koolan says come within the term as used in the adjustments clause. According to Koolan, the evidence in regard to trends is to be found in the way that it and the companies mining at Extension Hill and Tallering Peak (and other iron ore producers in Western Australia) regularly reviewed and revised their business decisions in response to external circumstances such as iron ore prices and exchange rates and to matters over which they have control, such as costs. If established, this may amount to a practice, or to an approach, but it is not a trend.

150    The understanding of the word 'trend' set out above is consistent with the approach that Mullins J took in PMB Australia Ltd v MMI General Insurance Ltd [2000] QSC 329. That case concerned a basis of settlement for business interruption in almost identical terms to that in the Policy, including as to definitions of Standard Turnover and the adjustments clause. Mullins J referred to evidence that the managing director of the insured had travelled to Europe before the loss-causing event to try to 'identify potentially profitable products and customers, but there were no definite sales negotiated' (at [217]). In that context, her Honour observed (at [219]) that although she had no doubt that the managing director:

was endeavouring to steer the plaintiff in a different direction when it came to marketing its products overseas, the change in strategy was not being achieved by mid 1996. The trend of a business cannot be determined on the basis of a desire that has not been implemented. The trend must be determined by reference to actual trading, wherever possible. I therefore do not accept that the calculation of standard turnover should proceed on the basis of allowing for exports at a rate of 2,068 tonnes for the period of 12 months ended 23 June 1997. On the basis of the evidence adduced, the only reasonable amount to allow in the calculation of standard turnover for exports must be a figure based on the actual exports.

151    It does not appear that the meaning of the adjustments clause was in issue in PMB Australia the way it was here, and I do not take this passage as authority as to its proper construction. But it is, with respect, a sensible approach to assessing whether the evidence has established that there is a trend in the Business for which an adjustment must be made. In any event, for the reasons given I do not consider that the posited change from EMP to RMP answers the description of a 'trend in the business'.

'Variations' and 'other circumstances'

152    There are two other phrases in the adjustments clause which describe the matters for which adjustments must be made: 'variations in … the Business' and 'other circumstances affecting the Business'. In its oral closing, Koolan ultimately submitted that if the adoption of the RMP is not a 'trend', then it would at least be a 'variation' in the Business (ts 522).

153    In relation to the second term ('other circumstances affecting'), Koolan submits that this is a 'clear reference to the top two risks affecting its business: iron ore price and exchange rates' (ts 522). While I do not agree that it is a clear reference to those specific things, I do accept that changes in iron ore prices and exchange rates are, using the wording of the adjustments clause, 'circumstances affecting the Business' both 'before or after the Damage' and 'which would have affected the Business had the Damage not occurred'.

154    Infrassure submits that it is significant that the adjustments clause refers to 'variations in or other circumstances affecting the Business … or which would have affected the business had the Damage not occurred'. That is because Infrassure reads this phrase so that the reference to something affecting the Business had the Damage not occurred only modifies the 'circumstances affecting the Business', not the 'variations in … the Business'. This, Infrassure says, indicates that only a variation that was actually implemented, whether before or after the Damage, can be taken into account, so that a hypothetical decision to vary the Business after the Damage cannot be.

155    As will be explained below, I accept that only variations that took place (whether before or after the Damage) can be taken into account for the purposes of the adjustments clause. But I do not agree that the structure of the clause dictates that result in the way that Infrassure submits. My attempt to set the clause out in a way that exposes its somewhat obscure syntax is above. The words 'variations in' only make sense if they are linked to the phrase 'the Business' where it subsequently occurs (which Infrassure's reading does). The words 'circumstances affecting' are similarly linked to the same instance of 'the Business'. What that means is that the words that follow 'the Business', that is, 'either before or after the Damage or which would have affected the Business had the Damage not occurred' modify both 'variations in … the Business' and 'circumstances affecting the Business'. Infrassure's preferred reading is selective about which of the words following 'the Business' (where it appears the second time) modify 'variations in' and 'circumstances affecting' respectively, where the syntax of the clause provides no basis for the distinction.

156    In a related submission, Infrassure also said that the words 'affecting the business' were inherently about objectively provable external matters. But while the verb 'affect' when used in this sense will often connote something that comes from outside, it is not necessarily limited to that; the Macquarie Dictionary definition includes, for example, 'produce an effect or change in'. A variation within a business can produce a change in it.

157    More importantly, it is difficult to reconcile the distinction Infrassure seeks to draw with the syntax of the adjustments clause explained above. Once again, this is because the words 'affecting the Business' do modify 'variations in … the Business'. The formatted version of the adjustments clause set out above shows that, while the result is a little awkward (because the word 'affecting' is only linked to 'circumstances' while the word 'affected' is linked to both 'variations' and 'circumstances'), it is only a little, and the phrase 'variations in … the Business … which would have affected the Business had the Damage not occurred' still makes sense.

