Admiral International Pty Ltd v Insurance Australia Ltd

[2022] NSWCA 277

Court of Appeal

Supreme Court

New South Wales

Medium Neutral Citation:

Admiral International Pty Ltd v Insurance Australia Ltd [2022] NSWCA 277

Hearing dates:

26–27 September 2022

Date of orders:

20 December 2022

Decision date:

20 December 2022

Before:

Bell CJ at [1];
Ward P at [274];
Macfarlan JA at [275]

Decision:

1.   Appeal in the CGU proceedings allowed in part.

2.   Appeal in the Brightcity proceedings allowed in part.

3.   In the CGU proceedings, set aside orders 1–3 of the orders made by the primary judge on 8 November 2021.

4.   In the Brightcity proceedings, set aside order 5 of the orders made by the primary judge on 8 November 2021.

5.   Direct that the parties file Short Minutes of Order consequent upon the reasons of the Court, together with any submissions (of not more than three pages) on the question of costs, with the Chief Justice’s Associate by 4.00pm on 27 January 2023, with any outstanding questions as to orders and costs to be determined on the papers.

Catchwords:

APPEALS – from findings of fact – circumstantial proof – inferences from primary facts – where insurer denied claim on basis of insured’s knowledge of and connivance in and consent to theft and arson – whether controlling mind and will of insured company had requisite knowledge – primary judge’s reasoning circumstantial and based on inference – whether strands of primary judge’s reasoning were capable of sustaining ultimate conclusion

INSURANCE – property insurance – industrial and special risks cover – liability cover – fraud – theft from and subsequent arson of bonded warehouse – where insurer denied claim on basis of insured’s knowledge of and connivance in and consent to theft and arson – whether controlling mind and will of insured company had requisite knowledge – primary judge’s reasoning circumstantial and based on inference – whether strands of primary judge’s reasoning were capable of sustaining ultimate conclusion – whether insurer’s denial of indemnity and allegation of arson were a breach of insurer’s duty of utmost good faith implied by s 13 of the Insurance Contracts Act 1984 (Cth) – whether insured was entitled to recover damages for consequential loss – whether insured had failed to take reasonable precautions to secure warehouse

INSURANCE – measure of indemnity – loss – business interruption cover – where forensic accounting experts disagreed on whether insured company had positive revenue growth trend – where primary judge held that there was no such trend – where primary judge held that insured company had concrete prospects of procuring new customers – whether evidence supported finding that there was no positive growth trend in insured’s revenue – where Court must do the best it can with the evidence available to assess damages

Legislation Cited:

Crimes Act 1900 (NSW) s 197(1)(b)

Customs Act 1901 (Cth) ss 35A, 77G, 79

Evidence Act 1995 (NSW) s 140(2)

Insurance Contracts Act 1984 (Cth) ss 13, 56

Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015 (NSW) r 25.1

Supreme Court Act 1970 (NSW) s 75A

Trustee Act 1925 (NSW) s 69 (repealed)

Uniform Civil Procedure Rules 2005 (NSW) rr 14.14, 15.3, 15.4

Cases Cited:

Almona Pty Ltd v Parklea Corporation Pty Ltd (2021) 392 ALR 457; [2021] NSWCA 171

Amalgamated Television Services Pty Ltd v Marsden [2002] NSWCA 419

Ballard v Multiplex [2012] NSWSC 426

Banque Commerciale SA (En Liqn) v Akhil Holdings Ltd (1990) 169 CLR 279; [1990] HCA 11

Barrie Toepfer Earthmoving and Land Management Pty Ltd v CGU Insurance Ltd (2016) 75 MVR 108; [2016] NSWCA 67

Booksan Pty Ltd v Wehbe (2006) 14 ANZ Ins Cas 61-678; [2006] NSWCA 3

Bradshaw v McEwans Pty Ltd (1951) 217 ALR 1

Briginshaw v Briginshaw (1938) 60 CLR 336; [1938] HCA 34

Clancy v Plaintiff A (2022) 318 IR 31; [2022] NSWCA 119

Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64; [1991] HCA 54

Comptroller-General of Customs v Zappia (2018) 265 CLR 416; [2018] HCA 54

ET-China.com International Holdings Ltd v Cheung (2021) 388 ALR 128; [2021] NSWCA 24

Fairfax Digital Australia & New Zealand Pty Ltd v Kazal (2018) 97 NSWLR 547; [2018] NSWCA 77

Fraser v B N Furman (Productions) Ltd [1967] 1 WLR 898

Gett v Tabet (2009) 254 ALR 504; [2009] NSWCA 76

Ghazal v Government Insurance Office of New South Wales (1992) 29 NSWLR 336

Globe Church Incorporated v Allianz Australia Insurance Ltd (2019) 99 NSWLR 470; [2019] NSWCA 27

Goodrich Aerospace Pty Ltd v Arsic (2006) 66 NSWLR 186; [2006] NSWCA 187

Jagatramka v Wollongong Coal Ltd [2021] NSWCA 61

John v Federal Commissioner of Taxation (1989) 166 CLR 417; [1989] HCA 5

Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563; [1995] HCA 68

Lee v Lee (2019) 266 CLR 129; [2019] HCA 28

Legal & General Insurance Australia Ltd v Eather (1986) 6 NSWLR 390

Libke v The Queen (2007) 230 CLR 559; [2007] HCA 30

Minister Administering the Crown Lands (Consolidation) Act and Western Lands Act v Tweed Byron Aboriginal Land Council (1990) 71 LGRA 201

Motor Accident Commission v Dinh (2015) 124 SASR 344; [2015] SASCFC 184

Mt Pleasant Stud Farm Pty Ltd v McCormick [2022] NSWCA 191

Nadinic v Drinkwater (2017) 94 NSWLR 518; [2017] NSWCA 114

Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170; [1992] HCA 66

New South Wales v Hathaway [2010] NSWCA 184

Palmer v Dolman [2005] NSWCA 361

Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd (2003) 77 ALJR 768; [2003] HCA 10

President of India v Lips Maritime Corporation [1988] AC 395

Queensland v Commonwealth (1977) 139 CLR 585; [1977] HCA 60

Robinson Helicopter Co Inc v McDermott (2016) 90 ALJR 679; [2016] HCA 22

Sgro v Australian Associated Motor Insurers Ltd (2015) 91 NSWLR 325; [2015] NSWCA 262

Skelton v R [2015] NSWCCA 320

Sprung v Royal Insurance (UK) Ltd [1999] 1 Lloyd’s Rep IR 111

Transport Industries Insurance Co Ltd v Longmuir [1997] 1 VR 125

Versloot Dredging BV v HDI Gerling Industrie Versicherung AG [2017] AC 1; [2016] UKSC 45

Warren v Coombes (1979) 142 CLR 531; [1979] HCA 9

White Constructions Pty Ltd v PBS Holdings Pty Ltd [2020] NSWCA 277

Worth v HDI Global Specialty SE (formerly International Insurance Company of Hannover SE) (2021) 393 ALR 93; [2021] NSWCA 185

Texts Cited:

J D Heydon, Cross on Evidence (13th Australian ed, LexisNexis Butterworths, 2021)

Category:

Principal judgment

Parties:

In proceedings 2021/341356:

Admiral International Pty Ltd (Appellant)
Insurance Australia Ltd (Respondent)

In proceedings 2021/341373:

Admiral International Pty Ltd (Appellant)
Insurance Australia Ltd t/as CGU Insurance (Respondent)

Representation:

Counsel:

Mr A J Sullivan KC with Mr N J Olson (Appellant)
Mr G M Watson SC with Mr M Kalyk
(Respondent)

Solicitors:

LMI Legal Pty Ltd (Appellant)
Lander & Rogers (Respondent)

File Number(s):

2021/341356;
2021/341373

Publication restriction:

N/A

 Decision under appeal 

Court or tribunal:

Supreme Court of New South Wales

Jurisdiction:

Common Law

Citation:

[2021] NSWSC 1440

Date of Decision:

8 November 2021

Before:

Fagan J

File Number(s):

2018/343393;
2019/191443

HEADNOTE

[This headnote is not to be read as part of the judgment]

The Appellant, Admiral International Pty Ltd (Admiral) operated a customs warehousing business from premises at Alexandria (the warehouse). The majority of goods held by Admiral were imported alcohol and tobacco products, including a significant quantity of goods imported into Australia by Brightcity International Trading Pty Ltd (Brightcity). The controlling mind and will of Admiral was Mr Denis Fateev (Denis), who was the Managing Director of the company at all material times. Denis was assisted in the operation of the business by his father, Mr Dmitry Fateev (Dmitry), who worked part-time at the warehouse. Dmitry died on 8 January 2021 in Vladivostok, Russia, where he had resided since 15 April 2018. Admiral also employed Mr Artur Russkikh (Mr Russkikh) as its Operations Manager until July 2019.

Admiral was insured by the Respondent, Insurance Australia Ltd t/as CGU Insurance (CGU), against both damage to the warehouse and business interruption, pursuant to an Industrial Special Risks Policy (the ISR Policy). Admiral was also insured against legal liability to third parties, pursuant to a General & Products Liability Policy (the Liability Policy). Both of Admiral’s insurance policies were issued for the period of 12 months from 30 September 2017.

In the early hours of the morning of Monday, 16 April 2018, the warehouse and its contents were destroyed by fire. At the time of the fire, neither Dmitry nor Denis was in Australia, as Denis had departed for a business trip to Hong Kong during the afternoon of Friday, 13 April 2018. The fire was preceded by the delivery of a considerable quantity of used tyres to the warehouse, and the theft of a sizeable quantity of alcohol and tobacco products from it, during the evening of 13 April and throughout 14 April 2018. The used tyres were delivered by Mr Maurizio Gazzara (Mr Gazzara), with Dmitry assisting to unload them into the warehouse. It was accepted that Dmitry was the last person to attend the warehouse prior to the fire, and that he had not armed the monitored alarm system at the warehouse.

Later on 16 April 2018, Admiral notified CGU of a claim for indemnity under the ISR Policy. Almost one year later, on 9 April 2019, CGU advised that, following the conduct of an investigation into the facts and circumstances of the fire, it had declined to indemnify Admiral on the basis of arson fraud, concluding that “the fire was lit with the knowledge, consent or authorisation of Admiral” following a coordinated theft of its customers’ goods. Admiral subsequently commenced proceedings against CGU (the CGU proceedings), seeking a declaration that it was entitled to indemnity under the ISR Policy, in addition to damages for breach of contract and for breach of CGU’s duty of utmost good faith under s 13 of the Insurance Contracts Act 1984 (Cth). Brightcity also commenced proceedings against Admiral for breach of bailment (the Brightcity proceedings), in which Admiral brought a cross-claim against CGU, seeking indemnity for its liability to Brightcity pursuant to the Liability Policy. CGU defended that cross-claim, including on the basis that Admiral had failed to take “reasonable precautions” to protect Brightcity’s goods from destruction.

The CGU and Brightcity proceedings were heard together and, on 8 November 2021, the primary judge entered judgment for CGU in the CGU proceedings and dismissed Admiral’s cross-claim in the Brightcity proceedings (the primary judgment). The primary judge held that Dmitry was the architect of the theft and subsequent arson, and that Denis had knowledge of and connivance in it, and consented to it.

