Adelaide (SA) Pools & Spa Manufacturing and Installation Pty Ltd & Ors v Westcourt General Insurance Brokers Pty Ltd (No 2)

[2021] SASC 123

SUPREME COURT OF SOUTH AUSTRALIA

(Civil)

ADELAIDE (SA) POOLS & SPA MANUFACTURING AND INSTALLATION PTY LTD & ORS v WESTCOURT GENERAL INSURANCE BROKERS PTY LTD (No 2)

[2021] SASC 123

Judgment of the Honourable Justice Doyle  

INSURANCE - INSURANCE AGENTS AND BROKERS - GENERAL DUTY OF CARE

INSURANCE - THE POLICY - CONDITIONS, WARRANTIES AND EXCEPTIONS - GENERALLY

TORTS - NEGLIGENCE - DUTY OF CARE: EXISTENCE

TORTS - NEGLIGENCE - CONTRIBUTORY NEGLIGENCE - GENERALLY

DAMAGES - MEASURE AND REMOTENESS OF DAMAGES IN ACTIONS FOR TORT

The first to fifth applicants are corporate entities, referred to collectively as the ASA Group or ASA.  The sixth applicant, Mr Elliott, was a director and shareholder of each of the first to fifth applicants, and the controller of the ASA Group.

The first applicant (ASA Manufacturing) was a manufacturer of fibreglass pools and spas at a factory premises in Burton.  The second applicant (ASA Sales) conducted a business selling the pools and spas manufactured by ASA Manufacturing.  The third applicant (TEE, as trustee for Mr Elliott’s family trust), was the owner of the Burton factory, and a display centre and adjacent property used in the businesses of ASA Manufacturing and ASA Sales.  The fourth applicant (ATPF) provided temporary pool fencing for use during the installation of pools.  The fifth applicant (H2O) was a supplier of solar heating products for use in relation to pools and spas.

The respondent was a general insurance broker, and the holder of an Australian Financial Services Licence.  OBI Services Pty Ltd and its principal, Mr Olbrich, were authorised representatives of the respondent.  The respondent accepts it is liable for any wrongdoing by OBI and Mr Olbrich.

On 29 January 2010, there was a fire at the Burton factory which caused extensive damage to the Burton factory and its contents.  ASA Manufacturing was no longer able to manufacture its pools or spas in the factory.

The essence of the claim brought by the applicants is that OBI, through Mr Olbrich, as the insurance broker retained by the ASA Group, failed to provide the applicants with adequate advice as to their insurance requirements for the businesses they were conducting, with the result that they were inadequately insured in respect of the fire.  While Mr Olbrich obtained cover for the ASA Group’s businesses under an Industrial Special Risks policy (referred to as the 2009 policy), that policy did not cover the entirety of either the material damage (to the Burton factory, its contents and the stock) or the consequential loss by reason of the interruption to the businesses.

The applicants claim that as a result of their inadequate insurance cover, ASA Manufacturing was not able to afford to rebuild or replace the Burton factory, and hence not able to resume manufacturing pools and spas to supply to ASA Sales.  They further claim that ASA Sales was required to purchase different pools and spas from interstate at a greater cost, and to incur other extra costs to keep its business operating.  They claim that they were inadequately insured in respect of these additional costs and their loss of gross profits.

By mid-2012, ASA Manufacturing ceased its efforts to rebuild or replace the Burton factory.  ASA Sales became insolvent and could not trade.  In September 2012, ASA Manufacturing and ASA Sales, as well as TEE, were placed into voluntary administration.

The businesses of ATPF and H2O were dependent upon the business of ASA Sales, given that they supplied products associated with the pools and spas sold by ASA Sales.  By mid-2012, they had also ceased to trade.

The applicants allege that the respondent, through Mr Olbrich and OBI, acted both in breach of contract to the named insureds, and in breach of a tortious duty of care owed to each of the applicants.  Broadly speaking, they allege that Mr Olbrich failed to provide them with the advice expected of a competent insurance broker in connection with the Industrial Special Risks policy which he obtained on their behalf, with the result that they ended up with an inadequate level of cover under both the material damage and consequential loss (or business interruption) sections of that policy.  They seek damages for the losses they claim to have suffered as a result of their alleged under-insurance.  They seek recovery of the additional insurance proceeds that they allege they would have received had they been provided with competent advice, and hence obtained adequate cover.  They also seek damages for various heads of consequential loss.

Held, per Doyle J:

1.      The respondent, through Mr Olbrich and OBI, and pursuant to its contract with the named insureds (relevantly, ASA Manufacturing, ASA Sales, ATPF and H2O), owed a general duty to exercise the skill and care expected of a reasonably competent insurance broker (the general duty).

2.      The respondent did not owe the named insureds any higher contractual duty to obtain ‘full insurance’; the evidence did not support any finding as to the instructions said to have given rise to such a duty.

3.      The respondent, through Mr Olbrich and OBI, breached the general duty it owed to the named insureds in several respects, including by failing to provide adequate advice in relation to the declared value for the Burton factory, the indemnity period, the declared value for gross profit, and the sub-limits for the additional increase in cost of working and claims preparation costs.

4.      Had the named insureds, through Mr Elliott, been competently advised, they would have instructed Mr Olbrich to obtain, would have been prepared to pay the additional premiums necessary to obtain, and would have obtained, cover which included a declared value for the Burton factory of at least $900,000 (rather than $500,000), an indemnity period of 24 months (rather than six months), declared gross profit of at least $6 million for that indemnity period (rather than $2 million), and sub-limits for the additional increase in cost of working of at least $500,000 (rather than $100,000) and claims preparation costs of at least $100,000 (rather than $15,000).

5.      Through this additional insurance cover, the named insureds would have recovered additional insurance proceeds in the amount of $3.2 million.

6.      The evidence establishes the requisite causal link between the respondent’s breaches of the general duty and the loss of these additional insurance proceeds.

7.      While the evidence revealed periods of delay and inactivity in the applicants’ attempts to respond to the damage caused by the fire, and to rebuild their businesses, it has not been established that the decisions, or indecision, on the part of Mr Elliott either severed the requisite causal link, or otherwise involved a failure to mitigate.

8.      In relation to the applicants’ consequential loss claim, the named insureds are not entitled to recover the value of their lost businesses by reason of the overlap between this head of loss and their claim for the loss of the additional insurance proceeds that they would have received had they been competently advised.

9.      The allegation of contributory negligence by reason of Mr Elliott’s pre-fire and post-fire conduct has not been made out.

10.    The respondent, through Mr Olbrich and OBI, owed the applicants, including TEE and Mr Elliott, a tortious duty of care.  However, subject to some matters in respect of which the parties agreed should be left for subsequent consideration, no additional recoverable loss has been established.

11.    The applicants are thus entitled to judgment in their favour in the amount of $3.2 million, with the Court to hear further from the parties in relation to interest on this sum, the additional potential heads of consequential loss that the parties agreed should be the subject of subsequent consideration, the form of the judgment, and costs.

Corporations Act 2001 (Cth) s 601AB; Australian Securities and Investments Commission Act 2001 (Cth) s 12ED; Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA) s 7, referred to.
Palios Meegan & Nicholson Holdings Pty Ltd v Shore (2010) 108 SASR 31; PC Case Gear Pty Ltd v Instrat Insurance Brokers Pty Ltd (in liq) (2020) 379 ALR 732; Norwest Refrigeration Services Pty Ltd v Bain Dawes (WA) Pty Ltd (1984) 157 CLR 149; Provincial Insurance Australia Pty Ltd v Consolidated Wood Products Pty Ltd (1991) 25 NSWLR 541; Marvin Manufacturers (Aust) Pty Ltd v Chambers of Manufacturers Insurance Ltd (1992) 7 ANZ Ins Case 61-122 (1992) 7 ANZ Ins Case 61-122; SKM Recycling Pty Ltd v Australian Reliance Pty Ltd [2017] VSC 159; Eurokey Recycling Ltd v Giles Insurance Brokers Ltd [2014] EWHC 2989 (Comm); William Jackson & Sons Ltd v Oughtred & Harrison (Insurance) Ltd [2002] Lloyd’s Rep IR 230; Synergy Health (UK) Ltd v CGU Insurance Plc [2011] Lloyd’s Rep IR 500; Geoffrey W Hill & Associates (Insurance Brokers) Pty Ltd v Squash Centre (Allawah North) Pty Ltd (1990) 6 ANZ Ins Case 61-012; Kotku Bread Pty Ltd v Vero Insurance Ltd [2012] QSC 109; Fanhaven Pty Ltd v Bain Dawes Northern Pty Ltd [1982] 2 NSWLR 57; Horsell International Pty Ltd v Divetwo Pty Ltd [2013] NSWCA 368; Fine’s Flowers Ltd v General Accident Assurance Co of Canada (1977) 81 DLR (3d) 139; Claude R Ogden & Co Pty Ltd v Reliance Fire Sprinkler Co Pty Lt [1973] 2 NSWLR 7; Elilade Pty Ltd v Nonpareil Pty Ltd (2002) 124 FCR 1; Ground Gilbey Ltd v Jardine Lloyd Thompson UK Ltd [2011] EWHC 124 (Comm); Arbory Group Ltd v West Craven Insurance Services [2007] Lloyd’s Rep IR 491; Messagemate Australia Pty Ltd v National Credit Insurance (Brokers) Pty Ltd (2002) 85 SASR 303; Strategic Property Holdings (No 3) Pty Ltd v Austbrokers RWA Pty Ltd [2012] NSWSC 1570; Ramwade Ltd v WJ Emson & Co Ltd [1987] RTR 72; Mander v Commercial Union Assurance Co P/c [1998] Lloyd’s Rep IR 93; Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1; South Australia v Johnson (1982) 42 ALR 161 ; Verderame v Commercial Union Assurance Co Plc [1992] BCLC 793; Postnet Pty Ltd v Wood [2002] ACTCA 5; Sherson & Associates Pty Ltd v Bailey (2001) Aust Torts Reports 81-591; Hirst v Nominal Defendant [2005] 2 Qd R 133; Banco de Portugal v Waterlow & Sons Ltd [1932] AC 452; Karacominakis v Big Country Developments Pty Ltd [2000] NSWCA 313; Fallon v Johnston [2018] VSC 273; Barclays Bank P/c v Fairclough Building Ltd [1995] QB 214; JW Bollom & Co Ltd v Byas Mosley & Co Ltd [1999] Lloyd’s Rep IR 598; Dunlop Haywards (DHL) Ltd v Barbon Insurance Group Ltd [2009] EWHC 2900; Café de Lecq Ltd v RA Rossborough Insurance Brokers Ltd [2012] JRC 053; Johnson v Gore Wood & Co [2002] 2 AC 1; Thomas v D’Arcy [2005] 1 Qd R 666; Oates v Consolidated Capital Services Pty Ltd [2009] NSWCA 183; Carey v Freehills (2013) 303 ALR 445; Caltex Refineries (Qld) Pty Ltd v Stavar (2009) 75 NSWLR 649; Hancock Family Memorial Foundation Ltd v Fieldhouse (No 5) [2013] WASC 121; Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191; Wallace v Kam (2013) 250 CLR 375; Bolton v New Zealand Insurance Co Ltd [1995] 1 NZLR 224; March v Stramare (E&MH) Pty Ltd (1991) 171 CLR 506; Perre v Apand Pty Ltd (1999) 198 CLR 180, considered.