158    I therefore do not accept Infrassure's submissions to the effect that either the syntax of the clause, or the use of the word 'affecting', dictate a construction where only external 'circumstances' can be taken into account, where they would have occurred whether the Damage had occurred or not. In my view, the clause also permits adjustments on the basis of 'variations in … the Business … which would have affected the Business had the Damage not occurred'. I do accept that 'circumstances affecting' does connote some factor external to the Business that bears upon it, but in my view 'variations in … the Business' are capable of encompassing changes resulting from an internal business decision, such as a change from the EMP to the RMP.

The proper construction of the adjustments clause as a whole

159    It is, of course, not enough to focus on specific terms; the adjustments clause must be construed as a whole, and in its context in the Policy as a whole. As to that, Infrassure submits, relying on the quote from Henry Booth & Sons v Commercial Union Assurance Co Ltd (1923) 14 Lloyds LR 114 in Mobis NSWCA as set out above, that the correct way to calculate Koolan's business interruption loss is to start with the Output during the 12 months immediately preceding the failure of the seawall and to make adjustments for the 'trend of the Business', which Infrassure submits is reflected by the existing life of mine plan, and for 'variations in or other circumstances affecting the Business' which it says are constituted by matters such as ore prices, exchange rates and vicissitudes likely to affect business operations, such as unexpected machinery breakdowns and unbudgeted rain days.

160    Infrassure submits (ICS para 309) that if:

the parties had intended that the insured could rewrite its business plan, not based on any trend of the business that existed prior to the Incident, but based on a supposed about-face of strategy occurring part way through the indemnity period, then there would have been no point in requiring the parties to conduct an enquiry into the preceding 12 months then adjusting that historical outcome. The Policy would simply have directed the insured to model the financial results likely to flow from the manner in which the insured would have conducted the business in the Indemnity Period, without regard to the past.

161    It was not entirely clear what construction of the clause Infrassure was arguing for, as distinct from its description of how the clause applied in this case. It was perhaps best encapsulated in the submission that (Infrassure's opening submissions paras 19 and 20): 'The whole tenor of the clause is that the application of the agreed formula in Item 1 is subject to adjustment to reflect trends, variations or other circumstances affecting the Business. This is essentially an objective exercise'; and 'the clause envisages an objective recalibration of results by reference to trends, variations or other circumstances affecting the Business'.

162    I accept this submission, largely for the reasons Infrassure gives, although it will be necessary to describe with a bit more precision what is meant by 'an objective exercise' here. In my view, what it means is simply that the trends, variations or other circumstances must have occurred, so that they are objectively observable from the facts that have transpired.

163    I have found that the text of the adjustments clause, construed literally, is capable of encompassing the kind of internally proposed change from EMP to RMP for which Koolan advocates here. That is, while I do not consider that it is a 'trend of the Business', or a circumstance affecting the business, it would be a 'variation in … the Business'.

164    I also consider that there is nothing inherent in the nature of the change from EMP to RMP which means that it is not possible to provide for it by means of an adjustment, that is a change to an integer or integers of the calculations of Standard Output or Rate of Gross Profit. I do not accept that what Koolan is proposing in changing mine plans is to simply replace those numbers with different numbers of its own. And I do not see how one can derive from the text of the clause any limit on the extent of a change or changes that will take them outside the scope of the term 'adjustments'.

165    Nevertheless, there must be limits of some kind. This is a term that is intended to provide for a workable basis on which insured and insurer can resolve the amount of insurance in a situation where, as Riley points out, it is not possible to simply the calculate the value of what was lost. Rather, it is necessary to derive a number for something that never was - gross profit that was never earned. Viewed objectively, it is likely that the parties intended to make it as easy as possible for them to reach agreement about that by the application of a relatively simple formula that would be a reasonably accurate approximation of those results that were never, in fact, achieved. That was recognised a century ago in Henry Booth & Sons.

166    This approach is inherent in the very bones of the Policy. It requires the application of a formula that starts with an approximation of, or proxy for, the actual results. To begin with, the Standard Output is obviously not going to be the same as the Output that would have been achieved in the Indemnity Period. Further, the Rate of Gross Profit is calculated, not on the basis of the equivalent period before the Damage (where the business interruption lasts for less than one year), or even on the basis of the 12 months leading up to the Damage, but on the basis of the financial year ending immediately before the Damage.

167    So, here, the formula applies the Rate of Gross Profit for the period 1 July 2013 to 30 June 2014 to the Output for a different period, 24 October 2013 to 23 October 2014. Plainly, the adjustments clause can take account of under or over indemnification that can occur because of discrepancies between these periods; account could be taken, for example, of a strike in July 2013 that affected the Gross Profit for the earlier period, but not for the later one. But it is significant that the provision applies with a formula that is likely to produce discrepancies of that kind. That suggests that it is aimed at producing a workable proxy for the results that the Business would have achieved but for the Incident, not actual quantification of those results, so as to permit relatively efficient and trouble-free quantification of claims.