The primary judge’s inferential analysis comprised a series of overlapping and cumulative “strands of reasoning”, including the Fateev family’s harmonious relationships; the practical necessity of Denis’ cooperation in the arson fraud; the timing of Denis’ trip to Hong Kong; Denis’ failure to make contact with the company monitoring the warehouse alarm; Denis’ failure to monitor the warehouse from Hong Kong, using a mobile phone app linked to the warehouse CCTV cameras (the CCTV app); and Denis’ perceived failure to make relevant inquiries following the fire, including to Dmitry.

These “strands of reasoning” formed the basis of Admiral’s appeal from the primary judgment. It was not in dispute that the fire had been deliberately lit, and ultimately not in dispute on appeal that Dmitry was involved in the theft of goods from the warehouse and its subsequent destruction by arson.

The principal issues on appeal were:

1. whether Admiral, through Denis, knew of and consented to the theft of goods from the warehouse, and its subsequent destruction by arson (the central issue);

2. whether Admiral failed to take “reasonable precautions” to protect Brightcity’s goods from destruction in the fire (the reasonable precautions issue);

3. whether Admiral was entitled to damages for consequential loss arising from CGU’s refusal of indemnity under the ISR Policy (the consequential loss issue); and

4. whether the primary judge erred in finding that there was no positive trend growth in Admiral’s gross revenue, notwithstanding that Admiral had “concrete prospects of increasing its business” (the growth trend issue);

The Court held (Bell CJ, Ward P and Macfarlan JA agreeing), allowing the appeals in each of the CGU proceedings and the Brightcity proceedings in part, setting aside the primary judge’s orders 1–3 in the CGU proceedings, and setting aside the primary judge’s order 5 in the Brightcity proceedings:

As to the central issue

Taking account of the application of the principles in Briginshaw, as reflected in s 140(2) of the Evidence Act 1995 (NSW), the gravity of the allegations, and having regard to the inferential nature of the reasoning, the primary judge erred in his conclusion on the central issue of knowledge and connivance. It follows that Admiral was entitled to indemnity from CGU under both the ISR Policy and the Liability Policy: [209]–[210] (Bell CJ); [274] (Ward P); [275] (Macfarlan JA).

Briginshaw v Briginshaw (1936) 60 CLR 336; [1936] HCA 34; Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170; [1992] HCA 66, applied.

There were multiple plausible explanations as to why Dmitry would not have told Denis of his criminal enterprise, even though the Fateev family appeared to be close knit: [123] (Bell CJ); [274] (Ward P); [275] (Macfarlan JA).

It was plausible that the very fact of Denis travelling to Hong Kong on 13 April 2018 created the window of opportunity for the theft and arson to occur over the ensuing three days: [132] (Bell CJ); [274] (Ward P); [275] (Macfarlan JA).

Contemporaneous documentary evidence established that Denis had a legitimate reason to travel to Hong Kong from 13–17 April 2018, in order to meet with representatives of a prospective Chinese customer ahead of a board meeting on 18 April 2018. Further, the evidence did not support the primary judge’s conclusion that there was a pressing need for Denis to be in Sydney during the weekend of 14 April 2018: [157]–[158] (Bell CJ); [274] (Ward P); [275] (Macfarlan JA).

Denis was able to be contacted by the alarm monitoring service while he was in Hong Kong, and he may not have checked the CCTV app either because he had no reason to do so, or because he was pre-occupied with his dealings with a prospective customer: [163]–[164], [170] (Bell CJ); [274] (Ward P); [275] (Macfarlan JA).

The evidence given by Denis under cross-examination established that, contrary to the primary judge’s conclusion, he had made contemporaneous inquiries of Dmitry following the fire, even after Dmitry had suffered a stroke, that he did not know and had never met Mr Gazzara, and that he had engaged in discussions with Mr Russkikh regarding theft from the warehouse: [184]–[185], [188] (Bell CJ); [274] (Ward P); [275] (Macfarlan JA).

An appellate court is, generally, equally as capable as a trial judge of determining whether an answer given by a witness is substantially responsive to a question: [205] (Bell CJ); [274] (Ward P); [275] (Macfarlan JA).

Discussion by Bell CJ of the principles governing the standard of proof and the proper pleading of allegations of fraud, circumstantial proof in civil proceedings, and the appellate review of factual findings: [86]–[103].

Briginshaw v Briginshaw (1936) 60 CLR 336; [1936] HCA 34; Clancy v Plaintiff A (2022) 318 IR 31; [2022] NSWCA 119; Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170; [1992] HCA 66; ET-China.com International Holdings Ltd v Cheung (2021) 388 ALR 128; [2021] NSWCA 24; Banque Commerciale SA (En Liqn) v Akhil Holdings Ltd (1990) 169 CLR 279; [1990] HCA 11; Nadinic v Drinkwater (2017) 94 NSWLR 518; [2017] NSWCA 114; Bradshaw v McEwans Pty Ltd (1951) 217 ALR 1; Palmer v Dolman [2005] NSWCA 361; Ballard v Multiplex [2012] NSWSC 426; Transport Industries Insurance Co Ltd v Longmuir [1997] 1 VR 125; Lee v Lee (2019) 266 CLR 129; [2019] HCA 28; Mt Pleasant Stud Farm Pty Ltd v McCormick [2022] NSWCA 191; White Constructions Pty Ltd v PBS Holdings Pty Ltd [2020] NSWCA 277, discussed.

Compound questioning of a witness is objectionable in that it may confuse a witness and/or be unfair to the extent that it is apt to produce incomplete answers: [203]–[204] (Bell CJ); [274] (Ward P); [275] (Macfarlan JA).

Libke v The Queen (2007) 230 CLR 559; [2007] HCA 30; Skelton v R [2015] NSWCCA 320, applied.

As to the reasonable precautions issue

1. In the absence of a basis to attribute knowledge of Dmitry’s acts to Denis and/or Admiral, it was not established that Admiral had failed to take “reasonable precautions” so as to deny its entitlement to indemnity under the Liability Policy: [227] (Bell CJ); [274] (Ward P); [275] (Macfarlan JA).

   Fraser v B N Furman (Productions) Ltd [1967] 1 WLR 898; Booksan Pty Ltd v Wehbe (2006) 14 ANZ Ins Cas 61-678; [2006] NSWCA 3; Legal & General Insurance Australia Ltd v Eather (1986) 6 NSWLR 390, applied.

As to the consequential loss issue

1. Admiral could not recover damages for consequential loss in its claim against CGU for breach of the ISR Policy, otherwise the principle precluding the award of “damages for non-payment of damages” would be offended: [237] (Bell CJ); [274] (Ward P); [275] (Macfarlan JA).

   Globe Church Incorporated v Allianz Australia Insurance Ltd (2019) 99 NSWLR 470; [2019] NSWCA 27; Worth v HDI Global Specialty SE (formerly International Insurance Company of Hannover SE) (2021) 393 ALR 93; [2021] NSWCA 185, applied.

2. A breach of an insurer’s implied duty of utmost good faith requires more than a simple denial of indemnity, provided that the insurer has a reasonably arguable basis for that denial, even if fraud is alleged. On that basis, Admiral failed to establish that CGU had not acted with the utmost good faith: [243]–[244] (Bell CJ); [274] (Ward P); [275] (Macfarlan JA).

As to the growth trend issue

1. Although a court must do the best that it can with the evidence available to assess future loss, Admiral failed to present sufficiently concrete data to allow for the estimation of a quantum of trend growth in its gross revenue, notwithstanding that it had concrete prospects of increasing its business: [271] (Bell CJ); [274] (Ward P); [275] (Macfarlan JA).

   Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64; [1991] HCA 54; Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd (2003) 77 ALJR 768; [2003] HCA 10, approved.

Judgment

BELL CJ:

Introduction

1. These are two appeals from a decision of Fagan J (the primary judge) in which his Honour dismissed claims brought by Admiral International Pty Ltd (Admiral) against its insurer, Insurance Australia Ltd trading as CGU Insurance (CGU), following the destruction by fire early in the morning of 16 April 2018 of a warehouse at 1/64–66 Burrows Road, Alexandria (the warehouse), from which Admiral conducted its customs warehousing business: Admiral International Pty Ltd v Insurance Australia Ltd; Brightcity International Trading Pty Ltd v Admiral International Pty Ltd [2021] NSWSC 1440 (the primary judgment or PJ).

2. Admiral was permitted to receive and store bonded goods at the warehouse pursuant to two licences issued to it conjointly by the Australian Border Force (ABF) and the Australian Taxation Office. The first was a “depot licence”, under s 77G of the Customs Act 1901 (Cth), which permitted Admiral’s short-term storage of bonded goods in order to enable unpacking and consolidation for safe and secure management. The second was a “warehouse licence”, under s 79 of the Customs Act, which generally permitted Admiral’s indefinite storage of bonded goods in a specific section of the warehouse (the bond store) and subject to certain conditions, including that bonded goods were required to be kept intact, ordinarily through the application of wrapped sheet plastic to unloaded pallets of alcohol or tobacco products, until the outstanding duty had been paid on them. [1]

   1. PJ [24].

1. Admiral stored both duty-paid goods (free goods) and those on which customs duties were outstanding (bonded goods) at the warehouse in consideration of a specified sum calculated on a per unit per week basis and payable by a customer (ordinarily an importer of goods into Australia). [2] The majority of the goods held by Admiral were imported alcohol and tobacco products. [3] A significant delivery of tobacco products having a retail value of well over $6 million had been delivered to the warehouse in the business week ending Friday 13 April 2018, although the precise date of delivery was not apparent from the business records.

   2. PJ [4].

   3. PJ [2].

2. Neither Denis Fateev (Denis), the then 27-year-old Managing Director of Admiral who had been running the business for five years at the time of the fire, nor his father, Dmitry Fateev (Dmitry), who worked part-time in the business, was in the country at the time of the fire, which occurred in the early hours of 16 April 2018. Because of the frequency with which it will be necessary to refer to them in the balance of these reasons, Denis and Dmitry will be referred to by their first names.

3. Denis departed for Hong Kong early in the afternoon of Friday, 13 April 2018 and his father departed Sydney for Vladivostok, Russia at 7.45am on the morning of Sunday, 15 April 2018, some 17 hours prior to the fire. He suffered a stroke in June of that year and died in Vladivostok of natural causes on 28 January 2021, prior to the trial. He never returned to Australia following his departure from Sydney on the morning of 15 April 2018. It should be noted that Dmitry’s mother lived in Vladivostok, and there was evidence that she was very ill at the time of Dmitry’s trip (she later died) and that Dmitry had visited her in Vladivostok previously.

4. The primary judge held that Dmitry was the architect both of a theft of a valuable quantity of goods, including cigarettes, from the warehouse on the evening of Friday, 13 April 2018 and in the course of Saturday, 14 April 2018 as well as of the subsequent arson although, self-evidently due to his departure from Australia prior to the fire, he was not the arsonist. Police inquiries into the arson were still ongoing at the time of the trial and the hearing of the appeals.