ADELAIDE (SA) POOLS & SPA MANUFACTURING AND INSTALLATION PTY LTD & ORS v WESTCOURT GENERAL INSURANCE BROKERS PTY LTD (No 2)
[2021] SASC 123

Civil

DOYLE J:

PART A:  INTRODUCTION

Course of the trial

Witnesses

Mr Elliott
Mr Olbrich
Other lay witnesses
Expert witnesses

PART B:  EVENTS BEFORE THE FIRE

Personal background
Residential properties
Establishment of ASA Manufacturing
Accounting advice from Mr Formichella
Personal insurance
Acquisition of the Burton factory
Pool moulds
Manufacturing pools

SPASA
Establishment of ASA Sales
H2O and ATPF
ASA Glass Fencing
Purchase of the Display Centre and Tait Street
Renovation of the Display Centre
Expansion plans
Advice and assistance from Mr Della Porta

PART C: EVENTS AFTER THE FIRE

The day of the fire
Discussions at the scene of the fire
Damage caused by the fire
The preparation of ASA’s insurance claim
The period immediately following the fire
Support of BankSA
Replacement pool shells
Clearing the Burton factory
The Auscomposites factory
Short-term tenancy in Wingfield
First insurance progress payment
Rebuilding the factory
Possibility of a new property and factory
Replacement moulds
Dealings with ALT
Plans as at March 2010
Quote for pool moulds from Quickform
Selling more pool shells
Ongoing negotiations with ALT
Second insurance payment
First consignments of pool shells from ALT
May 2010 visit to ALT
Continuation of the ASA business
Obtaining moulds
Rebuilding or replacing the factory
Third insurance progress payment
The second half of 2010
Family breakdown
Mr Della Porta quits
Efforts to continue trading in 2011
Attempts to reinstate the factory
Further funding and trading difficulties
Voluntary administration and asset sales
Income protection insurance

PART D:  THE APPLICANTS’ INSURANCE ARRANGEMENTS

The 2009 policy

Section 1 (Material Loss or Damage)
Section 2 (Business Interruption)
Other provisions and conditions under the policy wording

Mr Olbrich’s background
Mr Olbrich’s general practice
Dealings between Mr Olbrich and Mr Elliott

Mr Olbrich’s evidence
Mr Elliott’s evidence

OBI’s engagement by Mr Elliott
The 2007 renewal

Placing the cover
Terms of the cover
Mr Olbrich’s evidence
Mr Elliott’s evidence

The 2008 renewal

Mr Olbrich’s evidence
Mr Elliott’s evidence

Miscellaneous

The 2009 renewal

Mr Elliott’s evidence
Mr Olbrich’s evidence

The BankSA valuation of the Burton factory

Mr Elliott’s evidence
Mr Olbrich’s evidence

Other matters
Summary of changes in policy cover
Discussions following the fire

The appointment of Mr Kroon and the 30 January 2010 meeting
Appointment of Mr Flight and the 2 February 2010 meeting
Subsequent dealings

The Crawfords reports
Summary of insurance payments

PART E:  THE APPLICANTS’ CASE ON LIABILITY

The evidence of Mr Elliott and Mr Olbrich

PART F:  THE CONTRACTUAL CLAIM OF NAMED INSUREDS

The Contract and general duty to exercise skill and care
The content of the general duty

Authorities in relation to duties of an insurance broker
Evidence informing the general duty of an insurance broker

The alleged standing instruction to fully insure
Alleged breaches of duty

Replacement value of the Burton factory
Replacement value of stock and contents
Replacement value versus indemnity value
Reasonable despatch
Indemnity period
Declared value for gross profit
Additional increase in cost of working (AICW)
Claims preparation
Under-insurance and the co-insurance clause
Combined limit
Cumulative effect of areas of under-insurance
Summary of breaches of duty

PART G:  APPLICANTS’ CASE ON CAUSATION & LOSS

Separate entities
Expert evidence

PART H:  UNDER-INSURANCE LOSSES OF THE NAMED INSUREDS

Under-insurance in respect of Section 1 (material loss or damage)
Under-insurance in respect of Section 2 (business interruption)

During the six months of the nominated indemnity period
Assuming an indemnity period of 24 months

Total under-insurance losses
Alternative claim based upon AICW

PART I:  CONSEQUENTIAL LOSSES OF THE NAMED INSUREDS

The value of the ASA Group businesses

Future Maintainable Earnings
Price Earnings Ratio

ATPF
H2O

Summary

Causation
Overlapping claims

The Arbory Group decision
Application to the present case

Claim for loss of profits
Voluntary administration fees and cost

PART J:  CAUSATION / MITIGATION

PART K:  CONTRIBUTORY NEGLIGENCE

Pre-fire contributory negligence
Post-fire contributory negligence

PART L:  THE TORTIOUS CLAIMS OF TEE & ELLIOTT

Duty of care in favour of Mr Elliott
Breaches of the duty of care
Loss claimed by TEE

The value of TEE as at the date of the fire
Recoverability of the value of TEE
Property sales

Loss claimed by Mr Elliott

Property sales
Funds advanced

Other matters

PART M:  CONCLUSION & ORDERS

PART A:  INTRODUCTION

1. There are six applicants in these proceedings.  The first to fifth applicants are corporate entities, referred to collectively in these reasons as the ASA Group or ASA.  The sixth applicant, Timothy Elliott, was a director and shareholder of each of the first to fifth applicants, and the controller of the ASA Group.

2. The first applicant (Adelaide (SA) Pools & Spa Manufacturing and Installation Pty Ltd (ASA Manufacturing)) was a manufacturer of fibreglass pools and spas at a factory premises in Burton (the Burton factory).  The second applicant (ASA Pool & Spa Pty Ltd[1] (ASA Sales)) conducted a business selling the pools and spas manufactured by ASA Manufacturing. 

   [1]    This is the company name as it appears in the pleadings, but the documents include several variants of this (including Adelaide (SA) Pools & Spa Sales Pty Ltd).  Nothing turns upon the confusion as to the entity’s name.

3. The third applicant (Tim Elliott Enterprises Pty Ltd (TEE), as trustee for the Elliott Family Trust) was the owner of the Burton factory.  As explained later, TEE also owned a display centre and adjacent property which it acquired to further the businesses of ASA Manufacturing and ASA Sales.

4. The fourth applicant (Adelaide Temporary Pool Fencing Pty Ltd (ATPF)) conducted a business of providing temporary pool fencing for use during the installation of pools, including the pools manufactured and sold by ASA Manufacturing and ASA Sales.  The fifth applicant (H2O Solar Solutions Pty Ltd (H2O), as trustee of the H2O Solar Solutions Trust) was a supplier of solar heating products, and supplied those products in relation to pools and spas manufactured and sold by ASA Manufacturing and ASA Sales.

5. The respondent (Westcourt General Insurance Brokers Pty Ltd) was a general insurance broker, and was the holder of an Australian Financial Services Licence.  Relevantly for the purposes of these proceedings, OBI Services Pty Ltd (OBI) and its principal (Gary Olbrich) were authorised representatives of the respondent.  OBI was deregistered in 2012.  However, the respondent accepts that it is liable for any of the alleged wrongdoing by OBI and Mr Olbrich that is established by the applicants.

6. On 29 January 2010, there was a fire at the Burton factory which caused extensive damage to the factory and its contents.  ASA Manufacturing was no longer able to manufacture its fibreglass pools or spas in the factory.

7. The essence of the claim brought by the applicants is that OBI, through Mr Olbrich, as the insurance broker retained by the ASA Group, failed to provide them with adequate advice as to their insurance requirements for the businesses they were conducting, with the result that they were inadequately insured in respect of the fire.  While Mr Olbrich obtained cover for the ASA Group’s businesses under an Industrial Special Risks policy, that policy did not cover the entirety of either the material damage (to the Burton factory, its contents and the stock) or the consequential loss (by reason of the interruption to the businesses, and loss of gross profits) suffered by reason of the fire.

8. The applicants claim that as a result of their inadequate insurance cover, ASA Manufacturing was not able to afford to rebuild or replace the Burton factory, and hence not able to resume manufacturing pools and spas to supply to ASA Sales.  They further claim that ASA Sales was required to purchase different pools and spas from interstate at a greater cost, and to incur other extra costs to keep its business operating.  They claim that they were inadequately insured in respect of these additional costs and their loss of gross profits.

9. By mid-2012, ASA Manufacturing ceased its efforts to rebuild or replace the Burton factory. ASA Sales became insolvent and could not trade.  In September 2012, ASA Manufacturing and ASA Sales, as well as TEE, were placed into voluntary administration. 

1. The businesses of ATPF and H2O were dependent upon the business of ASA Sales, given that they supplied products associated with the pools and spas sold by ASA Sales.  By mid-2012, they had also ceased to trade.

2. The applicants allege that the respondent, through Mr Olbrich and OBI, acted both in breach of contract to the named insureds and in breach of a tortious duty of care owed to each of the applicants.  Broadly speaking, they allege that Mr Olbrich failed to provide them with the advice expected of a competent insurance broker in connection with the Industrial Special Risks policy which he obtained on their behalf, with the result that they ended up with an inadequate level of cover under both the material damage and consequential loss (or business interruption) sections of that policy.  They seek damages for the losses they claim to have suffered as a result of their alleged under-insurance.  They seek recovery of the additional insurance proceeds that they allege they would have received had they been provided with competent advice, and hence obtained adequate cover.  They also seek damages for various heads of consequential loss.

   Course of the trial

3. After a long and difficult interlocutory history, the trial of these proceedings took place over several weeks during November and December 2020. 

4. The parties called a number of lay witnesses, most of whom gave their evidence in chief by way of affidavit.  Subject to some exceptions, the oral evidence of most was substantially confined to cross-examination.  The parties also called expert evidence in relation to three disciplines:  insurance broking, forensic accounting and valuation.  Each of the experts prepared reports (indeed, multiple reports) setting out their opinions on the various topics they were instructed to address, and were cross-examined.

5. The parties also relied upon a very substantial volume of documents.  The agreed tender book consisted of 28 lever arch folders, and the other documentary exhibits received during the course of the trial ran to many hundreds of further pages.

6. Both parties filed lengthy written closing addresses, which they supplemented orally. 

   Witnesses

7. I propose to identify, and make some brief observations in relation to, each of the lay and expert witnesses.

8. In relation to the lay witnesses, I would commence by making the general observation that most of their evidence related to events that occurred approximately 10 years ago.  As such, it was not surprising that many of them were not able to recall much of the detail of the events and conversations in which they were involved.  As is often appropriate in such situations, I have ultimately been guided more, at least in relation to matters of detail, by the contemporaneous documents which exist, rather than the recollections of the witnesses.

   Mr Elliott

9. Mr Elliott gave very lengthy and detailed evidence in chief.  Most of it was in writing, but he also addressed a number of matters orally.  He was subjected to thorough cross-examination. 