168    It is inconsistent with that objective for a party to be able to posit an adjustment that is based on a trend, variation or circumstance that is entirely hypothetical. For that is likely to lead to precisely what has occurred here - prolonged disputation about intangible matters that are inherently difficult to prove or disprove.

169    To illustrate how unworkable it can be, it is important to appreciate that if the insured is able to posit a hypothetical variation, no part of which has manifested in the real world, there is nothing to stop the insurer from doing so either. An insurer determined to minimise its liability could posit a situation where, in fact, the insured would have changed its business for the worse, and earned much less than it did in the previous year. As absurd as that may sound, it is something that would be open on the construction of the Policy for which Koolan contends.

170    The only thing that makes it unlikely that the insurer, rather than the insured, would avail itself of that possibility is the fact that it will be easier for the insured to find witnesses who will attest to their post facto belief that they would have acted in an entirely hypothetical way. To recognise that fact is to highlight how commercially unworkable Koolan's reading of the Policy is.

171    In my view, a construction of the Policy that eliminates that possibility is both businesslike and readily derived from the text. It is not necessary to strain the words of the adjustments clause, let alone to add to them. All that is required is to recognise that when it refers to trends, variations or other circumstances, it is referring to things that actually exist or existed, that is, that have manifested in the real world. That is a natural and sensible way to understand them. A variation, for example, is simply a variation that has happened. A variation that has not happened is no variation at all.

172    There are two possible textual objections to this approach, but I do not consider either of them to be sound. The first is that the clause encompasses variations 'which would have affected the Business had the Damage not occurred'. That might be thought to invite the very kind of hypothetical inquiry that this preferred construction excludes. But that thought pays insufficient attention to the words used. They do not refer to variations which would have occurred had the Damage not occurred. They refer to variations which would have affected the Business in a counterfactual world where the Damage not occurred. It is the effect of the variation which is, as it were, obscured by the intervening Damage, not the variation itself. The variation must still be observable in the real world.

173    The second textual objection is that the objective at the end of the clause is not achieved. But it would be a mistake to read it as an overriding objective that must be achieved in all circumstances. For, as Infrassure submits, that would be to rob the formula, which is plainly central to the operation of the Policy, of any work to do. If that is what the parties had intended, they would have just provided for indemnity in the amount of the Gross Profit that would have been obtained during the Indemnity Period. But the key words in the command to achieve the objective - 'as nearly as may be reasonably practicable' - provide considerable room for flexibility. The command is not to achieve results as nearly as possible or even as nearly as reasonably possible to the results which would have been achieved; it is only to approach those results 'as nearly as may be reasonably practicable'. Those words admit of some flexibility, depending on the circumstances: see, in a different context, Rough v Rix (1982) 30 SASR 301 at 307. The objective at the end of the clause is a lodestar to guide the parties in identifying the adjustments that are to be made, not a destination that must be reached at all costs.

174    This construction is both commercially workable, and sufficiently flexible to take account of a wide variety of circumstances. The words of the adjustments clause encompass both variations before and variations after the Damage. The latter could occur in a situation where the Damage has not completely interrupted all the Insured's business activities. In the case of Koolan, for example, if Damage to its ship loading facilities were to interrupt its Turnover (on that option), but it was able to keep extracting ore from the mine, a change to the RMP which actually occurred after the Damage may provide a proper basis for an adjustment. But a variation that never was, because it is entirely hypothetical, would not.

175    To illustrate with another scenario, if the Board had resolved to adopt the RMP three days before the first slump of the seawall, that would answer the description of a variation in the Business. It would have been objectively manifested, in that it was formally adopted. It would not have been implemented, but contrary to Infrassure's submission I do not consider that implementation is a workable criterion. There is too much room for disagreement about when a variation has been implemented and the extent to which implementation has occurred.

176    It is true that on this scenario there would still be room for a dispute about the extent to which the plan would have been achieved (a dispute that is of course present here). But business interruption insurance is always going to involve some element of projecting observed trends, variations and circumstances forward into an unknown hypothetical past. As the scope of the respective factual disputes below illustrates, that is of a different order of difficulty than an attempt to make a different business plan.

177    I do not consider that this construction is inconsistent with the passage from PMB Australia on which Infrassure relies as described at [150] above. There was no specific variation (or trend, or other circumstance) in issue there; the managing director of the insured had travelled to Europe with the vague goal of trying to identify 'potentially profitable products and customers'. In any event, as discussed, I do not consider that the passage purports to lay down the proper construction of the clause; it is better understood as reflecting a common sense approach to the evidence.