5. The primary judge held that there was:^[4]

“clear proof that Dmitry Fateev facilitated the theft of many millions of dollars’ worth of Admiral’s customers’ goods from the warehouse on 13 and 14 April 2018, that he deliberately caused motor tyres to be spread around the warehouse to provide fuel for a fire and that he left the premises unsecured to facilitate the entry, at about 12:24 am on 16 April, of an arranged arsonist.”

4. PJ [10].

8. The central issue before the primary judge, in terms of Admiral’s claim for indemnity by CGU, was whether Admiral, through Denis, knew of and consented to the deliberate theft and subsequent arson of the warehouse and its remaining contents. [5] His Honour held that it did, meaning that Admiral’s claim against CGU for indemnity was precluded by the “fraudulent or dishonest acts” exclusion clause in the relevant insurance policy, reproduced at [20] below. The primary judge held that:[6]

“The ‘fraudulent or dishonest acts’ were those of Denis Fateev, attributed to the insured of which he was the directing mind and will; namely, the acts of consenting to and conniving at the deliberate destruction of the warehouse and its contents by fire. On the findings of fact that I have made the exclusion is engaged and CGU is entitled to refuse indemnity to Admiral under the policy.”

5. PJ [9].

6. PJ [212].

9. On appeal, Admiral originally challenged the primary judge’s findings as to Dmitry’s role in the theft and arson, of which he held that Denis both knew and approved. Admiral abandoned that challenge in the course of the hearing of the appeal.

10. The central issue on appeal therefore concerned the primary judge’s findings, based on circumstantial reasoning, as to Denis’ knowledge of, consent to and connivance in the deliberate destruction of the warehouse and its contents by fire, which he held was designed to conceal the earlier theft of valuable goods.

11. Further issues on appeal concerned an alleged failure by Admiral to take “reasonable precautions” to prevent the destruction of a customer’s goods in the fire, which CGU relied upon to refuse indemnity under Admiral’s liability insurance policy, discussed below, as well as Admiral’s claim for consequential loss beyond policy limits.

12. As noted above, in relation to the “reasonable precautions” issue, Admiral had brought a separate claim for indemnity against CGU arising from its liability to Brightcity International Trading Pty Ltd (Brightcity), a firm that operated a business importing alcohol and tobacco products from China into Australia, and which was a major (if not the largest) customer of Admiral, with its goods constituting 23% of the total goods in storage at the warehouse at the time of the fire. The entirety of Brightcity’s goods in storage at the warehouse was destroyed in the fire.

13. It was agreed between the parties that Brightcity’s goods were valued at $2,364,460.20, that Brightcity had incurred $967,393.80 in transport and duty costs on free goods prior to the fire, and that profit in the sum of $246,132.90 could have been earned on the sale of the destroyed goods. [7]

    7. PJ [5], [233], [273].

14. Brightcity sued both CGU and Admiral in relation to goods which had been destroyed in the fire, and those proceedings were heard concurrently with Admiral’s claim for indemnity against CGU (the Brightcity proceedings).

15. In the Brightcity proceedings, judgment was entered for Brightcity against CGU in the sum of $3,337,854, with CGU to pay one-third of Brightcity’s costs on its claim. In the present appeal, CGU did not challenge this decision.

16. Brightcity also obtained judgment against Admiral for $246,132.90 in damages for breach of bailment, together with two-thirds of Brightcity’s costs of its proceedings.

17. Admiral’s separate claim for indemnity from CGU, against its liability to Brightcity, had been brought as a cross-claim in the Brightcity proceedings pursuant to a General & Products Liability Policy issued for the period of 12 months from 30 September 2017 (the Liability Policy).

Insurance

18. Admiral was insured by CGU pursuant to an Industrial Special Risks Policy (the ISR Policy) issued for a period of 12 months from 30 September 2017, as well as by the Liability Policy. By the ISR Policy, CGU agreed to indemnify Admiral in accordance with the following insuring clause:

“In the event of any physical loss, destruction or damage … not otherwise excluded happening during the period of insurance at the Situation [defined in the Schedule as the property at 1/64–66 Burrows Road, Alexandria] to the Property Insured … the Insurer will, subject to the provisions of this Policy including the limitation on the Insurer’s liability, indemnify the Insured in accordance with the applicable Basis of Settlement.”

19. That insuring clause was qualified by a “fire and perils only endorsement”, which was expressed as follows:

“FIRE AND PERILS ONLY ENDORSEMENT

Notwithstanding anything contained herein to the contrary, it is hereby declared and agreed that damage means physical loss, damage or destruction caused by or arising out of fire, lightning, thunderbolt, explosion, implosion, earthquake, subterranean fire, volcanic eruption, impact, the acts of persons taking part in riots or civil commotions or of strikers or locked-out workers or persons taking part in labour disturbances or malicious persons or the acts of any lawfully constituted authority in connection with the foregoing acts or in connection with any conflagration or other catastrophe, storm, and/or tempest and/or rainwater and/or wind and/or hail, water or other liquids or substances discharged overflowing or leaking from apparatus, appliances, pipes or any other system at the premises or elsewhere.”

20. Exclusion 7 of the ISR Policy (the fraud exclusion), as modified by an endorsement, relevantly excluded indemnity for:

“Physical loss, destruction or damage occasioned by or happening through:

(a)(i)   fraudulent or dishonest acts ... by the Insured or any employee(s) of the Insured acting alone or in collusion with any other person(s);

Provided further that the term ‘dishonest acts’, in relation to any of the Insured’s employees, shall not be deemed to mean acts of arson or vandalism for the purposes of Perils Exclusion 7”.

21. The ISR Policy also contained an Interests of Other Parties Clause in the memorandum to s 1 of the policy wording (the IOP clause). The IOP clause provided that:[8]

“The insurable interests of only those lessors, financiers, trustees, mortgagees, owners and all other parties specifically noted in the records of the Insured shall be automatically included without notification or specification; the nature and extent of such interest to be disclosed in event of damage.

Where the insurance covers the interests of more than one party, any act or neglect of an individual party will not prejudice the rights of the remaining party/parties; provided the remaining party/parties shall, immediately on becoming aware of any act or neglect whereby the risk of damage has increased, give notice in writing to the Insurer(s) and on demand pay such reasonable additional premium as the Insurer(s) may require.”

8. PJ [217].

22. It was in reliance upon this clause that Brightcity successfully brought proceedings against CGU. As already noted, Brightcity also sued Admiral. In circumstances where it was an agreed fact that none of Brightcity’s goods had been stolen from the warehouse prior to the fire, it was also agreed that the ISR Policy responded to Brightcity’s claimed loss. [9]

    9. PJ [4], [234].

23. Admiral sought indemnity from CGU in respect of its liability to Brightcity, pursuant to cl 1.1 of the Liability Policy, which provided that CGU:

“will cover You for Your legal liability to pay all sums by way of compensation, and all charges, expenses and legal costs recoverable from or awarded against You in respect of:

(a)   Personal Injury

(b)   Property Damage

(c)   Advertising Liability

happening during the Period of Insurance and caused by an Occurrence within the Territorial Limits in connection with Your Business and Your Products.” (emphasis added)

24. The general wording of cl 1.1 was qualified by the definition of “occurrence” in cl 4.15 of the Liability Policy, as follows:

“an event which results in Personal Injury, Property Damage or Advertising Liability, neither expected not intended from Your standpoint.” (emphasis added)

25. The general obligation of CGU to indemnify Admiral under the Liability Policy was further qualified by cl 8.16, titled “reasonable care”, which relevantly provided that Admiral must:

“a)   exercise reasonable care that only competent Employees are employed and take reasonable measures to maintain all premises, fittings and plant in sound condition;

b)   take all reasonable precautions to prevent Personal Injury and Property Damage, to prevent the manufacture, sale or supply of defective products, and to comply with and to ensure that Your Employees, servants and agents comply with all statutory obligations, by-laws or regulations imposed by all relevant public authorities for the:

i)   safety of persons or property;

ii)   disposal of waste products; and

iii)   handling, storage or use of flammable liquids or substances, gases or toxic chemicals”.

26. The object of the reasonable care requirement in cl 8.16, namely “You, Your, Yours”, was relevantly defined in cl 4.29 of the Liability Policy to mean:

“a)   the person(s), companies or firms named on the current Policy Schedule as the Insured [i.e. Admiral];

…

c)   every past, present or future director, executive officer, Employee, partner, shareholder or voluntary worker of the parties shown in definition 4.29 a. … (including the spouse or family member of any such person performing a designated role in connection with the Business) while acting within the scope of their duties in such capacity;

…

g)   any director or senior executive or partner of the parties shown in definition 4.29 a. … in respect of private work undertaken by an Employee of those parties for such director or senior executive

…

However, You/Your does not include the interest of any other person other than as described in this definition.” (emphasis added)

Further background

Admiral

27. As of 16 April 2018, all nine issued shares in Admiral were held by Admiral Corporate Group Pty Ltd, of which Svetlana Fateev (Svetlana) was the sole shareholder and director. Svetlana (who was Dmitry’s wife and Denis’ mother) had also managed Admiral’s bookkeeping since it commenced operating. Dmitry had operated a predecessor freight carrying and courier business through Admiral Management Group Pty Ltd until 2013, when it went into liquidation. He thereafter worked part-time at Admiral assisting with the receipt, despatch and delivery of customers’ goods.

28. At all relevant times, Denis was the de facto Managing Director of Admiral. He was 27 years old, married and had a young family when the warehouse was destroyed by fire. His unchallenged evidence was that he was:

“the only person responsible for the management and operation of Admiral’s business affairs, including but not limited to the practices and procedures utilised in the operation of the business, the entry into respective agreements with customers and service providers and the making of the insurance claim on CGU.”

29. Denis’ younger brother, Nickita, worked part-time at Admiral in a similar capacity to Dmitry and lived with his parents. [10] Admiral also employed a number of persons who were not members of the Fateev family, including Mr Artur Russkikh (Mr Russkikh), who served as Admiral’s Operations Manager throughout 2018.

    10. PJ [15]–[16].

Events preceding the fire

30. Admiral had occupied the warehouse for almost four years as at the date of the fire, having commenced occupation under a four-year lease on 1 May 2014, which was due to expire on 30 April 2018. An extension of three months had been negotiated as at the time of the fire.

31. On 9 March 2018, Denis had signed heads of agreement to lease a warehouse at Birnie Street, Lidcombe, with a floor area of over 2,000m² for a term of five years commencing on 1 April 2018, with an option for a further five years. At about the same time a bond of $104,500, representing three months’ rent, was paid by Svetlana.

32. On 9 April 2018, the landlord of the Alexandria warehouse foreshadowed giving Admiral notice under its current lease, to which Denis replied “we will need to relocate to a cheaper facility. 90 days will be more than enough time for us to vacate this unit”. The landlord subsequently confirmed a handover date of 9 July 2018. The lease of the Lidcombe premises was executed on 9 April 2018 with a commencement date of 16 April 2018 (the Lidcombe lease).

33. There was evidence that, on 9 April 2018, Denis told Mr Stanislav Kozinets (Mr Kozinets), a sub-tenant at the Alexandria warehouse, that “it would be two to three months while [Admiral] moved all the stock over” to the Lidcombe premises. As shall be seen, this evidence is significant in view of one aspect of the primary judge’s analysis.