10. Mr Elliott presented as a confident and intelligent man who had a very good understanding of his business, and the industry and market within which it operated.  That said, I also accept that, so far as his business was concerned, his strength lay in his understanding of the technical and practical side of the business, as opposed to the management, financial and related aspects of the business (including insurance-related matters).  In relation to these latter types of matters, Mr Elliott’s understanding was not very sophisticated, and he was in the habit of seeking professional advice from others.

11. There is little or no dispute about much of the detail of Mr Elliott’s evidence concerning the nature and history of his business.  It was largely supported by, or at least consistent with, the contemporaneous documentary evidence adduced at trial.  I have set out the findings I have made in respect of these matters later in these reasons.  Those findings are largely in accordance with the evidence of Mr Elliott.  It follows that I found Mr Elliott’s evidence to be largely reliable in respect of these matters.

12. However, in other respects I had significant reservations in relation to the reliability of Mr Elliott’s evidence.  In particular, I consider that there was a significant degree of reconstruction and exaggeration in his evidence as to his dealings and conversations with Mr Olbrich in relation to his insurance cover.  I have mentioned examples later in these reasons.

13. I do not go so far as to suggest that Mr Elliott was deliberately untruthful in the evidence he gave.  I do not think the evidence permits me to draw that conclusion.  Rather, as I have mentioned, it seems more likely that the unreliability of his evidence was largely a product of reconstruction.  It is not uncommon for people who have gone through significant periods of stress and distress to have their memory of relevant events affected by their subsequent experiences and knowledge. Mr Elliott has undoubtedly experienced very significant stress and distress as a result of the fire that destroyed his factory and then ultimately his business.  He plainly attributes much of the blame for this to Mr Olbrich, and what he regards as Mr Olbrich’s failure to ensure that he had adequate insurance.  Indeed his anger towards, and dislike of, Mr Olbrich remains apparent.  As such, I do not find it surprising that Mr Elliott’s memory of the relevant events, and in particular his dealings with Mr Olbrich, has become contaminated by reconstruction.  At times it also seemed to me that Mr Elliott’s evidence was the product of a tendency to exaggerate in a self-serving manner.  

14. In any event, regardless of the precise explanation for the unreliability of Mr Elliott’s evidence, I am not satisfied that it is appropriate for me to rely upon the detail of his evidence as to his dealings and conversations with Mr Olbrich in relation to his insurance arrangements.  I have only relied upon Mr Elliott’s evidence in respect of these matters to the extent it is consistent with either the evidence of Mr Olbrich, or other evidence (such as the contemporaneous documentary evidence).

    Mr Olbrich

15. Mr Olbrich gave written and oral evidence in chief, and was also subjected to lengthy cross-examination.  The focus of his evidence was his dealings and conversations with Mr Elliott in relation to the ASA Group’s insurance arrangements.

16. Mr Olbrich was not able to recall much at all of the detail of those dealings and conversations.  This is not surprising given not only the time that had passed by the time he gave evidence, but also the fact that, from his perspective, his dealings with Mr Elliott were fairly routine; Mr Elliott was just one of many clients Mr Olbrich had at the time.  

17. I found Mr Olbrich to be a reasonably good witness in the sense that he appeared to understand the need to distinguish between these instances where he was able to recall what was said or done, and those where he was reliant upon his general practice.  He also made some concessions where appropriate.  While he was at times a bit defensive in the manner in which he gave evidence, I did not have any reason to doubt the truthfulness or honesty of Mr Olbrich’s evidence.

18. The evidence that Mr Olbrich was able to give as to his dealings and conversations with Mr Elliott consisted largely of a description of his general practice when providing insurance services to clients in similar situations; and his evidence to the effect that he followed this general practice in his dealings with Mr Elliott.  While there are limits to the weight that can be attached to evidence of this nature, I have no reason to doubt its general reliability in the present case. 

19. However, to the extent that Mr Olbrich purported to go further, and to recall some specific aspects of his dealings and conversations with Mr Elliott, I had some reservations as to the reliability of his evidence.  As developed later in these reasons, I consider that Mr Olbrich’s purported recollection of such matters tended to be self-serving and redolent of reconstruction.  I have thus not relied upon his evidence in relation to such matters.

    Other lay witnesses

20. I do not consider it necessary to say much about the balance of the lay witnesses.  With some limited exceptions, as identified at the relevant places in my reasons, their evidence was generally fairly peripheral to the matters in issue in the proceedings and of assistance only by way of general background and context.  I did not have any reason to doubt the honesty of any of these witnesses, and found their evidence to be generally reliable. 

21. Nicola Formichella is a partner of BCFR Chartered Accountants.  He had been Mr Elliott’s personal accountant from the mid-1990s, and was the accountant for the ASA Group from its inception.  He gave evidence about his role in assisting and advising Mr Elliott both in the years leading up to the fire, and in the period following the fire.  Mr Formichella was assisted in this respect by Stacey Muggleton and Nesrine Raslan.  

22. While Mr Formichella’s role included preparing the usual financial statements, and providing advice in relation to taxation, business structure, asset protection and other accounting matters, he also had a broader advisory role.  He used to meet with Mr Elliott regularly, perhaps once a month or so, to discuss the performance of the business.  During 2009, Mr Formichella introduced Mr Elliott to Pierre Della Porta (see below) with a view to him providing Mr Elliott with some broader business advice in relation to what appeared to be a growing business.  But even after the introduction to Mr Della Porta, Mr Formichella continued to advise Mr Elliott.  Indeed, his advisory role continued in the period following the fire, with both Mr Formichella and Mr Della Porta being quite closely involved in Mr Elliott’s attempts to rebuild or replace the Burton factory, and to restore his business more generally. 

23. Mr Formichella also gave some evidence to the effect that he expected that, had the fire not occurred, the ASA Group would have grown.  He explained the circumstances of the preparation of the estimate of 14.43 per cent growth in turnover for the 2010 year which featured in the evidence.

24. I was not impressed by Mr Formichella’s manner as a witness.  When being cross-examined he became quite defensive and argumentative.  That said, my concerns about the manner in which he gave evidence did not ultimately affect my view as to his honesty or reliability as a witness.  I am satisfied that his evidence was honest and generally reliable. 

25. Pierre Della Porta is a (now retired) business consultant.  Having been introduced to Mr Elliott by Mr Formichella in mid-2009, Mr Della Porta gave significant advice and assistance to Mr Elliott regarding improvements that might be made to his business to improve its efficiency and profitability.  I have explained the nature and significance of Mr Della Porta’s role, and the advice that he gave Mr Elliott, in some detail later in these reasons.  While he appeared a little too keen at times to minimise his role, and to emphasise the role of Mr Elliott in making all the relevant decisions, I am satisfied that his evidence was honest and generally reliable.

26. Stephen Flight is a loss adjuster employed by Crawford & Company (Australia) Pty Ltd.  Mr Flight was retained by the insurer, Miramar Underwriting Agency Pty Ltd, as its loss adjuster in relation to ASA’s claim under the policy the subject of these proceedings.  Mr Flight’s evidence consisted largely of the reports he prepared during 2010 and 2011, which I have summarised later in these reasons.  I accept his evidence, including the contents of his contemporaneous reports, as honest and reliable.

27. Shane Highet is a relationship manager for BankSA.  He managed the accounts of Mr Elliott and the ASA Group.  His evidence was largely confined to his role in arranging a restructure of ASA’s financing arrangements in late 2009, as outlined later in these reasons.  I accept his evidence.  That said, he had only a very limited recollection of events, and so his evidence did not ultimately add much at all to the contemporaneous record of his role and communications.  

28. Frank Granozio is a financial planner who provided various types of personal insurance for Mr Elliott and his de facto partner, Renata Hlavacek.  When giving his evidence, he revealed that he was funding Mr Elliott’s pursuit of these proceedings, and stood to receive one third of any judgment sum, after costs.  While the respondent submitted that I should treat Mr Granozio’s evidence with caution in light of his interest in the litigation, I am nevertheless satisfied that his evidence was honest and reliable.  However, I do not attach any significant weight to the evidence he gave in relation to his own practices as a broker, given the very different nature of the insurance products with which he was concerned.

29. Frank Iadarola is an insurance advisor.  Mr Elliott appointed him to manage his and ASA’s insurance needs in around June 2010, after Mr Elliott had fallen out with Mr Olbrich.  He outlined the cover that he put in place, and also gave some evidence as to his practices and expectations as a broker.  While I have no reason to doubt the honesty or reliability of his evidence, it was of limited relevance to the matters in issue in these proceedings.

30. Chris Papa is a businessman who, for a period of over 10 years concluding in January 2011, worked as the national sales manager of Poolrite.  Poolrite is a supplier of pumps, chlorinators and other swimming pool equipment.  Mr Papa was based in Victoria, but dealt with pool and spa manufacturers all around Australia.  In that capacity he dealt regularly with Mr Elliott and ASA.  He gave some general evidence in relation to ASA’s position in the pool and spa market in South Australia, which I accept.

31. Evan Jackson is the managing director of Guardian Insurance Brokers Pty Ltd.  As explained later in these reasons, Mr Olbrich worked as a broker with Guardian for several years until late 2006.  Mr Jackson said that Mr Elliott approached him in approximately 2000, asking Guardian to act as his broker.  While Guardian commenced providing him, and later his companies, with insurance broking services from around that time, Mr Jackson said he never personally acted as Mr Elliott’s broker.  Mr Elliott and ASA were clients of Mr Olbrich.

32. Mr Jackson also gave some evidence about the broking practices in place while he worked with Mr Olbrich.  He gave some examples of the written material that Mr Olbrich provided some of their clients at the time.  He also provided the Court with a publication known as the ISR Book (referred to later in these reasons in some detail).  He explained that the ISR Book was supplied by the National Insurance Brokers Association, and that he and Mr Olbrich used it to assist them when advising clients in relation to ISR policies.  He also explained the use made of other tools such as a Business Interruption calculator (to determine gross profit), and Cordell’s replacement cost estimator (to determine the replacement cost of buildings). 

33. While Mr Jackson was at times argumentative during cross-examination, I accept the general effect of his evidence.

34. I conclude my reference to the lay witnesses by observing that in relation to those who gave some evidence relevant to the practices of insurance brokers (being not only Mr Jackson, but also Mr Granozio and Mr Iadarola), I have had regard in a general way to their evidence.  However, in considering whether or not Mr Olbrich’s conduct fell short of the standard of care expected of a reasonably competent insurance broker, I have paid closer attention to the evidence of the two independent experts who gave detailed evidence on this topic.

    Expert witnesses

35. The parties called evidence to assist the Court in its consideration of what was to be expected of an insurance broker in the position of Mr Olbrich.  The applicants called evidence from Lyndon Parnell, and the respondent called evidence from Gary Gribbin.  I have addressed their evidence later in these reasons, when considering the issues of liability to which it related.

36. The parties also called evidence from forensic accountants in relation to various of the causation and loss issues raised in the proceedings.  The applicants called evidence from Nicholas Cooper, and the respondent called evidence from Brian Morris.  I have addressed their evidence later in these reasons, when considering the issues to which it related. 

37. The applicants also called evidence from a valuer, Darcy Bruce.  While the respondent had obtained responding valuation evidence, it did not ultimately call that evidence.  Several of the valuation issues in dispute were ultimately resolved through the provision to the Court of some agreed facts.  The respondent otherwise addressed its challenges to Mr Bruce’s evidence through cross-examination and submissions. 

    PART B:  EVENTS BEFORE THE FIRE

38. In this section of my reasons, I have set out a narrative of the factual findings I have made in relation to the events before the fire.  In the next section of my reasons I have done the same in relation to the events after the fire.  The matters I have addressed in these sections relate primarily to Mr Elliott and the course of the ASA Group’s business, and are largely uncontroversial.  To the extent there were matters of significant factual contest, I have indicated where that is so.  Most of the matters of factual contest (such as in relation to the dealings between Mr Elliott and Mr Olbrich) have been addressed in subsequent sections of these reasons.

    Personal background 

39. Mr Elliott was born in 1967, in Adelaide.  He grew up in Adelaide, and attended school through to the end of year 10.  In the decade or so after he left school he worked in various roles, including spending a few years as a carpenter’s assistant.  In 1994, he started his own removal and cartage business.

40. He met Renata Hlavacek in 1996, and they began living together as a de facto couple the following year.  They never married.  They have two daughters together, born in 2000 and 2003.

    Residential properties

41. When they met, Ms Hlavacek owned a property in North Haven (the North Haven property).  She remained the sole registered proprietor of that property.

42. On 12 December 2006, Mr Elliott and Ms Hlavacek jointly purchased a residential property in Largs Bay (the Largs Bay property).  They borrowed $591,000 from BankSA to purchase it, secured by a registered first mortgage over that property. 

43. Mr Elliott and Ms Hlavacek lived in the North Haven property.  They planned to renovate the Largs Bay property with a view to it becoming their long-term family home.  They intended to continue living in the North Haven property before moving into the Largs Bay property once the renovations were complete.  Their plan was to then demolish the house on the North Haven property; to build two apartments in its place; and to rent those apartments out for a period, before ultimately giving them to their daughters.

44. Mr Elliott undertook some of the renovations on the Largs Bay property himself, but he also used tradespeople to undertake some of the work.  The renovations had not been completed by the time of the fire at the Burton factory.  As for the North Haven property, by the time of the fire he and Ms Hlavacek had obtained council approval for their intended development of the apartments. 

45. The plans of Mr Elliott and Ms Hlavacek for the North Haven and Largs Bay properties were not progressed after the fire, and never came to fruition.  Both properties were sold by BankSA as mortgagee in 2012.

    Establishment of ASA Manufacturing

46. Soon after meeting Ms Hlavacek, Mr Elliott began working for a man named Pat Cheetham.  Mr Cheetham taught Mr Elliott how to work with fibreglass.  After a time he became Mr Cheetham’s foreman, responsible for inspecting the coating of commercial floors to make sure the work had been done properly.

1. In about 1997 or 1998, Mr Elliott was informed by Mr Cheetham that he had purchased three damaged pool moulds from the Northern Territory that he planned to fix up and use to make fibreglass pool shells for sale in Adelaide.  The three moulds were for pool shell designs or models known as the Spartacus, the Paradise and the Kingfisher.  Mr Elliott ended up purchasing those moulds from Mr Cheetham.  He and Ms Hlavacek borrowed $60,000 to buy the moulds, together with a crane to move them and the equipment necessary to fix them.

2. Mr Elliott arranged for ASA Manufacturing to be incorporated on 21 July 1998 in order to operate his business of manufacturing and selling fibreglass pools and spas.[2]  The business operated under the trading name ‘Adelaide Pools and Spas’.

   [2]    Its name upon incorporation was Adelaide (SA) Pools & Spas Pty Ltd.  Its name was changed to Adelaide (SA) Pools & Spa Manufacturing & Installation Pty Ltd on 26 July 2006.

3. For a few months, ASA Manufacturing manufactured pool shells from the moulds purchased from Mr Cheetham, and sold them wholesale to a nearby retailer by the name of Blue Water Pools & Spas.  However, Mr Elliott came to realise that the moulds were not in as good condition as he had assumed.  The significant cost and effort associated with making pool shells from the moulds meant that ASA Manufacturing was left with a low profit margin.

4. Mr Elliott became aware of an opportunity to purchase a pool shell from a pool manufacturing company in Perth named Buccaneer Pools that had gone into liquidation.  He purchased a Pompeii 7[3] shell with a view to using it as a ‘flop’ to make a mould from which ASA Manufacturing could then make its own pool shells.[4]   This pool shell, and the right to make a mould from it in South Australia, cost ASA Manufacturing $35,000, plus the cost of freight to Adelaide.  Upon receipt of this pool shell from Perth, ASA Manufacturing stopped selling pool shells to Blue Water Pools & Spas on a wholesale basis, and commenced selling and installing the pools that it manufactured from the Pompeii 7 mould.

   [3]    The number that follows the name of a pool shell design indicates the length of the pool in metres.

   [4]    The process of using a ‘flop’ to make a mould is described later in these reasons.

   Accounting advice from Mr Formichella

5. I have mentioned that Mr Elliott only attended school through to the end of year 10.  While it was apparent to me from his evidence that Mr Elliott is an intelligent person, and the evidence establishes that he was a skilled manufacturer of fibreglass pools, I accept his evidence that he had limited knowledge or understanding of matters related to the running of a business, including matters of an accounting, legal and insurance nature.  As will be seen, he generally sought advice from others in relation to these sorts of matters.

6. One of the people from whom Mr Elliott obtained advice was his accountant, Mr Formichella of BCFR.  I have given an overview of his role earlier in these reasons which I need not repeat.

   Personal insurance

7. Frank Granozio was a financial planner who operated his business from premises adjacent to where Mr Formichella and BCFR operated their business.  While also badged as BCFR, Mr Granozio’s business operated independently from Mr Formichella’s.

8. Mr Granozio had been Mr Elliott’s financial advisor since 1998.  In about 2002, Mr Elliott asked Mr Granozio to review his personal insurance needs, and in particular his income protection, business overhead, life, TPD and trauma insurance requirements.  Mr Granozio thereafter advised Mr Elliott in relation to these matters and arranged the relevant cover.

9. Mr Granozio’s evidence, which I accept, was that during the period prior to the fire that he was acting for Mr Elliott, Mr Elliott never instructed him to obtain a policy based on premium rather than the appropriateness of the cover; never rejected his advice or recommendations; and never questioned or complained about a premium that he quoted.  He said that the only concern that Mr Elliott ever expressed to him was to make sure that he had appropriate insurance, both in terms of the risk covered and the levels of the cover.

   Acquisition of the Burton factory

10. Having enjoyed some success in selling and manufacturing pools through ASA Manufacturing, Mr Elliott decided in 2002 that the business required larger premises.  In part this was because of the volume of work that the business was already generating, but also in part because Mr Elliott wished to expand the business by increasing the number of pools that it manufactured and sold.

11. In 2003, Mr Elliott identified the Burton factory as a suitable premises, and arranged for ASA Manufacturing to commence renting it, with an option to purchase it.

12. On 19 June 2003, Mr Elliott caused TEE to purchase the Burton factory, and by a written lease dated 14 August 2003, TEE leased it to ASA Manufacturing for a period of five years, with two rights of renewal for five years.

13. Mr Elliott purchased the Burton factory in the name of TEE upon the advice of Mr Formicella.  Indeed, he had incorporated TEE, and established his family trust with TEE as the corporate trustee, upon the advice of Mr Formichella.

14. The Burton factory had been purpose-built in the late 1980s for fibreglass manufacturing. The factory was steel framed, with iron clad construction, and had a floor area of about 1,000 m² (the factory being about 50 m long by 20 m wide).  The building had a concrete floor, with large sliding doors at the eastern and western ends where pools could be moved in and out of the building by crane. Located on the northern side of the building was a store for retaining flammable materials used in the pool manufacturing process.  It had a sawtooth roof, which allowed ventilation, and which would catch the cooler south-easterly winds, but not the hot northerly winds.  In addition to this natural ventilation, the factory was fitted with industrial ceiling fans.  The fans helped remove the toxic and flammable fumes generated by the pool making process. 

15. The Burton premises also included a detached administration or office building.  It was also steel framed, with iron clad construction, but had a significantly smaller floor area of about 120 m².

16. The business performed well enough following the acquisition of the Burton factory for the debt that TEE had incurred in making that acquisition to be repaid within about a year.  The business continued to grow, and by about 2006 ASA Manufacturing was making and selling in excess of 200 pools each year.

17. A couple of years before the fire, ASA Manufacturing rented an additional parcel of land immediately adjacent to the Burton factory.  It used this land to store pool shells.

    Pool moulds

18. The process by which pool and spa moulds were manufactured was time-consuming and expensive.  Each mould took about three months to manufacture, and once completed was an item of considerable value. 

19. By the time of the fire, ASA Manufacturing had accumulated about 17 moulds of various sizes and designs.  It was in the process of making replacement moulds for the Coral Sea 7 and Fijian pool shells, and the Hawaiian spa shell, as the existing moulds for these designs had reached the end of their lives.

20. ASA Manufacturing used two methods to manufacture its moulds.  The first involved making the mould from a ‘plug’.  This involved Mr Elliott conceiving the design for the pool, and then having a plan drawn up and a three-dimensional version made in timber by a pattern maker.  This process cost between about $30,000 and $40,000.  The pool mould would then be made inside the wooden pattern.  This process cost an additional amount of between about $50,000 and $60,000 on account of the materials and labour involved.  The tooling gel and resin used to manufacture the moulds was more expensive than the gel and resin used to manufacture the shells.

21. The other method by which ASA Manufacturing made moulds involved the use of a ‘flop’.  A flop is a pool shell which is manufactured with about three times the usual stiffness of a pool shell.  This stiffer structure could then be used to make a mould.  Obtaining a flop involved reaching an agreement with another pool manufacturer who had a pool model that Mr Elliott wished to use.  Usually the agreement would need to be with an interstate manufacturer, as a local competitor would be unlikely to be prepared to enter into such an agreement with one of its direct competitors.   

22. Of the 17 or so moulds owned by ASA Manufacturing at the time of the fire, only two were made from plugs.  The rest were made from flops.

23. A flop could also be obtained by purchasing it.  The only flop which ASA Manufacturing purchased was for the Pompeii 7, which it was able to purchase cheaply from the liquidator of Buccaneer Pools.  Generally they were too expensive to purchase.  The other way in which a flop could be obtained was through a swap, or exchange, of flops with another company. 

24. In the period leading up to the fire, some of the pool shells being offered for sale by ASA Sales were manufactured by Conquest Pools in Victoria, rather than ASA Manufacturing.  In particular, Conquest Pools made a range of pool shells known as the Centurian 7, 8, 9, 10 and 11.  Initially, Mr Elliott bought some of each of these pool shells from Conquest Pools, and sold them to his customers in South Australia.  However, as the Centurian 7, 8 and 9 were the more popular designs, Mr Elliott arranged with Conquest Pools to swap moulds of these three Centurian pools for three of ASA Manufacturing’s moulds.  While ASA Manufacturing was thereafter able to manufacture its own Centurian 7, 8 and 9 pools, it continued to purchase Centurian 10 and 11 pools from Conquest Pools (albeit at the rate of only about one pool per month).