34. Also of significance was that Denis was the guarantor under the Lidcombe lease, personally guaranteeing payment of annual rent of $380,000 plus GST in monthly instalments over the five-year term of the lease.

Mr Gazzara, the booking of a delivery of auto parts and the actual delivery of used tyres

35. On Thursday 12 April at 12.43pm, Admiral received an email from Mr Maurizio Gazzara (Mr Gazzara) of Morris Automotive Pty Ltd, which read as follows:

“Hi to the Logistics team. I would like to enquire if you would be able [to] store car parts and accessories on pallets for export in the next few weeks until I am ready to export

What is you charge rate per pallet, per week.” (emphasis added)

36. Mr Russkikh (of Admiral) replied to this inquiry at 1.26pm on the same day, indicating that the storage cost was $15 per pallet per week. Mr Gazzara responded at 2.14pm, acknowledging this reply and inquiring whether it would be possible to drop some pallets off “in the next few days”. Further communication ensued with Mr Gazzara emailing Mr Russkikh at 1.19pm on Friday, 13 April 2018, asking whether he could start to drop pallets at the warehouse on Saturday morning, indicating that he had 20–30 pallets, and seeking confirmation that someone would be present at the warehouse to receive them. Mr Russkikh responded shortly thereafter as follows:

“Yes, tomorrow is fine, but we will charge AUD 65 per hour due to weekend. PIC: name Dmitry, phone number … Please call at least 30 minutes before arriving to the warehouse.”

37. The evidence, in the form not only of an Affidavit of Mr Gazzara but also CCTV footage, disclosed that the deliveries in fact commenced on the Friday evening and continued on the Saturday morning.

38. Although the initial inquiry received from Mr Gazzara referred to storage of “car parts and accessories”, it appears that the actual delivery that was made comprised used tyres, which the primary judge found were spread around the warehouse and in effect used to fuel the fire when it was lit early on the Monday morning. The link between the delivery and the presence of used tyres was reinforced after the fire, when Mr Gazzara supplied Mr Russkikh with an invoice that referred to 318 mixed used tyres and 53 used vehicle batteries. This information was only supplied after Mr Gazzara had been chased up by Admiral on many occasions, seeking information relating to the goods delivered to the warehouse for the purposes of formulating an insurance claim. Mr Gazzara’s covering email to Mr Russkikh on 22 June 2018 included the following:

“Arthur I will attach only one invoice for a portion of the stock I had dropped off at the warehouse, I do not intend on claiming for additional stock as I cannot locate invoices to substantiate the claim and I do not want to delay your claim any further. It is unfortunate that this event has occurred and I hope you could assist me with at least recovering the amount on the invoice I have provided. Please let me know if this will suffice.”

39. The primary judge noted that, following inspections of the warehouse on 19 April 2018 and then 16, 17, 18 and 20 July 2018, CGU’s expert forensic fire investigator (Mr Pellegrino) issued a report in September 2020 showing that “he had found, spread through the warehouse, 19 pallets or remains of pallets on which there were used motor tyres, in some cases partially burnt or heat damaged, and/or remnants of radial steel tyre reinforcing consistent with tyres having burned away”. [11] The report also noted that in the western half of the northern aisle of the warehouse, there were five pallets of used tyres and, halfway down the middle aisle, there were two more, with a further 12 distributed along the southern aisle. The report concluded that the tyres would have acted as an accelerant “because of their fuel load and high heat release rate”.

    11. PJ [88].

40. Mr Gazzara was cross-examined extensively on an Affidavit he had made which was read on Admiral’s behalf in the proceedings at first instance. That Affidavit purported to give, inter alia, Mr Gazzara’s explanation of why and to whom he was proposing to export a cargo of used tyres, and the circumstances of their delivery. His account was squarely rejected by the primary judge, who described it as containing numerous contradictions and improbabilities. His Honour held that:[12]

“The emails to Mr Russkikh of Thursday 12 April on Friday 13 April were a cover, to provide the appearance of a genuine commercial storage arrangement in case the tyres should not be completely consumed in the fire and in case questions should be asked about them. The emails also provided a pretext for Dmitry Fateev to attend the warehouse after hours on the Friday and on the Saturday.”

Significantly, the primary judge did not infer that Mr Russkikh knew of the pretextual nature of the emails and found that he was not involved in the subsequent theft of goods or arson.

12. PJ [111].

41. Mr Gazzara also gave evidence (which the primary judge also did not accept)[13] that Dmitry told him after the second or third load had been delivered on the Saturday morning that all of the pallets that had been delivered on the Friday night and Saturday morning had to be reloaded and taken away for re-packing, which he says he then did by taking them either to Revesby (18km from the warehouse) or Rossmore (35km away) and then returning them to the warehouse.

    13. See, for example, PJ [109].

42. His Honour also rejected Mr Gazzara’s denial that goods belonging to Admiral’s customers were removed from the warehouse in the trucks that he and his two associates drove.  The primary judge found that “late on Saturday 14 April Mr Gazzara and his two associates delivered to the warehouse more than 300 used motor tyres on approximately 19 pallets, for the purpose of fuelling a fire that was to be ignited early on the Monday morning”. [14]

    14. PJ [110].

43. Later in the primary judgment, his Honour rejected the evidence of Dmitry (who had sworn an Affidavit on 8 December 2020, just over a month prior to his death) and that of Mr Gazzara, to the effect that the three trucks captured on CCTV footage repeatedly attended the warehouse on the evening of 13 April and during the day on 14 April 2018 merely to deliver tyres, finding that this body of evidence had no credibility and provided no material support for any reasonable hypothesis alternative to the inference of a large-scale theft. [15] In other words, the primary judge held that the trucks driven by Mr Gazzara and his associates were used to deliver tyres to the warehouse for the purposes of fuelling the fire and also to convey the stolen goods from the warehouse.

    15. PJ [179].

Denis’ trip to China and Hong Kong

44. More than a month prior to the fire, on 9 March 2018, Denis travelled to Chongqing, China on business and arranged, on his way back to Australia on the afternoon of 4 April 2018, to meet in Hong Kong with a solicitor acting for Juhao Flavor (Hong Kong) Co Ltd (Juhao) with whom Admiral appeared to have been in discussions about the proposed storage of imported food products at Admiral’s warehouse.  The purpose of the proposed meeting was “purely to clarify the warehousing and logistic protocol and to understand Admiral’s standard trading terms and conditions”.

45. Denis cancelled the meeting shortly after midday on 4 April and returned to Australia shortly thereafter.

46. The primary judge then recorded that, on Thursday, 12 April 2018, Ms Debbie Fu (Ms Fu), a solicitor acting for Juhao, wrote to Denis requesting a number of documents relating to Admiral’s business, such as insurance policies, audited accounts, a list of major contracts and an organisational chart. The letter included the following:

“We have instructions from [the Vice President of Juhao] to contact [Admiral] for the purpose of the due diligence exercise to facilitate the preparation of a due diligence report for consideration by the Board.

We also have instructions that the due diligence report should be ready for the Board’s consideration no later than Wednesday, 18 April 2018.”

47. On Thursday 12 April 2018, Denis booked a flight to Hong Kong departing Sydney at 2.20pm the next day, Friday, 13 April 2018. The booking included a return flight departing at 8.00pm on Tuesday, 17 April 2018, Hong Kong local time, and arriving in Sydney on the morning of 18 April 2018. That trip involved a meeting with Ms Fu in relation to the Juhao transaction. According to the evidence, the meeting occurred on Sunday, 15 April 2018. As shall be seen, the primary judge considered that this trip was designed to provide Denis with an alibi in relation both to the theft of goods and the subsequent arson in order to conceal the theft.

48. More detail of Denis’ engagements in Hong Kong is considered later in these reasons, in the context of considering Admiral’s attack on the primary judge’s finding of alibi.

Friday 13 and Saturday 14 April 2018

49. According to its inventory schedule entry for Friday, 13 April 2018 (being the last business day before the fire in the early hours of Monday, 16 April 2018), Admiral was storing approximately 609 pallets of goods for its customers (the approximation likely being the result of the presence of “part pallets”). Those 609 pallets included 18 intermediate bulk containers (IBCs), each of which contained 1000 litres of pure alcohol and were recorded by the primary judge as constituting a whole pallet. Of 609 pallets in total, 271 contained cigarettes and 129 contained alcohol.

50. As noted above at [47], Denis left for Hong Kong at 2.20pm on Friday, 13 April 2018. His evidence was that he thought that Dmitry drove him to the airport.

51. There was evidence of extensive movement of three trucks to and from the warehouse on the evening of 13 April 2018 and throughout the next day, which was captured on CCTV. There were five individual arrivals and departures by the trucks on Friday, 13 April 2018 between 6.16pm and 10.35pm, and a further 14 arrivals and departures on Saturday, 14 April 2018 between 6.21am and 11.11pm. CCTV footage showed that Dmitry was present at the warehouse at all of the relevant times over the Friday and Saturday, bar three periods totalling approximately three hours on the Saturday. He was also involved in the loading of the trucks by forklift. Dmitry had arrived at the warehouse at 5.52am on Saturday, 14 April 2018. He departed and returned on numerous occasions throughout the remainder of that day before departing for a final time at 11.11pm.

52. Mr Gazzara's discredited and disbelieved evidence as to what transpired between him and Dmitry to explain the movement of trucks on the Saturday has already been noted: see [40]–[41] above.

53. It was an agreed fact between the parties that Dmitry was the last person to have access to the warehouse prior to the entry of the anonymous arsonist in the early hours of 16 April 2018.

Security at the warehouse

54. The warehouse was fitted with an alarm system, including motion sensors and reed switches on certain internal doors, which had been upgraded by Mr Peter Yammine (Mr Yammine) at some time prior to April 2015, from which time he subcontracted Securitas Australia Pty Ltd (Securitas) to provide back-to-base monitoring of the alarm system.

55. Mr Yammine gave evidence and was cross-examined before the primary judge. He deposed that Admiral’s alarm system was working properly during March and April 2018 and that “if the alarm was in an armed condition early on 16 April 2018 before the fire started a person could not have forced entry into the warehouse without triggering one of the motion sensors” and causing an “alarm event” to be signalled to and recorded by Securitas. [16]

    16. PJ [68].

56. No such event, including the arming of the alarm system, was signalled or recorded following the activation of the internal office-to-warehouse door at 5.59pm on Saturday 14 April 2018, at which time Dmitry was present at the warehouse, until Securitas recorded a “direct wireless complete communications failure” at 12.28am on Monday, 16 April 2018. That final alarm event corresponded with the approximate timing of the fire taking hold of the warehouse.