    Manufacturing pools

25. I accept the evidence of Mr Elliott that the manufacture of fibreglass pools involves the application of considerable skill and experience.

26. The processes involved in the manufacture of the moulds and shells were standard throughout the industry, but needed to be applied with care and precision.  There was very limited margin for error in the mixing of resin and glass, in the application of the various chemicals involved in the various processes, and in the removal of the shells from the moulds.  The ratios of the materials used needed to be precise, and were sensitive to both temperature and humidity.  The chemicals were very expensive, and errors in the manufacturing process might result in not only the wastage of those chemicals, but also damage to the relevant mould. 

27. If a mould was damaged, such as by being scratched or torn while a shell was being removed, it might take weeks to repair and hence result in a significant loss of production.  Mr Elliott estimated that the cost of repairing a mould could vary enormously from a few hundred dollars up to tens of thousands of dollars.  Even when repaired, the pool moulds were often inferior in quality.

28. The production process needed to be carefully timed.  As soon as a pool shell was taken from the mould, it was necessary to start using that mould to make a new shell in order to prevent the mould from gathering dust.  If dust were permitted to gather it could create problems, and risk causing damage to the mould, when it came to taking the pool shell off the mould.

29. Skill and experience were also required in the installation of the pools to ensure that the pools were perfectly level, and to ensure that the area around the pools was properly filled so that the pool shells would not bulge.

30. Over the years, Mr Elliott had developed a team of staff skilled in the various manufacturing and installation processes.  The manufacturing team was led by Frank Cava.  He was a contractor rather than employee.  He was regarded by Mr Elliott as having particular expertise, and was paid more than the other manufacturing staff.  Mr Cava had previously worked in a similar role at Freedom Pools, but had a good relationship with Mr Elliott and so had agreed to work for him.

    SPASA

31. In about 2004, Mr Elliott joined the Swimming Pool & Spa Association of South Australia Inc (SPASA), which was an association of not only fibreglass pool companies, but also concrete pool companies, pool services suppliers and pool heating suppliers.

32. In 2006 Mr Elliott became the Vice President of SPASA, and in 2009 he became the President.

33. SPASA kept records of the number of pool installations by its members in South Australia, as well as other information about the industry.  The evidence was to the effect that, as at 2009, the ASA Group was selling slightly less than 20 per cent of the pools installed by SPASA members, which in turn represented about 80 per cent of the market for the installation of residential pools in South Australia.

    Establishment of ASA Sales

34. In 2006, and on the advice of Mr Formichella, Mr Elliott arranged for the incorporation of ASA Sales.  The rationale for this was that the business had grown to an extent that it would be beneficial to split the business into its component parts, with ASA Manufacturing to carry out the manufacturing and installation of the pools, and ASA Sales to be responsible for the marketing and sale of the pools.

    H2O and ATPF

35. As the business of pool manufacturing and sales grew, Mr Elliott looked for opportunities to expand into related areas.  It was in this context that he established H2O and ATPF in 2006 and 2007 respectively.

36. Mr Elliott established H2O in October 2006.  He was the sole director and secretary, and owned its only share.  H2O was the trustee of the H2O Solar Solutions Trust.  It was Mr Formichella who advised Mr Elliott to adopt this legal structure, and who attended to the formalities of establishing it.

37. Mr Elliott established H2O with a view to commencing a business that would sell pool accessories such as solar heating and pool blankets; and that would provide services following the installation of a pool, including not only the usual work to be done at the point of handover, but potentially also ongoing pool maintenance. 

38. In July 2007, H2O registered H2O Pool Solutions as a business name, and commenced providing pool handover services.  During 2009, Mr Elliott took some steps to establish an internet presence and email address for H2O, and to arrange for some advertising, including putting H2O Solar Solutions logos on the H2O van. However, by the time of the fire Mr Elliott had not managed to develop the ongoing pool maintenance business that he hoped to establish. 

39. Mr Elliott’s intention had been that H2O would ultimately operate from the Display Centre (see below) once it was up and running.  He anticipated establishing a retail shop from that location, and using it to develop the pool maintenance business.

40. Mr Elliott established ATPF in November 2007 with a view to establishing a business providing temporary pool fencing.  He was the sole director and secretary, and owned all of the shares in ATPF.

41. It was a legislative requirement to fence off the area of the hole that was being dug for the installation of a pool, pending the erection of permanent pool fencing after the pool had been installed.  Mr Elliott’s practice had been to hire this temporary fencing from other companies.  However, it was a significant expense, and Mr Elliott saw a business opportunity in providing this fencing.  He designed some compliant fencing, and arranged for it to be made for use by ATPF in its business.  The idea was that ASA Manufacturing could then hire this temporary fencing from ATPF.  It could also be supplied by ATPF to other people or companies requiring temporary fencing.  By 2009, Mr Elliott had commenced advertising ATPF’s temporary fencing, and had engaged his father as the contractor to install the fencing for ATPF at a daily rate. 

42. It is fair to say that as at the date of the fire that destroyed the Burton factory, the businesses that Mr Elliott hoped to establish and build through H2O and ATPF were still at a relatively embryonic stage.  They were not progressed any further after the fire.

43. H2O and ATPF were deregistered by ASIC pursuant to s 601AB of the Corporations Act 2001 (Cth) in March and April 2014 respectively; however, both had been re-registered by the time of the commencement of these proceedings.

    ASA Glass Fencing

44. In 2007, Mr Elliott was introduced to a Mr McGee who operated a business in Queensland that imported glass from China.  Mr Elliott saw an opportunity to import glass with a view to making pool fencing that he could sell and install as part of the ASA Group’s business.

45. It was in this context that Mr Elliott arranged through Mr Formichella to establish ASA Glass Fencing Pty Ltd (ASA Glass Fencing).  It was initially mistakenly registered as ASA Fencing Pty Ltd in June 2008, but its name was corrected to ASA Glass Fencing Pty Ltd in September 2010.  Mr Elliott was the sole director and shareholder.  Mr Elliott was originally the sole shareholder of the company’s ten issued shares, but Mr Formichella then arranged for these shares to be transferred into the name of Mr Elliott’s father (but on the basis that he held them for Mr Elliott).

46. After the establishment of this company, Mr Elliott and Mr McGee collaborated in importing glass from China by sharing the containers in which it was imported, and the expenses associated with its importation.  By the time of the fire, ASA Glass Fencing had sold and installed a few glass pool fences, but according to Mr Elliott this business “had not really got going yet”.  His plan had been to “ramp it up” once the Display Centre opened and he was able to put some of his glass fencing on display and sell them on a retail basis.  He also thought it would be able to supply glass pool fencing on a wholesale basis to other SPASA members.

47. Mr Elliott explained in his evidence that when he engaged Mr Della Porta (see below), he was advised by Mr Della Porta that he was trying to do too much, and that he should concentrate on the main pool manufacture, sales and installation businesses, and put his glass fencing business on the back burner “until we could work out costs and profitability and whether it was worth putting time and energy into it.”

48. ASA Glass Fencing was deregistered by ASIC pursuant to s 601AB of the Corporations Act in October 2013, but was subsequently reregistered.

    Purchase of the Display Centre and Tait Street

49. In 2007, Mr Elliott purchased a property on the corner of Torrens Road and South Road in Renown Park, which he intended to use as a display centre for the ASA Group’s business (the Renown Park property or the Display Centre). For the reasons explained below, he also purchased an adjacent property that fronted Tait Street (the Tait Street property).  The combined purchase price was $1.3 million, being $1.1 million for the Display Centre property and $200,000 for the Tait Street property.

50. On the advice of Mr Formichella, Mr Elliott arranged for these properties to be purchased in the name of TEE.  They were purchased with the assistance of finance provided by BankSA.  The documents in connection with that finance indicate that the bank’s approval was conditional upon, amongst other things, a valuation of the Burton factory premises at $800,000.

51. Mr Elliott had noticed that the property in question was vacant, even though it was not on the market.  It had previously operated as a car dealership, and it had a small building suitable for offices and meeting with customers, as well as a large allotment of land that Mr Elliott thought could be used to display pools.  While the office building would require considerable renovation, and it would involve significant work to install the display pools in the yard and pave the balance of the yard, Mr Elliott was keen to purchase the property with a view to developing it into a showroom or display centre for the ASA Group’s pools, as well as an office and meeting area from which the sales side of the business could be conducted.

1. There was also a significant shed on the property where Mr Elliott envisaged being able to store pool chemicals with a view to also being in a position to sell these products from the Display Centre.  He thought it would be an advantage to have this storage area at the Display Centre because there were dangerous substance regulations that placed some restrictions upon the ability to store certain quantities of these pool chemicals at the Burton factory.

2. Mr Elliott considered that an advantage Freedom Pools (his largest competitor in the Adelaide market) had over ASA Group was that it had a display centre.  While there was a modest office building at the front of the Burton factory, it was very basic and those premises were not suitable for establishing a display centre.  Mr Elliott believed that the ASA Group needed a display centre in order to grow its business and to compete with Freedom Pools.

3. Adjacent to the Display Centre was a car park.  While he had initially assumed this was on the same title as the Display Centre when negotiating its purchase in February 2007, Mr Elliott came to appreciate that it was in fact part of the adjacent Tait Street property, and that there would need to be a rezoning to permit the use of that car park for the purposes of the Display Centre. BankSA was prepared to provide Mr Elliott with the additional $200,000 that he needed to purchase the Tait Street property, but on condition that Mr Elliott arrange for the boundary to be shifted, and certificates of title amended, so that the car park would form part of the Display Centre rather than the Tait Street property.  Mr Elliott agreed to this condition, and so was able to settle on the purchase of the properties in late March 2007.  And, as required, he attended to the contemplated rezoning and boundary realignment with the assistance of a conveyancer.

   Renovation of the Display Centre

4. Mr Elliott did not commence the process of renovating the Display Centre until the first half of 2009.  He engaged an architect, Damian Campagnaro of DC Architects, to prepare the plans and obtain the necessary approvals for the renovations.  While Mr Elliott initially envisaged that the renovated Display Centre would be opened in mid-2009, this was delayed. 

5. The delay coincided with the advice Mr Elliott received from Mr Della Porta (see below) to the effect that he should do a budget and timeline for the Display Centre before proceeding further with it.  Consistently with this advice, Mr Elliott held off advancing the renovations while Mr Della Porta helped him with these tasks.  A budget and costing were prepared in late July 2009.

6. In the second half of 2009, Mr Elliott resumed the renovations of the Display Centre.  He installed seven of his most popular pool shells as display pools in the yard of the Display Centre.  He arranged for Mr Campagnaro to design a rotunda for the yard.  He also advanced the renovations of the office area.  He purchased new computers and a new server for the Display Centre, and arranged for the transfer of data from the old server that was located in the offices at the Burton factory.  By mid-December 2009, the new computer system at the Display Centre had been set up. 

7. Mr Elliott’s plan was that most of the office staff would work from the Display Centre.  In late December 2009 or early January 2010, he hired Wayne Millsteed to take on the role as the Display Centre Manager.

8. However, even by the time of the fire, the renovations had still not been completed.  There was still work to be done in the office area, and the paving of the yard was yet to be completed.  Mr Elliott expected to be in a position to complete and open the Display Centre in either late February or March 2010.

9. As described below, Mr Elliott did manage to complete the renovation of the Display Centre after the fire.  However, he had to take out the display pools he had installed in 2009, and install samples of the different pools that he had acquired from Western Australia.

   Expansion plans

10. At the time of the fire, while seven or eight moulds might have been in use in the manufacturing of pool shells within the Burton factory at any given time, the factory was operating at a capacity of two pool shells a day.  The ASA Group was thus manufacturing and installing in excess of about 200 pools per year; however, Mr Elliott had plans to grow the business, and believed that he could ultimately achieve a capacity of up to 500 pools per year from the Burton factory.

11. During 2009, Mr Elliott was in the process of developing his own gelcoat for application to the pool shells that he made.  He had engaged a chemist employed by the supplier of the gelcoat generally used on the pools made by ASA Manufacturing.  Mr Elliott’s intention and expectation was that the gelcoat would be called ‘KleerBright’, that it would be supplied exclusively to ASA Manufacturing, and that it would be more impervious to water, less prone to blister, less prone to colour fading and more fungal resistant than the other equivalent products that were available in the market.  Mr Elliott’s expectation was that, once developed, the availability of this gelcoat would be superior to the PCG coating used by the Perth company, Aquatic Leisure Technologies Pty Ltd (see below), and would enable him to give 25 year or lifetime warranties on the pools he sold.  Prior to the fire, he had contacted a patent attorney to start the patent process; however, the fire put an end to the process of developing the gelcoat.

12. Mr Elliott also had other plans for the development and expansion of his pool manufacturing business.  In 2009, he designed and made a lap pool mould.  As it involved a unique design with a ‘wet deck’ and concealed gutter (which did away with the need for a skimmer box), he was looking at obtaining a patent over it.  Given the technical difficulty associated with its design and manufacture, Mr Elliott intended to sell the lap pool at a premium price.  To that end, he had already arranged for a lap pool shell to be installed at the Display Centre at the time of the fire.  The plug for the lap pool was sitting in the yard at the Burton factory.

13. Mr Elliott had also begun to have some discussions in relation to the possibility of exporting pool shells.  Some of the other larger pool manufacturers in Australia were already exporting pools, and Mr Elliott’s understanding was that there was a significant export market in which his business might participate.

    Advice and assistance from Mr Della Porta

14. Mr Elliott’s interest and skills lay primarily in the technical and practical side of his pool manufacturing and sales business, rather than the management side of that business. 

15. By his own admission, Mr Elliott was “not very good at the paperwork and the everyday ‘nitty gritty’ management of business, or at the office and record-keeping systems … or at keeping track of expenditure, budgeting and keeping separate records for each of the businesses.”  Mr Elliott tended to regard all of his business activities as part of one overall business that he owned, without regard to the separate entities or businesses, and their individual financial positions and performance.  As he also acknowledged, he had “no real systems in place for the staff and me to follow to make everyone accountable and track what we were doing.”

16. Mr Formichella had come to appreciate some of Mr Elliott’s limitations in terms of management skills.  In about May 2009, he advised Mr Elliott that he should seek help managing his businesses, and introduced him to Mr Della Porta.  Mr Della Porta was an experienced business consultant, who Mr Formichella envisaged would be able to advise and guide Mr Elliott.

17. Mr Elliott took Mr Formichella’s advice, and engaged Mr Della Porta as a consultant to give him some guidance with the management of his businesses, and in particular in setting up appropriate procedures to enable him to better understand and monitor the position and performance of his businesses, to identify and eliminate inefficiencies and wastage in those businesses, and to expand and grow those businesses.

18. Throughout the period from around May 2009 until the fire, Mr Della Porta and Mr Elliott met regularly to discuss the management of the ASA Group’s businesses.  Mr Della Porta spent significant time familiarising himself with the way in which those businesses operated, and providing Mr Elliott with advice and recommendations as to various steps he could take, and procedures that he could put in place, to assist and improve his management of those businesses.  Mr Della Porta also assisted Mr Elliott’s implementation of his advice and recommendations through the creation of a checklist, the provision of follow-up emails, and regular meetings or discussions between the two of them to monitor the progress of the items in the checklist and emails.  

19. Mr Della Porta provided Mr Elliott with monthly invoices in which he charged an hourly rate for the work done in the preceding month.

20. The applicants adduced a significant amount of evidence as to the various areas of the businesses in which Mr Della Porta provided advice and suggestions, and the numerous communications with Mr Della Porta designed to monitor and progress the implementation of his advice and suggestions.  The following is a summary of some of the topics on which Mr Della Porta provided Mr Elliott with advice and suggestions:

    ·Office systems.  Mr Della Porta assisted Mr Elliott to introduce a number of procedures designed to improve the operation and functioning of the office systems, both in terms of streamlining and standardising the processes, as well as ensuring that Mr Elliott had control over, and access to information about, the operation of his businesses.  These included the introduction of procedures to ensure that all expenditure was authorised by two people (with Mr Elliott being one of those people); to ensure that all incoming mail was stamped on receipt and entered into the office system; to ensure that all insurance, legal and other important documentation was filed appropriately; to facilitate the authorisation and payment of invoices; to ensure that expenses were allocated between the various entities and jobs, and that an accurate description of the expenses was captured to assist the preparation of accounts; to maintain a register of cheques; to manage the absence of staff members, and the sharing of tasks and information between staff; to progress towards a paperless working environment; and to receive and respond to customer complaints and feedback.

    ·Employee policies.  Mr Della Porta assisted Mr Elliott to prepare and put in place an employee leave policy, as well as forms to apply for leave and make expense claims.  He also assisted Mr Elliott to introduce a policy to address the significant overtime that was being paid to employees, essentially requiring that employees obtain Mr Elliott’s approval before working overtime.

    ·Bonuses and commissions. Prior to the involvement of Mr Della Porta, Mr Elliott had been paying his sales staff bonuses based upon the number of pools they sold, regardless of the contract price.  Mr Della Porta assisted Mr Elliott to devise a new system that involved setting a monthly sales budget, with a fixed bonus dependent upon the sales staff meeting that budget and a percentage commission payable on sales in excess of that budget.  The new system was also structured so as to incentivise sales without doing so at the expense of the contract price.  This system took some time to discuss with the sales staff, fine tune and then put in place.  It was ultimately implemented in November 2009, but with retrospective effect from July 2009.  At around the same time, and again on the advice of Mr Della Porta, Mr Elliott also introduced a system for the payment of bonuses to manufacturing staff.

    ·Sales staff training. Mr Della Porta also persuaded Mr Elliott to arrange for some training for his sales staff, with the idea being to improve their ability to make sales without having to compete or compromise on price.  Mr Della Porta recommended Gordon Smith of Thoneman Pty Ltd as someone with expertise in this area.  Mr Elliott retained Mr Smith to assist in various ways during the second half of 2009, including in undertaking a questionnaire and assessment of the sales staff, conducting a training seminar for the sales staff, providing some subsequent ongoing telephone training or assistance for those staff, arranging some conferences for the sales staff to attend, and assisting in the recruitment of sales staff.

    ·Dealings with staff. Mr Della Porta gave Mr Elliott some general advice and tips in relation to his dealings with staff members.  He arranged for a survey of the staff, the responses to which led Mr Elliott to appreciate that he needed to be more available to his staff.  On the recommendation of Mr Della Porta, Mr Elliott commenced to hold regular meeting with the staff in order to enable them to raise any problems they were having, to ensure those problems were dealt with, and to monitor the progress of their work and make them more accountable for their performance.  Minutes were kept of these meetings.

    ·Employee contracts. Mr Della Porta assisted Mr Elliott to arrange for each of the employees to enter into written employment contracts.

    ·Sub-contractors. On the recommendation of Mr Della Porta, Mr Elliott decided to stop employing people to carry out the pool installation work, and to use a subcontractor (PoolCo) to undertake that work at a fixed price.  Mr Elliott implemented this change in December 2009, on the basis that he agreed that it would incentivise the efficient installation of the pools. 

    ·Branding and advertising.  Mr Della Porta gave Mr Elliott some advice about branding and advertising.  While Mr Elliott’s evidence was that this led to him undertaking some advertising for H2O and ATPF, and obtaining some new business cards, letterheads and ‘with compliments’ slips for ASA, the advice to Mr Elliott was generally to the effect that if he was going to spend money on advertising he needed to have “the facts to support its efficacy”.

    ·Financial oversight.  Mr Della Porta gave Mr Elliott advice about various aspects of the financial oversight of his business.  This included advice to assist him (in conjunction with Angie Presland) to monitor creditors.  It included assisting Mr Elliott to prepare a sales budget.  It also included advising Mr Elliott to undertake a review of his and the ASA Group’s overall assets and finances, and, in conjunction with Mr Formichella, assisting him with the refinancing with BankSA that occurred in late 2009.

    ·Stock and wastage.  Mr Della Porta also gave Mr Elliott advice to the effect that he should try and reduce the amount of stock of both pool shells and chemicals that he had on hand given that this was a drain on working capital.  He discussed with Mr Elliott steps that could be taken to avoid pool shells being manufactured too long ahead of installation, or indeed ahead of sales; and steps that could be taken to minimise the wastage of the expensive chemicals used in the manufacture of pools.

    ·Insurance.  Mr Della Porta advised Mr Elliott to follow up his income protection insurance, and to keep it separate from his business insurance.  According to Mr Elliott, he recalled Mr Della Porta advising him to get a second quote for his insurance.  He said that he understood this to mean that he should make sure that Mr Olbrich got quotes from more than one insurance company, as opposed to any suggestion that he should get a quote from a second insurance broker.  Certainly he did not get any other quote for his business insurance.  He did not ever ask Mr Iadarola to provide a quote for business insurance.

    ·The Largs Bay property.  Mr Elliott had been undertaking much of the renovation works on this property himself.  Mr Della Porta advised him to borrow the money necessary to retain contractors to finish the renovations, with a view to not only completing the renovations so that Mr Elliot and Ms Hlavacek could move into their Largs Bay property and commence developing the North Haven property, but also so as to free up Mr Elliott to concentrate on his businesses, and to attend to the completion of the Display Centre.

21. By the time he came to give evidence, Mr Della Porta had difficulty remembering any of the detail of his dealings with Mr Elliott in the period leading up to the fire (and, indeed, in the period after the fire).  While he was able to recall discussions with Mr Elliott about a number of the topics outlined above, he could not recall the detail or content of those discussions and could not add much at all to the contemporaneous record of their communications. 

22. In giving his evidence, Mr Della Porta was keen to emphasise the nature of his role, which he saw as one of assisting Mr Elliott to put in place practices and procedures that would enable him to better understand his business operations, and thus empower him with greater information and control to make decisions that would improve the performance of his businesses.  He emphasised that he did not regard himself as having any role in making or participating in decisions about Mr Elliott’s businesses.  As Mr Della Porta said several times in his evidence, he did not have any expertise in pool manufacturing and sales, and did not purport to be in a position to advise Mr Elliott about his business operations per se.  His advice and assistance was more in relation to management techniques intended to assist Mr Elliott in making decisions about those business operations.