57. On the basis of that sequence of events, the primary judge was satisfied that “Admiral’s warehouse alarm was not armed at the time of the fire and had not been since Dmitry Fateev left the premises late on the preceding Saturday night”. [17]

    17. PJ [73].

58. The primary judge described the overall security infrastructure at the warehouse as consisting of:[18]

    18. PJ [48].

1. a cyclone wire fence on the street boundary;

2. double gates at each vehicle entryway;

3. locks for the vehicle entry to the warehouse and the pedestrian entry to the adjoining office;

4. motion sensors at doorways and throughout the warehouse storage area, linked to a monitored alarm panel;

5. a data transmission unit for transmitting signals from the alarm system to a 24-hour monitored base;

6. CCTV within the warehouse and at the front of the building, displayed on monitors in the downstairs area of the office and in Denis’ office upstairs;

7. a network video recorder (NVR) in Denis’ upstairs office, which comprised a hard drive capable of recording up to 30 days of surveillance footage; and was connected to

8. a mobile phone application (the CCTV app) which allowed users to monitor the CCTV footage in real time.

59. His Honour observed that “these security devices were all disabled at the time when the fire was deliberately started shortly after 12:24am on Monday, 16 April 2018”. [19] His Honour placed responsibility for these security failures with Dmitry, as the last person to have attended the warehouse prior to the fire, recording that “[o]n his last departure he failed to secure the door between the back of the office and the warehouse, to arm the alarm system, to lock the front door to the office or to lock the front driveway gates”.

    19. PJ [49].

60. Crucially, the NVR was not recording footage from any of the various CCTV cameras mounted throughout the warehouse and at its entrance as at the time of the fire igniting, nor had it recorded footage since around 9.45am on Monday, 9 April 2018. [20] (It should be noted that on 9 April 2018, Denis had arranged for a technician to come to the warehouse to investigate a beeping noise made by the NVR. It transpired that the hard drive in the NVR had failed and, as it was still under warranty, a replacement hard drive was ordered which Mr Yammine expected would arrive in 2–4 days. It does not appear to have been delivered prior to the theft and the fire, although the NVR remained in place and capable of transmitting, though not recording, footage). [21] The difficulty with the NVR did not result in a complete absence of evidence comprising CCTV footage, as:[22]

“movements at the front of the premises were continuously recorded by the CCTV surveillance system of a building directly across Burrows Road from the southern vehicle entrance to Nos 64-66. One CCTV camera at that location faced south east and covered the front facade of Admiral’s Unit 1 and the southern vehicle entry. The other camera faced north east and covered both vehicle entries.”

20. PJ [76].

21. PJ [76]–[78].

22. PJ [50].

61. On the basis of this body of footage, the primary judge found that “[n]either entry was secured by the closing of the double gates at any time from 4:00 pm on Friday 13 April until the time when the arsonist drove in through the north vehicle entry, parked outside Unit 1, entered the warehouse, started the fire, returned to his car and drove away.”[23]

    23. PJ [50].

62. In this context, the primary judge found that Dmitry had left the double doors to Admiral’s office unlocked when the anonymous arsonist arrived, in circumstances where security of those doors “depended upon a heavy, lockable patio bolt on the external surface of the right-hand door”. His Honour recorded that “[i]mmediately after the fire, the patio bolt was found to be unlocked”[24] and reasoned that this was the result of Dmitry’s conduct, as follows:[25]

“It is clear from the speed with which the arsonist did his work between about 12:24 am and 12:31 am on 16 April that access was gained through the office front door, without forcing. There was no time for forcing and there is no evidence of forcing. One or other … means of leaving the office front door so that it could be opened without impediment must have been adopted. Each of the alternative means depended upon Dmitry Fateev having failed to lock the patio bolt in the engaged position and also having either failed to lock the mortise latch, or issued a key, or deliberately held the latch open”.

24. PJ [57].

25. PJ [58].

The fire and following

63. As the primary judge recorded:[26]

“A person entered the warehouse at about 12:24 am on Monday, 16 April 2018 and set it alight. A very destructive fire instantly took hold, with a powerful explosion at 12:31:35 am. The fire destroyed the warehouse building and Admiral’s contents within, such as office equipment, forklift vehicles, pallet racks and pallet jacks.”

26. PJ [2].

64. The site of the fire became a crime scene and investigations were commenced not only by the police and the ABF but also CGU. There was no suggestion that Admiral, through Denis, did not give full cooperation to the investigating authorities and CGU. Indeed, there was evidence that he facilitated inquiries as he was no doubt obliged to do under the insurance policies. The warehouse was subsequently demolished, with the process of demolition and debris removal commencing on Monday, 16 July 2018.

65. As has already been noted, the primary judge accepted Mr Pellegrino’s evidence[27] and held that the fire was fuelled by tyres located within the warehouse which had been brought onto the premises for that purpose, with the tyres acting as an accelerant “because of their fuel load and high heat release rate”. [28] The tyres had been brought onto the premises by Mr Gazzara and two associates, outside of ordinary business hours, and there was no obvious commercial benefit to either party in moving the tyres into the warehouse. As noted at [40]–[41] and [52] above, Mr Gazzara’s evidence that the tyres were intended for export was not accepted as plausible and was undermined by his inability to provide any satisfactory explanation in this respect.

    27. PJ [185].

    28. PJ [89].

66. It was also held, based upon the expert report of Mr Pellegrino, who had inspected the remains of the warehouse shortly after the fire in April and July 2018 but whose report was only served in September 2020, that the tyres were located around the floor of the warehouse in a configuration which could not be explained and which made no practical sense because they would have obstructed the ordinary use of the warehouse. It was also noted that other combustible items, including ethanol and toilet paper, were placed around and near the tyres. [29]

    29. PJ [181(7)].

67. Denis arrived back in Sydney on 17 April 2018, having been informed of the fire whilst he was in Hong Kong. As noted above, he was originally scheduled to return home on the morning of the following day.

Notification of claim and declinature of cover by CGU

68. Following the fire, Admiral’s insurance broker notified CGU of a claim for indemnity under the ISR Policy on 16 April 2018. CGU had not notified Admiral of a decision on indemnity by 8 November 2018, on which date Admiral commenced proceedings in the District Court relevantly seeking a declaration that CGU was bound to indemnify it. These proceedings (the CGU proceedings) were subsequently removed into the Supreme Court and were heard concurrently with the Brightcity proceedings: see [14] above.

69. On 9 April 2019, CGU’s solicitor wrote to Admiral and advised that, based on the facts and circumstances known to CGU following a professional investigation conducted by, amongst others, Mr Pellegrino, it had determined that Admiral was not entitled to indemnity and that CGU therefore declined its claim.

70. It was CGU’s position that Admiral’s claim was excluded by the ISR Policy Condition 7 (Fraud) (the fraud condition) so as to engage s 56 of the Insurance Contracts Act 1984 (Cth). The fraud condition was expressed as follows:

“If any claim be in any respect fraudulent or if any fraudulent means or devices be used by the Insured or anyone acting on the Insured’s behalf to obtain any benefit under this Policy, or if any destruction or damage be occasioned by the wilful act or with the connivance of the Insured, the Insurer, without prejudice to any other rights the Insurer might have under this Policy, shall be entitled to refuse to pay such claim.”

71. Also relevant to CGU’s decision to refuse indemnity was the fraud exclusion, the relevant terms of which have been noted above at [20].

72. According to CGU, the fraud exclusion and condition were both engaged in circumstances where “the fire was deliberately started with the knowledge, consent or authorisation of Admiral and, in any case, Admiral has made fraudulent misrepresentations to CGU for the purposes of pursuing the Claim under the Policy” (emphasis added).

73. CGU provided the following particulars of its determination that Admiral had committed arson fraud:

“(a)   the Fire was deliberately lit;

(b)   the Fire was lit by a person entering the Premises at approximately 12.23 a.m. on 16 April 2018 and leaving the premises 8 minutes later at approximately 12.31am;

(c)   at the time of entry into the Premises by the person the security gates were open which allowed access to the Premises;

(d)   at the time of entry into the Premises by the person the security alarm system was not working or working properly;

(e)   at the time of entry into the Premises by the person the CCTV camera system was not working or was not working properly;

(f)   at the time of entry into the Premises by the person there was combustible material in the nature of tyres spread around the Warehouse;

(g)   the tyres had been delivered to Admiral at the Premises on 14 April 2018;

(h)   prior to 14 April the Warehouse was full of large quantities of stock to the approximate value of $14,000,000;

(i)   by the time of the Fire, the Warehouse was not full of stock and large quantities of stock had been removed from the Premises prior to the Fire;

(j)   the stock had been removed from the Premises in the 48 hours prior to the Fire and with the knowledge of Admiral;

(k)   according to Admiral, the last person on the Premises prior to the night of the Fire was Dmitry Fateev, who was formerly the director of Admiral, the father of the current director, a person working for Admiral, who left Australia the next day and has not returned;

(l)   the door to the Warehouse was not securely bolted when the last person was on the Premises;

(m)   Admiral has falsely asserted or implied that:

(i)   no stock had been removed from the Premises during the 48 hours prior to the Fire;

(ii)   the Premises were full of stock at the time of the Fire;

(iii)   it was unaware that either the security system or CCTV system was not working properly; and

(iv)   the tyres said to have been delivered and accepted by Dmitry Fateev on Saturday 14 April 2018 were stored in a specific area of the warehouse (and not spread around the Warehouse); and

(n)   in all the circumstances CGU considers the Fire was lit with the knowledge, consent or authorisation of Admiral.” (emphasis added)

74. CGU also provided the following particulars of its determination that, in bringing the claim for indemnity under the ISR Policy, Admiral had made fraudulent misrepresentations:

“(a)   all of the customers’ goods referred to in a series of documents describing the goods and their details (the stock reports) were in the Premises at the time of the Fire when in fact they were not in the Premises at the time of the Fire;

(b)   that there was no movement of trucks in and out of the Premises in the 48 hours prior to the Fire for the purposes of removing stock from the Premises;

(c)   that the estimated value of the contents in the Warehouse was $14M when in fact it was not and was known by the Plaintiff to not have that value;

(d)   that there were approximately 12 employees of the Plaintiff working at the premises up to Friday, 13 April 2018, and that the stock could not have been moved from the Premises without the knowledge and cooperation of the Plaintiff, when it was in fact so moved; and

(e)   that neither Denis Fateev nor Artur Russkikh had any knowledge of any movement of stock from the premises prior to the Fire when in fact such representations must be false.”

75. Essentially, it was contended that Admiral had knowingly authorised or consented to the extensive theft of some of its customers’ goods from the warehouse and, subsequently, had knowingly authorised or consented to an act of arson in the warehouse, presumably to conceal the earlier theft.

75. In response to CGU’s refusal of indemnity, Admiral commenced the CGU proceedings by filing a Statement of Claim seeking a declaration that CGU was bound to indemnify it under the ISR Policy, and damages for breach of contract and for breach of the duty of utmost good faith as set out in s 13 of the Insurance Contracts Act.

76. The CGU proceedings at first instance, together with the Brightcity proceedings, were heard over nine days in September 2021, during which Denis was cross-examined at length and nine other witnesses gave oral evidence. As noted at [43] above, an Affidavit sworn by Dmitry on 8 December 2020, shortly before his death, was also admitted into evidence.

Proceedings at first instance

78. In the proceedings at first instance, it was not in dispute between the parties that the fire had been deliberately lit. Admiral denied any knowledge either of the theft of any goods from its warehouse or the act of arson. It has already been noted that Dmitry had left the country early on the morning of 15 April 2018, prior to the fire having occurred. In addition, Denis was overseas at the time of the fire, having flown to Hong Kong some two-and-a-half days prior to the fire.