23. I accept Mr Della Porta’s general characterisation of his role, albeit that I also accept – particularly from Mr Elliott’s perspective – that there was likely a grey area between assisting and advising as to management processes and techniques, and assisting and advising Mr Elliott in relation to the decisions he made on the basis of the information obtained through those processes and techniques. 

24. Ultimately, I do not think it matters much precisely how Mr Della Porta’s role is defined.  On any view, it is clear that in the second half of 2009 Mr Elliott embarked upon a process of improving the management of his businesses, and that he had taken steps to put in place a number of changes in the areas I have outlined above.

25. According to Mr Elliott, even by the end of 2009, he had noticed that the changes he made based on Mr Della Porta’s advice had made his businesses “much more streamlined, efficient and profitable”.

26. Mr Della Porta’s evidence was less definitive in assessing the progress that had been made by the time of the fire.  While agreeing that a number of steps had been taken, it would seem that he regarded his task as much more of a ‘work-in-progress’.  He described Mr Elliott as someone who was keen to learn more about how to manage his businesses, but at the same time Mr Della Porta also conveyed in his evidence the impression that he considered Mr Elliott to be someone who was taking a while to grasp some aspects of what was required.  Mr Della Porta also said that he had encountered some resistance from staff members – particularly Ms Presland – in the implementation of the processes and procedures he had recommended that Mr Elliott put in place.  He accepted that the success of his recommendations was to some extent reliant upon achieving ‘buy-in’ from the staff, and that this was something that he and Mr Elliott were still working to achieve at the time of the fire.

27. While I accept that Mr Della Porta’s involvement led to a number of improvements in Mr Elliott’s management of his businesses, and that over time these would likely have led to some improvement in the financial performance of those businesses, I also accept Mr Della Porta’s evidence to the effect that these improvements were still a work-in-progress at the time of the fire.  It is difficult to predict the extent to which they would ultimately have improved the financial performance of the businesses.

    PART C: EVENTS AFTER THE FIRE

1. Given my earlier conclusions as to the breaches of the general duty owed by Mr Olbrich, it follows that Mr Olbrich breached the duties of care he owed to TEE and Mr Elliott.

   Loss claimed by TEE

2. Focusing upon the articulation of TEE’s loss in the applicants’ closing address,[133] the primary loss claimed by TEE is the loss of its value as at the date of the fire.  TEE claims an amount of $780,000.[134]

   [133] In particular in section 6 of the Quantum Calculations provided by the applicants.

   [134] Subject to the concession referred to below that there was an overlap of about $300,000 between this aspect of the claim, and the claim of the named insured for additional insurance proceeds.

3. I will commence by addressing the value of TEE as at the date of the fire.  I will then consider its recoverability.  I will then address TEE’s further claim for the loss it suffered by reason of being deprived of the subsequent increases in the value of the properties owned by TEE as at the date of the fire (namely, the Burton property, the Display Centre and the Tait Street property).

   The value of TEE as at the date of the fire

4. In his first report, Mr Cooper undertook a valuation of TEE as at the date of the fire.  As its value lay primarily in its real estate assets, he considered it appropriate to value it using the ‘assets approach’.  There is no challenge to the appropriateness of this valuation methodology.

5. When initially undertaking a valuation of TEE, Mr Cooper did not have the benefit of the valuations that were later carried out by Mr Bruce of the three properties owned by TEE.  He thus based his figures for those properties on other information available to him at the time.  He subsequently revised his figures to reflect Mr Bruce’s valuations of those three properties.

6. Mr Cooper ultimately arrived at a figure of $918,100 for the value of TEE as at the date of the fire.

7. This figure included values of $965,000 for the Burton property, $1,280,000 for the Display Centre, and $280,000 for the Tait Street property.  The first two values were based upon valuations carried out by Mr Bruce; the third value was based upon a Mason Gray Strange valuation.  During the course of the trial, the parties agreed certain market values for these properties:  namely, $1,150,000 for the Burton property as at 10 December 2012 (assuming the reinstatement of the improvements); $910,000 for the Display Centre as at 1 January 2013; and $327,500 for Tait Street as at 1 May 2013.  Noting that the total of these values was $137,500 less than the total of the valuations used by Mr Cooper, TEE reduced its formulated claim in respect of the loss of the value of TEE as at the date of the fire by $137,000, reducing the claim from $918,100 to a rounded $780,000.

8. While these agreed values were as at dates later than the fire, given the approach adopted by TEE in its formulated claim, I consider it appropriate to use the figure of $780,000 as the claimed value of TEE as at the date of the fire.

9. Putting the recoverability of this loss to one side, the only challenge to this figure by the respondent was that it did not take account of the related-party liabilities that had appeared in TEE’s accounts as at the date of the fire.  Mr Cooper excluded those liabilities from his assessment of value; Mr Morris’s opinion was that they should be included, reducing the value of TEE by $500,552.

10. The related-party liabilities of $500,552 that appeared in the accounts reflected loans from Mr Elliott ($163,107) and members of his family (Ms Hlavacek ($321,633) and their two children ($7,109 each)).

11. Mr Cooper reasoned that, on the assumption that they did not relate to the funding of assets acquired by TEE, but rather were beneficiary loan accounts, they were properly to be excluded from the valuation exercise. 

12. Mr Morris took issue with this approach.  In his report, he explained that his review of the tax returns of the trust of which TEE was the trustee indicated that the liabilities to Ms Hlavacek and the children appeared to represent distributions from the trust that were not paid to them.  The position was not as clear in the case of the liability to Mr Elliott, as he had not received any distributions in the two preceding financial years.  The fluctuations in his loan account appeared to represent other monies advanced by Mr Elliott to the trust. 

13. In any event, Mr Morris took the view that these liabilities represented obligations of the trustee that were to be met out of the assets of the trust.  Hence, in his view, the net asset value of TEE must be measured net of those obligations.

14. In his reply report, Mr Cooper maintained his approach of excluding the related-party liabilities.  Noting that Mr Morris’ report indicated that he would include related-party liabilities in the valuation regardless of whether or not they related to the funding of assets, he argued that this was inconsistent with what he described as generally accepted principles for valuing businesses.  He relied in this respect upon the following passage from Wayne Lonergan’s text on the valuation of businesses:[135]

    Excess liabilities are frequently financed by shareholders’ loans, or shareholders giving security over their private assets to secure debts of the company.  An appropriate portion of these shareholders’ loans and excess borrowings should be treated as de facto equity in order to determine the appropriate level of net assets invested in the business.  The value of equity assessed on a ‘normalised’ debt/equity ratio should then be adjusted for the value of excess liabilities.  This does not necessarily affect the value of net assets or the priority of distribution in an orderly realisation valuation scenario.  However, it may affect an earnings based valuation scenario due to the effect of excess interest charged.

    [135] Lonergan W, The Valuation of Businesses, Shares and Other Equity, 2003, 4^th ed, Allen & Unwin, p116, although noting that Mr Cooper did not included the last two sentences of this passage in his report.

15. In Mr Cooper’s view, the related-party liabilities appearing in TEE’s accounts were properly characterised as ‘excess liabilities’ of the type contemplated in the above passage.

16. In their oral evidence, both Mr Cooper and Mr Morris adhered to their competing views set out above.  Mr Cooper gave the following elaboration upon his reasoning in relation to the related-party liabilities:[136]

    [136] T1250-1251.

    Q.  And the net assets would normally deduct, wouldn’t they, the related party liabilities.

    A.  Looking at the net assets you would certainly do that, but when you’re preparing a valuation the leading texts as I mentioned in my report is that they are not always included.

    Q.  So your election to including them was that a function of an assumption or an accounting judgment.

    A.  To exclude them?

    Q.  Yes, exclude.

    A.  Certainly is an exercise in my judgment, that I had regard to the leading texts on valuations, and also the fact that those related-party liabilities appeared to be non-core liabilities of the business.

    HIS HONOUR

    Q.  What’s the logic for excluding them, is it that you can break up and sell the assets and just leave the related liabilities sitting there, or what’s the rationale for excluding it.

    A.  Yes, you’re quite right, your Honour, the assets could be sold and the liabilities, external liabilities paid and the related party loan holders could forgive their loans or just have them sitting in the structure, that’s one reason.  Another reason is that it often arises particularly in a trust situation where there has been an allocation of profits over the years, but the beneficiaries don’t draw down on those distributions, they leave them in the balance sheet, in the trust so to speak and sit there as liabilities of the trust.

    Q.  So that’s why they are there, why are they not, what’s the rationale for not including them in a valuation exercise.

    A.  Because in my view they don’t relate to the value of the business or the assets in this case, the assets could be sold, external liabilities paid and in my view that’s how it should be treated for valuation purposes.

17. Mr Morris did not accept that the exclusion of the related-party liabilities was appropriate in the present situation.  In so opining, he distinguished between valuing the assets that might be sold off and the equity of the entity.  He said:[137]

    A.  … the value of the equity of the entity that’s there is the amount net of those liabilities.  If one’s hypothesising a different … transaction, a transaction of saying ‘Let’s sell the assets of this enterprise’, then value the assets of the enterprise and ignore the liabilities by all means but, if the hypothetical purchaser is buying that enterprise, unless … the creditors associated with the vendor forgive or release their debts, you certainly are not going to end up with a different value.

    Q. …

    A.  I’m troubled with the notion of simply removing them.  Again, my valuation would depend entirely upon what I’m trying to value.  If I’m trying to value the equity … then I don’t think I would remove them.  If I’m trying to value the assets, I’d be looking at the assets, I think we’d [deduct the loan account to the proprietors].

    [137] T1614.

18. Mr Morris later added:[138]

    A.  … the liability we’re talking about is a liability that exists because it’s come from the past from distributing profits.  So the business – this business has got some profits, it’s distributed them but it’s said ‘But you can’t have the profits Mr Beneficiary, I need the profits in the business, so I just have to owe you that’.  I don’t think you can increase the value of the enterprise simply by the stroke of a pen.  And the stroke of a pen seems to be to cross out this liability on the basis that it’s a non-arm’s length liability.

    [138] T1615.

19. I have found it difficult to resolve the difference between the views of Mr Cooper and Mr Morris as to the appropriate treatment of the related-party liabilities.  Doing the best I can, it seems to me that the proper approach to related-party liabilities depends upon the nature and purpose of the valuation task. 

20. If the task is to value the business or enterprise of an entity – in order to determine the price at which it might be exchanged – it would seem appropriate to focus upon the assets and liabilities essential to the running of that enterprise.  Those liabilities (such as the related-party liabilities) that are merely debts owed by the entity, but which are not related to the functioning of the business, and would not form part of any sale, might logically be excluded.

21. However, if the task is one of valuing the entity itself, then it seems to me that it would be difficult to justify excluding what I can only assume are legally enforceable liabilities.

22. That said, having drawn this distinction, it rather begs the question as to the nature of the valuation task in the present case.  In that respect, it seems to me that what the applicants (including TEE) lost in the present case was the value of their business or businesses.  TEE continued to exist, and continued to owe the obligations inherent in the related-party liabilities.  What it lost was its assets and the business of which they formed part.  Looked at in this way, it seems to me that the task required to assess the loss claimed by TEE is more akin to the valuation task underpinning Mr Cooper’s approach.  For that reason, I propose to approach the assessment on that basis.

23. For the reasons set out above, and subject to the double-counting qualification mentioned in the next section of my reasons, I consider that the capital loss suffered by TEE was the $780,000 figure calculated by Mr Cooper.

    Recoverability of the value of TEE

24. In closing addresses, counsel for the applicants acknowledged that there was a double-count in the valuation of TEE.  He noted that the claim for additional insurance proceeds included an amount of approximately $300,000 on account of the replacement value of the Burton factory (being the difference between the replacement value under the policy of slightly in excess of $900,000, and the indemnity value that was paid of slightly in excess of $600,000).  He said that “[w]e would concede we can’t get that $300,000 and at the same time claim an increase in the capital value of Burton on the assumption we would have spent that money on building a factory”.[139]

    [139] T1776.

25. While this concession was not expanded upon, it seems to me that it exposes a greater difficulty in the recoverability of the capital loss claimed by TEE.  In my view, it is an aspect of what I regard as the broader double-counting inherent in the applicants’ claim to recover the loss of the value of their business(es) (as at the date of the fire) in addition to the additional insurance proceeds that they would have recovered had Mr Olbrich not breached his duties to them.  I have explained this broader double-counting, or inconsistency, in the context of my consideration of the named insureds’ claim to recover, as consequential loss, the loss of their business.  In my view, the same difficulty stands in the way of TEE recovering the value of its business. 

26. While the applicants ultimately acknowledged that the additional insurance proceeds would have included, in effect, the price of restoring the Burton factory (and hence the value of the Burton property), it seems to me that the difficulty goes further than this.  To the extent that TEE had a ‘business’, its value was substantially dependent upon the ASA business operated through ASA Sales and ASA Manufacturing.  As such, the additional insurance proceeds represent what would have been necessary to restore not only the ASA business, but also the business, and hence value, of TEE.  Assuming the applicants are to be paid the additional insurance proceeds as damages, I do not think they can also recover the loss of the value of the TEE business. 

27. In so concluding, I do not think it matters that TEE is a separate legal entity from ASA Sales and ASA Manufacturing.  Having approached its case on the basis that there was no need to distinguish between the various entities for the purposes of allocating the insurance proceeds, and that TEE should be treated as if it were a named insured, I do not think TEE can be treated as a separate entity solely for the purpose of avoiding the consequences of the double-counting that would be inherent in a combined or group claim.

28. Having concluded that TEE is not entitled to recover the value of its business, it also follows that it was not entitled to recover the profit stream that it lost.  For the reasons set out in the context of the equivalent claims by ASA Sales and ASA Manufacturing, this limb of TEE’s claim is misconceived.

    Property sales

29. In their statement of claim, the applicants also pleaded loss suffered by TEE on account of the sale of the three properties owned by TEE at the date of the fire (the Burton property, the Display Centre and Tait Street).

30. The essence of the pleaded case was that by reason of their under-insurance, the named insureds defaulted on their loan, resulting in BankSA issuing a notice of default, and ultimately taking possession of and selling various assets, including TEE’s properties.  In particular, the Burton property was sold in December 2012 for $649,000 (resulting in net proceeds to BankSA of $621,800); the Display Centre was sold for $990,000; and Tait Street was compulsorily acquired in May 2013 for $320,000 (resulting in net proceeds to BankSA of $299,904).

31. The applicants further pleaded that TEE suffered loss by reason of the mortgagee sales of the Burton property, the Display Centre and Tait Street, in that were it not for Mr Olbrich’s breaches of duty, TEE would still have owned the Burton property and would have owned the other two properties through to the date of their compulsory acquisition.  As such, TEE lost the ability to earn the rental income it would have earned from those properties while it held them, and also lost the opportunity to benefit from the increase in the value of the Burton property.

32. While the statement of claim pleads various amounts of lost rental, the ‘Quantification Calculations’ document ultimately relied upon by the applicants appeared to confine the claim to the loss of capital value.  Further, to the extent that TEE might have had a claim for any loss of the value of its properties as at the date of the fire, I do not understand such a claim to have been pressed.  In any event, the valuation evidence suggests that the claim formulated in this way would have been an empty one.  The values realised for both the Display Centre and the Tait Street properties were in line with the market values of those properties as at the date they were sold.  Put another way, it cannot be said that Mr Olbrich’s breaches of duty resulted in those properties being lost or sold for less than market value.

33. The same may be said of the Burton property.  While it was sold for less than what it would have been worth had the factory been restored, the applicants acknowledge that the loss of this value is inherent in the insurance proceeds (and additional insurance proceeds) that were (and should have been) paid.  And the evidence does not establish that the property was sold for anything less than its market value without the factory.

34. I do not think that TEE is entitled to recover the increase in value that it might have benefited from if it had held the properties, particularly the Burton property, for longer.  In my view, it is not appropriate in the circumstances of the present case to approach the assessment of TEE’s loss in this way.  A common law claim for loss suffered by reason of the loss (or forced sale) of an item generally falls to be assessed by reference to a comparison between the value of the property when lost, destroyed or sold, and the proceeds (if any) received.  To use, as TEE seeks to use, some later date – such as the date of trial – is not ordinarily permissible when assessing common law damages.

35. To come at the matter another way, to approach the assessment of loss in the manner contended for by TEE would be to permit it to recover an amount solely referable to an increase in the property market.  In my view, such losses were beyond the scope of the harm for which the respondent is liable.[140]  Whether that is so by reason of the limits upon the scope of the duty of care owed to TEE, or the principles governing causation and foreseeability of loss, does not much matter.

    Loss claimed by Mr Elliott

    [140] Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191 at 213-214; Wallace v Kam (2013) 250 CLR 375 at [24]. See also Bolton v New Zealand Insurance Co Ltd [1995] 1 NZLR 224 at 240.

36. Having accepted that OBI (through Mr Olbrich) owed and breached a duty of care in favour of Mr Elliott, he is entitled to recover any personal (non-reflective) loss that was within the scope of the duty owed by OBI, was caused by a breach of that duty, and was not too remote.

37. In the statement of claim, Mr Elliott claimed two heads of loss: the losses suffered from the sale of the Largs Bay and North Haven properties that he owned (or had an interest in); and the losses suffered through his sale of other assets to realise proceeds which Mr Elliott then advanced to the named insureds.

    Property sales

38. The applicants pleaded claims of loss on the part of Mr Elliott in relation to both the Largs Bay property and the North Haven property.  The claim in respect of the latter was not ultimately pressed.

39. In relation to the Largs Bay property, in which he had a 50 per cent interest, Mr Elliott claimed to have suffered loss by reason of the mortgagee sale by BankSA of that property in January 2013 for $750,000 (from which BankSA received net proceeds of $726,415).  He claimed that had Mr Olbrich not breached his duty, there would have been no default on the BankSA facilities and hence no occasion for it to exercise its right of sale over the Largs Bay property.  He claimed that he would therefore have retained his 50 per cent interest in that property.  He therefore lost the ability to complete the house that was to be built on the Largs Bay property, and the opportunity to benefit from the consequential increase in the value of that property through to the date of trial.

1. Relying upon Mr Bruce’s valuation of the Largs Bay property at $1,250,000 (assuming completion of the house) as at August 2019, Mr Elliott’s primary claim was for the difference of $500,000 between this value and the sum of $750,000 received upon its mortgagee sale in January 2013.  In the alternative, Mr Elliott sought $225,000, being the difference between the ‘as complete’ market value at the date of sale (which according to Mr Bruce was $975,000) and the price obtained ($500,000).  

2. In considering this component of Mr Elliott’s claim, it is relevant that it was an agreed fact that as at January 2013 the market value of the Largs Bay property (as it was, or ‘incomplete’) was $725,000.[141]   In other words, the mortgagee sale realised the market value of the property.  It follows that, while Mr Elliott lost his interest in the property, he received market value for that interest; or at least the bank received market value and then applied that value in reduction of his obligations to the bank.  The sale did not occasion him any loss.

   [141] Exhibit P55.

3. I acknowledge that while the parties agreed that the market value of the Largs Bay property as at January 2013 was $725,000, this reflected its value in its incomplete state; and that the parties also agreed that its value, if completed, would have been $952,500.  However, in the absence of any evidence as to the likely cost to bring the property to completion, I do not think I can use this figure in my assessment of any loss suffered by Mr Elliott (even assuming it was otherwise recoverable).

4. The second qualification is the submission inherent in Mr Elliott’s formulation of his loss that he is entitled to recover the difference between the current value of the property (on the assumption that but for Mr Olbrich’s breach of duty he would have continued to hold that property) and the sale price realised in January 2013.  For the reasons given in the context of the equivalent claim advanced by TEE, I do not accept that it is appropriate to approach the assessment of Mr Elliott’s loss in this way.

5. I acknowledge that my conclusion that the sale of the Largs Bay property for market value did not occasion Mr Elliott any loss is predicated upon those sale proceeds having been applied in reduction of Mr Elliott’s own indebtedness to BankSA.[142]  He might have suffered a recoverable loss if, and to the extent that, the proceeds were applied to the indebtedness of other entities within the ASA Group rather than his personal indebtedness.  However, the applicants have not sought to quantify Mr Elliott’s loss in this way, and have not otherwise directed me to any evidence that might establish any such loss.

   Funds advanced

   [142] Albeit swollen by Mr Elliott’s reflective loss by reason of the demise of the ASA Group.

6. The applicants also pleaded a claim for loss on behalf of Mr Elliott based upon the funds he advanced to the ASA business prior to it failing.  The claim as pleaded was that Mr Elliott sold various personal assets (including shares and a boat that he owned) and advanced the proceeds from the sale of these assets to the named insureds in order to assist them to continue to trade, which advances he lost as a result of the failure of those businesses.  To the extent these claims are pressed, they were not quantified at trial.  Indeed, the applicants sought to defer the quantification of these losses for subsequent consideration on the basis that the extent of the losses suffered would depend upon what, if anything, Mr Elliott recovers as an unsecured creditor from the administrations of the named insureds.  I propose to hear the parties further in relation to this aspect of Mr Elliott’s claim.

   Other matters

7. I have addressed the issues of causation and contributory negligence earlier in these reasons.  The conclusions and reasoning in relation to those matters apply equally in respect of the claims brought by TEE and Mr Elliott, and hence do not represent any independent obstacle to those claims. 

   PART M:  CONCLUSION & ORDERS

8. For the reasons set out, I have upheld the claims of ASA Sales, ASA Manufacturing, ATPF and H2O in contract and negligence.  I have held that they are entitled to recover damages in the sum of $3.2 million on account of the additional insurance proceeds they would have received had OBI (through Mr Olbrich) not breached the duties it owed to those entities.

9. I will hear the parties further in relation to these entities’ claims for interest on that sum.

10. I will also hear the parties further in relation to the applicants’ claims in respect of the fees paid in connection with the voluntary administrations of ASA Sales, ASA Manufacturing and TEE, and in respect of the payments made by Mr Elliott to those entities as a result of their under-insurance.

11. I have otherwise rejected the named insureds’ claims for various heads of consequential loss, and the claims advanced on behalf of TEE and Mr Elliott.

12. I will hear the parties in relation to the form of the judgment and costs.