79. As noted above at [8], the primary judge framed the central issue for his determination as being “whether Admiral knew of and consented to the deliberate burning of the warehouse and its contents”,[30] in circumstances where his Honour had found there to be: [31]

“10   … clear proof that Dmitry Fateev facilitated the theft of many millions of dollars’ worth of Admiral’s customers’ goods from the warehouse on 13 and 14 April 2018, that he deliberately caused motor tyres to be spread around the warehouse to provide fuel for a fire and that he left the premises unsecured to facilitate the entry, at about 12.24am on 16 April, of an arranged arsonist …

11   … Despite clear evidence that Dmitry Fateev took part in the massive theft of Admiral’s customers’ goods and that he enabled the staging of a fire to cover the stock deficiency, Admiral has actively disputed Dmitry Fateev’s involvement. It tendered an implausible statement from him denying complicity and it adduced equally unimpressive evidence from Maurizio Gazzara, one of three truck drivers who helped remove the stock and who delivered the tyres that fuelled the subsequent fire.”

30. PJ [9].

31. PJ [10]–[11].

80. The primary judge’s finding that Dmitry orchestrated and participated in the theft of a significant quantity of goods stored at the warehouse by Admiral, during the weekend prior to the fire, was reached by inference from the following circumstances:[32]

    32. PJ [178].

“(1)   Admiral’s stock records establish what was in the warehouse up to Friday 13 April.

(2)   I am satisfied from Mr Pellegrino’s evidence that the fire debris was not materially altered between the time when the fire was extinguished and the dates upon which he examined and catalogued the debris. By ‘not materially altered’ I mean that no debris was removed, no additional debris was brought to the site and the material was not in any significant degree rearranged, so that Mr Pellegrino’s conclusions are properly based upon the true remains of the fire.

(3)   Mr Pellegrino’s examination was rigorous and it satisfies me that all or substantially all of the goods listed at [147] and [150] were removed between the Friday afternoon and the commencement of the fire.

(4)   The missing goods were of very great value, in the order of $34 million. The cigarettes, which represented most of the value, were marketable and easily transported. Hence, they would have been a target for theft.

(5)   The seizure by police, in August 2018, of significant quantities of ICT’s Top Smoke cigarettes, that had been stored in the warehouse until 13 April, supports Mr Pellegrino’s evidence concerning goods on Admiral’s stock list of which there was no evidence in the fire debris and which must have been removed before the warehouse was set alight.

(6)   Between the late afternoon of Friday 13 April and the commencement of the fire there were 19 movements from the warehouse of trucks that had the capacity to remove stock of the description and quantities identified by Mr Pellegrino as missing from the debris. There were no other means by which and no other time at which the stock could have been taken.

(7)   Dmitry Fateev was present at the warehouse throughout the truck movements on 13 and 14 April 2018.

(8)   He departed for Vladivostok, on a one-way ticket, at 7:45 am on Sunday, 15 April 2018. I infer that that was either the first departure for the Far East, or one of the first departures, after the last truck movement from the warehouse late on the previous evening.”

81. The primary judge’s subsequent conclusion that Dmitry intentionally facilitated the lighting of the fire that destroyed the warehouse was established on the balance of probabilities, by inferential reasoning, from the following circumstances:[33]

“(1)   As captured on the CCTV, the arsonist drove straight to Unit 1 and immediately started the fire. Admiral’s warehouse was a premeditated target. The company was not the victim of a random or coincidental attack.

(2)   Dmitry Fateev actively participated in the theft, as concluded above. He therefore had a compelling motive to have the warehouse burned down so as to reduce the remaining stock to unrecognisable rubble and thereby to conceal the shortfall. The evidence does not disclose any other possible motive of any person for this targeted arson.

(3)   At 11:11pm on 14 April Dmitry Fateev left the warehouse unsecured in that he did not close and lock the front gates; he did not lock the patio bolt of the front office door in the ground-engaged position; he did not close the door from the office into the warehouse so as to activate its electronic latch and he did not arm the alarm.

(4)   Dmitry Fateev’s departure for Vladivostok early on the Sunday morning not only followed closely after the last of the truck movements by which stock was removed but was just 17 hours prior to the warehouse being set alight.

(5)   Dmitry Fateev knew that only he and his son Denis were listed contacts for notification of alarm signals received by the monitoring service engaged through Mr Yammine. By Friday 13 April, at the latest, Dmitry Fateev knew that Denis would be out of the country over the weekend and into the next week so that, upon Dmitry Fateev’s own departure, there would be no one directly concerned in the business available in Sydney to be notified of alarm activation and to give authority for a patrol car to be sent.

(6)   Dmitry Fateev received 19 pallets of used tyres into the warehouse late on Saturday, 14 April and caused those pallets and individual tyres to be spread through the aisles.

(7)   He caused to be placed at the midpoint of the middle aisle an IBC of ethanol, side-by-side with a pallet of toilet paper, the two items together obstructing the aisle and abutted on both sides by pallets of tyres.”

33. PJ [181].

82. The primary judge rejected CGU’s argument that Dmitry was relevantly the controlling mind and will of Admiral and that his actions were attributable to the company. [34] His Honour concluded that Dmitry’s “role in the business of Admiral as a part time warehouseman and delivery driver, was far too limited to constitute him the directing mind and will of the company”. [35] There is no cross-appeal from that conclusion.

    34. PJ [175]–[177].

    35. PJ [177].

83. Accordingly, CGU’s entitlement to decline indemnity turned, in the primary judge’s words, upon its ability to “establish that Denis Fateev, as the controlling mind and will of the insured company, connived at Dmitry Fateev’s procurement and facilitation of the fire”. [36] The primary judge reached a positive conclusion on that proposition, such that CGU was entitled to refuse indemnity, by a process of inferential reasoning, reflecting the fact that “[t]he evidence that the fire was deliberately lit with Admiral’s knowledge and consent is entirely circumstantial”. [37]

    36. PJ [11].

    37. PJ [169].

84. On the hearing of the appeal, Mr Sullivan KC, who appeared for Admiral with Mr Olson, focussed upon the primary judge’s analysis leading to his conclusion that Denis knew of and connived in the arson. That analysis was contained in PJ [186]–[207] and is set out in full at [104] below, as it was the subject of close and searching critique in oral submissions and the focus of Admiral’s various grounds of appeal and challenges to factual findings made by the primary judge.

85. Before turning to consider that critique, and the grounds of appeal by reference to which it was made, it is desirable first to set out the principles and authorities governing various aspects of the present case, namely the standard of proof, proper pleading of allegations of fraud, and the circumstantial reasoning employed by the primary judge in reaching his ultimate conclusion on the central issue, as well as familiar principles relating to appellate review.

Applicable principles and authorities

The standard of proof

86. First, the nature of the allegations, namely Admiral’s connivance in acts of theft and arson, and a subsequent fraudulent insurance claim in light of its knowledge and connivance, engaged s 140(2) of the Evidence Act 1995 (NSW), which has been equated with the well-known observations in Briginshaw v Briginshaw (1938) 60 CLR 336 at 360–362; [1938] HCA 34 (Briginshaw); see also Clancy v Plaintiff A (2022) 318 IR 31; [2022] NSWCA 119 at [26], citing Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170; [1992] HCA 66 (Neat Holdings); Amalgamated Television Services Pty Ltd v Marsden [2002] NSWCA 419 at [61], where it was said that “[i]t is well accepted that the test to be applied under s 140(2)(c) is the Briginshaw test”; and New South Wales v Hathaway [2010] NSWCA 184 at [263], where it was said that in a case involving allegations of serious misconduct with grave consequences, “clear or cogent or strict proof” is required.

87. In Briginshaw, a case involving a charge of adultery, Dixon J conceived of the principle that a “court should only make a finding of wrongdoing if satisfied to a standard that recognises the seriousness of what is alleged” (see Jagatramka v Wollongong Coal Ltd [2021] NSWCA 61 at [7]) in the following terms: [38]

“Except upon criminal issues to be proved by the prosecution, it is enough that the affirmative of an allegation is made out to the reasonable satisfaction of the tribunal. But reasonable satisfaction is not a state of mind that is attained or established independently of the nature and consequence of the fact or facts to be proved. The seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question whether the issue has been proved to the reasonable satisfaction of the tribunal. In such matters ‘reasonable satisfaction’ should not be produced by inexact proofs, indefinite testimony, or indirect inferences. Everyone must feel that, when, for instance, the issue in on which of two dates an admitted occurrence took place, a satisfactory conclusion may be reached on materials of a kind that would not satisfy any sound and prudent judgment if the question was whether some act had been done involving grave moral delinquency.”

Later in his Honour’s judgment, Dixon J elaborated upon what is now referred to as the Briginshaw principle, in the context of a circumstantial case, as follows: [39]

“[u]pon an issue of adultery in a matrimonial cause the importance and gravity of the question make it impossible to be reasonably satisfied of the truth of the allegation without the exercise of caution and unless the proofs survive a careful scrutiny and appear precise and not loose and inexact. Further, circumstantial evidence cannot satisfy a sound judgment of a state of facts if it is susceptible of some other not improbable explanation. But if the proofs adduced, when subjected to these tests, satisfy the tribunal of fact that the adultery alleged was committed, it should so find.” (emphasis added)

38. Briginshaw at 361–362.

39. Briginshaw at 368–369.

Pleading allegations of fraud

88. Secondly, it is a fundamental requirement of procedural fairness that allegations of fraud are pleaded with strict particularity: ET-China.com International Holdings Ltd v Cheung (2021) 388 ALR 128; [2021] NSWCA 24 at [172]. This principle is explicitly enshrined in r 15.3 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR), titled “allegations of behaviour in the nature of fraud”, which requires that “[a] pleading must give particulars of any fraud, misrepresentation, breach of trust, wilful default or undue influence on which the party relies”. Rule 15.3 operates in conjunction with r 15.4, concerning “allegations as to condition of mind”, which is expressed as follows:

“(1)   A pleading that alleges any condition of mind must give particulars of the facts on which the party pleading relies.

(2)   In subrule (1), condition of mind includes … any fraudulent intention, but does not include knowledge.” (emphasis added)

89. The significance of the requirement that fraud be specified and particularised clearly in pleadings is further indicated by the fact that it is expressly raised in the UCPR’s “general rule as to matters to be pleaded specifically”, in the following r 14.14:

“(2)   In a defence or subsequent pleading, a party must plead specifically any matter—

(a)   that, if not pleaded specifically, may take the opposite party by surprise, or

(b)   that the party alleges makes any claim, defence or other case of the opposite party not maintainable, or

(c)   that raises matters of fact not arising out of the preceding pleading.

(3)   Matters which must be pleaded pursuant to subrule (2) include (but are not limited to) fraud”. (emphasis added)

90. This requirement is well established and of long standing, as was noted by Mason CJ and Gaudron J (with whom Brennan and Toohey JJ respectively agreed) in Banque Commerciale SA (En Liqn) v Akhil Holdings Ltd (1990) 169 CLR 279; [1990] HCA 11 (Akhil), a case in which a party sought to defeat a limitation defence under the now-repealed s 69 of the Trustee Act 1925 (NSW) on the basis of a fraudulent breach of trust. Their Honours observed that: [40]

“It has long been recognised that fraud may take a variety of forms and is, on that account, incapable of precise definition. See, e.g., Draper v Dean (1679) Finch 439 [23 E.R. 239]; Reddaway v Banham [1896] AC 199, at p 221; Allcard v Skinner (1887) 36 Ch. D 145, at p 183. The variety of matters which may constitute fraud prevents any construction of the proviso to s. 69(1) of the Act which would require a defendant to negate fraud. That variety effectively deprives a party who may or may not have acted fraudulently from ascertaining precisely what must be negatived. Indeed, it is this feature of fraud which underlies the rule of practice, now embodied in Pt. 15, r. 13 and Pt. 16, r. 2 of the Rules, that fraud must be pleaded specifically and with particularity. See Wallingford v Mutual Society (1880) 5 App. Cas. 685, at p. 701, per Lord Hatherley; Middleton v O’Neill (1943) 43 SR (NSW) 178, at p. 184, per Jordan CJ. And the same feature necessitates that the proviso be construed as requiring a plaintiff to establish fraud to defeat a limitation defence.” (emphasis added)

40. Akhil at 285; see, also, 290 per Brennan J, 295 per Dawson J and 301–302 per Toohey J.

91. In Sgro v Australian Associated Motor Insurers Ltd (2015) 91 NSWLR 325; [2015] NSWCA 262 at [55]–[57], a case involving an allegedly fraudulent insurance claim, Beazley P (with whom Meagher JA and McDougall J agreed) cited Akhil at 285 in support of the observation that “[t]he seriousness of raising a question of fraud underlies the express pleading requirement that fraud be clearly pleaded and properly particularised: Uniform Civil Procedure Rules 2005 (NSW), r 14.14. The pleading must allege the acts involved and that they were done in a manner that involves fraud”. [41]

    41. See, also, Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 at 573; [1995] HCA 68; Minister Administering the Crown Lands (Consolidation) Act and Western Lands Act v Tweed Byron Aboriginal Land Council (1990) 71 LGRA 201 at 203–204; Fairfax Digital Australia & New Zealand Pty Ltd v Kazal (2018) 97 NSWLR 547; [2018] NSWCA 77 at [185]; Almona Pty Ltd v Parklea Corporation Pty Ltd (2021) 392 ALR 457; [2021] NSWCA 171 at [53].

92. In Nadinic v Drinkwater (2017) 94 NSWLR 518; [2017] NSWCA 114 (Nadinic), this Court considered the propriety of serious findings of fraud following a trial in which there were no pleadings nor any particularisation of dishonesty. At [110], Leeming JA (with whom Beazley P and Sackville AJA agreed) affirmed that, as an aspect of natural justice and procedural fairness (Ghazal v Government Insurance Office of New South Wales (1992) 29 NSWLR 336 at 344), a party is “entitled to be informed of the way in which it was said [he, she or it] had been party to [a] fraud”, which evidently underpins the principle in Akhil and rr 14.14(3), 15.3 and 15.4 of the UCPR. However, his Honour also noted that “[i]n theory, it is possible that a party may forego that right, and may do so by acquiescence rather than express election, but such acquiescence is not easily inferred”.

93. The necessarily high threshold to be met by the trier of fact before making such an inference of acquiescence was made clear by Leeming JA in concluding that the primary judge in Nadinic was not entitled to make findings of fraud in circumstances where: [42]

“109   Mr Nadinic was both a witness and a party. As a witness, a finding of dishonesty could not be made without his first having been given an opportunity to deal with the criticism: Kuhl v Zurich Financial Services Australia at [67]. This is not a case where the pleadings or the affidavits or the openings put Mr Nadinic squarely on notice of the dishonesty which the primary judge ultimately found. In the absence of cross-examination on the point, fairness dictated that the primary judge refrain from making findings of dishonesty: Bale v Mills at [67]; State of New South Wales v Hunt (2014) 86 NSWLR 226; [2014] NSWCA 47 at [32]–[44].

…

114   In the trial before the primary judge, there were no pleadings, and the statement of issues and opening written submissions did not come close to alleging, let alone particularising, dishonesty. The conduct of the hearing does not permit the conclusion that Mr Nadinic acquiesced in its expansion to include an allegation of dishonesty or fraud.

115   The single question asked of Mr Nadinic in cross-examination, which was not completed by the cross-examiner, and was immediately followed by statements by the primary judge to the effect that this was outside Ms Drinkwater’s case, to which proposition her counsel acceded, did not come close to giving Mr Nadinic a fair opportunity to deal with the criticism. It corresponded to the ‘bare and unparticularised assertion’ held to be insufficient in [Akhil].

116   As Mason CJ and Gaudron J observed in [Akhil at 287], it requires a clear case to conclude that the parties acquiesced in an expansion of a case so as to extend to fraud. That is not this case. That is best seen from the absence of an allegation of fraud in the statement of issues and opening, and, when the primary judge made it clear to Ms Drinkwater’s legal representative, shortly before the evidence closed, that she could apply to amend, his response was to the effect that he accepted that he was ‘bound by the statement of issues’ and had ‘nothing further to say’. The exchange between the primary judge and Mr Nadinic’s counsel at the end of the trial as to dishonesty being ‘the nub of the case’, even if it is taken at its highest, is insufficient to sustain a conclusion of acquiescence in an expansion of a case of misleading and deceptive conduct to one based on fraud, given all that had previously occurred in this litigation.” (emphasis added)

8.3   The annual trend for the year prior to the month the loss occurred is lower at -0.24%. However, the 3-month and 6-month trend percentages show strong double-digit growth at 38% and 22%. This reflects growth in the business through sales development work that had been occurring over a lengthy period of time.

8.4   Furthermore, at the time of the fire the owners had been in negotiations to commence contracts with new overseas customers wishing to employ an Australian importer for their products. If the fire had not disrupted the ability for Admiral International to serve new customers, these new business opportunities would have further grown the future turnover for the business.

8.5   Accordingly, we believe that a trend of 6.5% is conservative and reasonable considering the trend for the business in the nine months preceding the fire, and in view of likely new business opportunities.”

The “new overseas customers” referred to by Mr Bleasdale were Pegasus Supply Solutions Pty Ltd and Juhao respectively. [70]

70. PJ [256].

255. Mr McPhee did not accept Mr Bleasdale’s opinion as to the growth trend of Admiral’s gross revenue, nor his methodology, which calculated the trend “based on the actual growth achieved in the 9 months before the date of the loss”, adjusted to take account of a “one-off unusually large revenue transaction” in the March 2018 quarter, notwithstanding that “Mr Bleasdale acknowledged that for the full 12 months to March 2018 Admiral’s Gross Revenue showed no growth relative to the previous 12 month period”. [71]

     71. PJ [252].

256. Mr Bleasdale adopted this methodology on the basis that a comparison with the 12-month period from March 2017–March 2018 did not provide a holistically accurate account of the improvement in Admiral’s financial performance up to the “indemnity period”, in circumstances where “[t]he historic growth rate in turnover for 6 months before the fire was 12.5% and for the 3 months before the fire was 19%”, which “show a clear trend of significant and rising rate of growth in Admiral’s business”.

257. The methodology adopted by Mr McPhee to conclude that it was not appropriate to apply a growth trend (i.e. applying a growth trend of 0%) to calculate Admiral’s expected turnover corresponded to that which was eschewed by Mr Bleasdale, namely, “highlighting that the twelve months prior to the loss show a growth percentage close to zero”. The following data informed that conclusion:

12 months ending 31 March			Average yearly change
2017	2018	2019 (expected)
Adjusted turnover	$1,396,517	$1,349,169	$1,405,385	$8,868	0.63%
Average turnover per month	$116,376	$112,431	$117,115	$739	0.63%
Rate of gross profit	67%	62%	62.29%	0.29%

As noted at [255] above, and recorded by the primary judge at PJ [252], Mr Bleasdale accepted the foregoing analysis of the 12 months prior to the fire, albeit that he did not consider it to provide a fair representation of Admiral’s financial performance, in light of a more recent upturn in gross revenue to March 2018.

258. Mr McPhee provided further justification for his longer-term methodology in the joint report, stating he considered it “more appropriate to use the actual historical annual turnover achieved by the Plaintiff when considering whether to apply a trend, because the Plaintiff’s historical monthly turnover during the 24 months prior to the Incident fluctuates … from around $193,000 in September 2016 through to $69,000 in June 2017”.

259. In the joint report, Mr Bleasdale revised his initial calculation of a 6.5% growth trend in Admiral’s gross revenue, increasing the applicable figure to 19.32%, in order to “reflect the growth shown by Admiral in the three months before the fire (38%) and for the six months before the fire (22%) as well as the expectations communicated to me by Mr Denis Fateev of sales growth opportunities” (emphasis added). Mr Bleasdale had previously described those “opportunities for growth in turnover” in his second report, dated 26 April 2021, as follows:

“2.10   Since submitting our report dated 1 June 2020, we have given further consideration to the statements made in the affidavit of Mr Denis Fateev dated 5 June 2020 … In doing so it is appropriate that we revisit the growth rate used in our previous report. We now consider that growth rate was understated and a higher rate of 15% from May 2018 to October 2018, and 20% from November 2018 to 15 April 2019 is justified and is supported by the results of the business in the nine months prior to the fire and by its future plans.

2.11   The expected growth advised by Mr Denis Fateev was a key reason for Admiral’s decision to move to larger premises at Lidcombe. The move to Lidcombe would have provided twice the amount of storage space for customers goods.

2.12   The expected growth is also supported by two new business opportunities being negotiated by Denis Fateev at the time of the fire.

2.13   The first of these was with an existing customer, Pegasus Supply, whom Admiral provided bond storage to as well as deliveries to cruise ships in Sydney. This customer was planning to increase their business volume with Admiral and significantly increase the bonded warehouse storage they required.

2.14   A second opportunity arose whereby Admiral was in negotiations with a Chinese manufacturer to handle the importation of their products to Australia and New Zealand and to manage the distribution of the manufacturer’s products once the goods were in Australia/New Zealand. Mr Denis Fateev was in Hong Kong at the time of the fire for the purpose of continuing these negotiations.

2.15   Taking the recent high growth rates and the new growth opportunities into account we consider that a reasonable forecast for growth in turnover, had the fire not occurred, would be 15% during the first 6 months after the fire, and 20% for the second six months”.

260. The prospect of opportunities for growth in Admiral’s gross revenue was attributed by Mr Bleasdale to “statements made in the affidavit of Mr Denis Fateev dated 5 June 2020” in the CGU proceedings. It appears that Mr Bleasdale was referring to the following passages of Denis’ evidence:

“Fire Damage to Admiral’s Premises

16   On 16 April 2018, there was a fire at the Premises.

…

18   At the time of the fire, I was in Hong Kong on a business trip. A copy of my travel documents is at pages 106 to 136 of Exhibit DF-1.

…

Consequential Loss

31   As a result of the fire, Admiral’s business has been interrupted and interfered with. Admiral has suffered, and continues to suffer, losses as a result.

…

33   Prior to the fire, Admiral operated a logistics, storage and distribution business, which included the handling of both bonded and unbonded goods. Admiral was in the process of expanding its business internationally and had secured a customer overseas as part of that expansion.

…

35   To accommodate Admiral’s growing business, Admiral sought alternate warehousing premises.

36   Prior to the fire, I began negotiating with the landlord of a warehousing premises located at 42 Birnie Avenue, Lidcombe (Lidcombe Warehouse).

…

57   Had the fire not occurred, I fully expect that Admiral would have been granted the depot licence for the Lidcombe Premises”. (emphasis added)

It is clear from this extract that Denis’ Affidavit of 5 June 2020 failed to provide any evidence (whether calculated or estimated) of the value or quantum of Admiral’s “new growth opportunities”.

Consideration regarding the growth trend in gross revenue

261. In the course of oral argument in this Court, Mr Sullivan attempted to identify evidence that better particularised the “two new business opportunities” presented to Admiral by Pegasus and Juhao respectively, with specific reference to the primary judge’s finding that Admiral had a “concrete prospect” of increasing its gross revenue by “handling food products to be imported from Juhao” (emphasis added). [72] To that end, Mr Sullivan drew the Court’s attention to the following matters deposed to by Denis in his Affidavit in the CGU proceedings, dated 28 June 2021:

     72. PJ [256].

“At least one aspects of Admiral’s new business venture (importing products from China/Hong Kong) did not require a bonded warehouse and otherwise we do not have any evidence as to whether and to what extent Admiral’s business after the fire requires a bonded warehouse

30   While it is correct that the new business venture in relation to the importation of food products from China and Hong Kong would not require a bonded warehouse, I disagree with this insofar as it attempts to infer that Admiral’s business could have operated without the requisite licences.

…

Lost Business Opportunities

64   As a result of CGU’s failure to indemnify Admiral, Admiral has lost business opportunities which had the potential to substantially increase Admiral’s business operations.

65   One such business opportunity which Admiral lost was with a company known as Pegasus Supply.

66   For many years prior to the fire, Pegasus Supply used Admiral for provision of transport services. Pegasus Supply was interested in using Admiral to handle its bonded goods, however the Alexandria premises were unsuitable due to its size.

67   Prior to the fire, I had completed negotiations with Pegasus Supply, and Pegasus Supply had agreed for Admiral, to commence providing bonded warehousing services shortly after Admiral began occupying the Lidcombe Warehouse.

68   Those services involved the storage, distribution and logistics of the entirety of the bonded goods being handled by Pegasus Supply.

69   I expected that the agreement with Pegasus Supply, in addition to Admiral’s existing customers, would enable Admiral to operate the Lidcombe warehouse at its full capacity.

70   I expect that based upon that agreement alone, had CGU indemnified Admiral in respect of its claim, Admiral could have operated the Lidcombe Warehouse at its full capacity:

a)   Realistically, by October 2018; or

b)   Conservatively, by April 2019.

71   In December 2018, Pegasus Supply opened its own bonded warehouse and, as such, Admiral has lost the opportunity to provide those services to Pegasus Supply and to operate the Lidcombe Warehouse at full capacity.” (emphasis added)

262. Two features of this evidence should be noted. First, it fails to provide any detail or basis for assessing the pecuniary value or unit quantum of Admiral’s prospective commercial arrangements with Juhao and/or Pegasus. This is especially relevant in circumstances where Denis had deposed, in his Affidavit of 28 June 2021, to having entered into an agreement with Pegasus which would, presumably, have included terms in the nature of consideration or cost per unit. Secondly, the evidence post-dated Mr Bleasdale’s second report, in which he referred (both expressly and by implication) to Juhao and Pegasus as “two new business opportunities” and which formed the basis of his opinion that annual trend growth of 19.32% should be applied to Admiral’s gross revenue.

263. Those features were also recognised by Mr McPhee in formulating his response to Mr Bleasdale’s opinion in the joint report, which was as follows:

“1.27   I consider Mr Bleasdale’s methodology of applying an overall growth trend of 19.3% to his calculation of expected turnover to be inappropriate. I consider the assertions of Mr Denis Fateev … that Mr Bleasdale has relied upon to arrive at these trends to be general and unsupported. I consider these unsupported trends to materially overstate the expected turnover of the Plaintiff and therefore the losses sustained as a result of the incident.

1.28   Noting the monthly fluctuations observed in the Plaintiff’s historical turnover, I also consider a period shorter than 12 months, like the three to six months Mr Bleasdale has relied upon in order to arrive at his assumed growth trend of 19.3% to calculate the expected turnover trend, to be inappropriate. A period shorter than 12 months may be skewed by the monthly turnover fluctuations observed and therefore would not accurately reflect the true expected performance of the Plaintiff but for the Incident.

1.29   … it is unclear to me why Mr Bleasdale has now increased his trend so materially, given that no new information has been provided since his earlier reports.” (emphasis added)

264. These criticisms were sound and there was no reasoned basis justifying Mr Bleasdale’s methodology of applying an overall growth trend of 19.3% to his calculation of Admiral’s expected turnover. The primary judge did not err in finding that, on the balance of probabilities, a positive growth trend should not be applied to Admiral’s expected gross revenue during the indemnity period.

265. His Honour gave concise consideration to the question of whether to apply positive trend growth. In coming to the ultimate finding on this question, the primary judge said:

“254   I regard Mr Bleasdale’s methodology, relying on comparison of nine-month periods, as unsound, even when the adjustment for the unusual revenue item is made. The Gross Revenue figures for Admiral show very large fluctuations from month-to-month in each of the 12 month periods ended 31 March 2017 and 31 March 2018. In the first of those periods, the high point was $193,277 in September 2016 and the low point was approximately half of that, namely, $87,971 in December 2016. In the second period, the variation was between $143,886 in September 2017 and $69,071 in June 2017. Across the two years there was no consistency of the months in which Gross Revenue was relatively high and those in which it was relatively low. Comparing the two years month by month, half of the months in the year to March 2018 had a lower Gross Revenue than in the corresponding months of the preceding year and half had higher gross revenue. In light of that variability I consider it necessary to take each12 month period as a whole in order to remove the arbitrary influence of such significant and unpredictable variations from month-to-month. A comparison of the two years does not establish any upward trend in Gross Revenue that should be projected beyond March 2018.

…

256   I accept that Admiral had concrete prospects of increasing its business by providing bonded warehouse services to Pegasus Supply Solutions Pty Ltd and by handling food products to be imported from Juhao, the Chinese entity with which Denis Fateev was in discussions through solicitors in Hong Kong. I also accept that the Lidcombe premises are significantly larger than the warehouse Admiral occupied in Alexandria and that the company therefore had the capacity to expand. However, the volume of such potential new business has not been quantified in the evidence and its potential impact on Gross Revenue can only be the subject of crude estimation. Of themselves, these possibilities of additional business provide no justification for Mr Bleasdale’s adoption of 6.5%.

257   In his second report of 26 April 2021 … in reliance upon Denis Fateev’s evidence regarding prospects for expansion of the business, as deposed in his affidavit 5 June 2020, Mr Bleasdale opined that for the first six months of the Indemnity Period, Standard Gross Revenue should be adjusted upwards by 15% relative to the corresponding period in the year before the fire and for the second six months the adjustment upward should be 20%. I do not find in the evidence any breakdown, calculation or itemisation that would justify quantifying a projected increase in Gross Revenue by these very substantial margins.

258   In the forensic experts’ joint report, following their conclave, Mr Bleasdale states that he now adopts 19.32% as the trend of increase in Gross Revenue … This opinion involves Mr Bleasdale reverting to the erroneous calculation for the three and six months periods, as originally carried out before the agreed adjustment for the one-off revenue transaction in March 2018, and adopting a speculative component for ‘expectations’ of a very general and unquantifiable nature.

259   Although I have accepted that Admiral had prospects of expanding its business in the new premises, it appears unlikely that this could have occurred any earlier than three months into the Indemnity Period, allowing for the transition to the new premises that was to occur irrespective of the fire. Some allowance would have to be made for the possibility of reduced capacity to handle business during the transition period. None of these considerations are capable of being sensibly quantified on the evidence before me. I am not satisfied on the balance of probabilities that there has been established any trend of growth in Gross Revenue that should be applied in respect of the Indemnity Period.” (emphasis added)

266. The emphasised portion in PJ [256], set out above, formed the basis of Admiral’s attack on the primary judge’s finding with respect to the trend in Admiral’s gross revenue.

267. The argument raised by Admiral on this issue boiled down to the proposition that the primary judge’s finding that “Admiral had concrete prospects of increasing its business by providing bonded warehouse services to Pegasus Supply Solutions Pty Ltd and by handling food products to be imported from Juhao”,[73] in addition to capitalising upon the increased size of the Lidcombe premises, was incompatible with his Honour’s determination that the body of evidence failed to establish a positive trend of growth in Admiral’s gross revenue. [74]

     73. PJ [256].

     74. PJ [259].

268. It is important to note, however, that the finding as to “concrete prospects” of increased business was immediately qualified by a material observation that “the volume of such potential new business has not been quantified in the evidence and its potential impact on Gross Revenue can only be the subject of crude estimation. Of themselves, these possibilities of additional business provide no justification for Mr Bleasdale’s adoption of 6.5%”. [75] Of course, the figure of 6.5% was subsequently increased by Mr Bleasdale without justification.

     75. PJ [256].

269. Admiral relied upon the principle that “the Court must do the best it can with the evidence available to assess damages”,[76] and submitted that the primary judge did not do so when assessing damages with respect to the contingent payments under the insurance policy.

     76. Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 80, 138 and 153–154; [1991] HCA 54.

270. In Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd (2003) 77 ALJR 768; [2003] HCA 10 at [38], Hayne J (with whom Gleeson CJ, McHugh and Kirby JJ agreed) said that there is a distinction to be drawn between “cases where a plaintiff cannot adduce evidence of what has been lost (in which ‘estimation, if not guesswork, may be necessary in assessing the damages to be allowed’) and cases where, although apparently able to do so, the plaintiff has not adduced such evidence”. According to Hayne J, references to “mere difficulty in estimating damages not relieving a court from the responsibility of estimating them as best it can” are more applicable to the former class of case, where a plaintiff cannot adduce evidence of its loss, as opposed to the latter, where the plaintiff has (either deliberately or inadvertently) failed to adduce such evidence, which was available to the plaintiff on reasonable inquiry.

271. The present case is, in my opinion, an example of the latter category in that Admiral did not equip the experts, and ultimately the Court, with sufficiently concrete data that may have made the estimation of a quantum of trend growth possible. It follows that this ground of appeal must also be dismissed.

Conclusion and orders

272. It follows that the appeal in the CGU proceedings must be allowed in part and the appeal in the Brightcity proceedings should also be allowed in part.

273. The parties should bring in short minutes of order to reflect these reasons by 27 January 2023, together with any submissions (of not more than three pages) as to costs and any dispute as to orders by that same date, to be determined by the Court on the papers.

272. WARD P: I agree with Bell CJ.

273. MACFARLAN JA: I agree with Bell CJ.

**********

Endnotes

Decision last updated: 20 December 2022