Admiral International Pty Ltd v Insurance Australia Ltd; Brightcity International Trading Pty Ltd v Admiral International Pty Ltd

[2021] NSWSC 1440

Supreme Court

New South Wales

Medium Neutral Citation:

Admiral International Pty Ltd v Insurance Australia Ltd; Brightcity International Trading Pty Ltd v Admiral International Pty Ltd [2021] NSWSC 1440

Hearing dates:

6–16 September 2021

Date of orders:

8 November 2021

Decision date:

08 November 2021

Jurisdiction:

Common Law

Before:

Fagan J

Decision:

In Admiral International Pty Ltd v Insurance Australia Ltd trading as CGU Insurance – No 2018/00343393:

1.   Verdict and judgment for the defendant on the plaintiff’s claims for damages.

2.   The statement of claim is in all other respects dismissed.

3.   The plaintiff is to pay the defendant’s costs of the proceedings.

In Brightcity International Trading Pty Ltd v Admiral International Pty Ltd and Insurance Australia Ltd trading as CGU Insurance – No 2019/00191443:

1.   Judgment for the plaintiff against the first defendant in the sum of $246,132.90.

2.   The first defendant is to pay two thirds of the plaintiff’s costs of the proceedings on the statement of claim.

3.   Judgment for the plaintiff against the second defendant in the sum of $3,337,854.

4.   The second defendant is to pay one third of the plaintiff’s costs of the proceedings on the statement of claim.

5.   The first cross-claim is dismissed with costs.

Catchwords:

INSURANCE — claim for indemnity — warehouse fire — theft of goods prior to fire — whether insured knew fire was to be started and consented to it — identification of the insured’s active and directing mind — fraud of individuals attributed to insured company — insured disentitled from indemnity

INSURANCE – claim by owner of goods – not a party to warehouse operator’s policy — construction of policy — interpretation of “interests of other parties” clause — s 48(1) of the Insurance Contracts Act 1984 (Cth)

BAILMENT – Bailee — Duties — Breach of obligation to return goods or their value — where bailed goods destroyed by fire — failure to take reasonable care —bailee liable for loss — Tottenham Investments Pty Ltd v Carburettor Services Pty Ltd applied

EVIDENCE — Standard of proof — Civil case — where fraud sought to be inferred — circumstantial evidence — Bradshaw v McEwans Pty Ltd applied

Legislation Cited:

Customs Act 1901 (Cth)

Evidence Act 1995 (NSW)

Insurance Contracts Act 1984 (Cth)

Cases Cited:

Beresford v Royal Insurance Co [1938] AC 586

Bradshaw vMcEwansPty Ltd (1951) 217 ALR 1

Entwells Pty Ltd v National and General Insurance Co Ltd [1991] WASC 286; (1991) 5 ACSR 424

Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; 230 CLR 89

Federation Insurance Ltd v Wasson [1987] HCA 34; (1987) 163 CLR 303

General Accident & Life Assurance Corp Ltd v Midland Bank Ltd [1940] 2 KB 388

Gett v Tabet [2009] NSWCA 76

HL Bolton (Engineering) Co Ltd v TK Graham & Sons Ltd [1957] 1 QB 159

Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 707

Lombard Australia Ltd v NRMA Insurance Ltd (1968) 72 SR (NSW) 45

MMI General Insurance Ltd v Baktoo (2000) 48 NSWLR 605; [2000] NSWCA 70

P Samuel & Co Ltd v Dumas [1925] AC 431

Palmer v Dolman [2005] NSWCA 361

Tesco Supermarkets Ltd v Nattrass [1972] AC 153

Tottenham Investments Pty Ltd v Carburettor Services Pty Ltd (1994) Aust Torts Reports 81-292

Texts Cited:

Mann’s Annotated Insurance Law

Kelly & Ball Principles of Insurance Law

Category:

Principal judgment

Parties:

2018/343393
Admiral International Pty Ltd (plaintiff)
Insurance Australia Limited t/as CGU Insurance (defendant)
2019/191443
Brightcity International Trading Pty Ltd (plaintiff)
Admiral International Pty Ltd (defendant)

Representation:

Counsel:
TM Mehigan SC with P Mann (plaintiff)
GM Watson & D Lloyd SC with M Kalyk (defendant)
S Gray (Brightcity)

Solicitors:
2018/343393
LMI Legal (plaintiff)
Landers & Rogers (defendant)

2019/191443
Norton Rose Fulbright (plaintiff)
LMI Legal (defendant)

File Number(s):

2018/343393 and 2019/191443

Publication restriction:

No

Judgment

1. These two proceedings were heard together in September 2021, evidence in each matter being received as evidence in the other. The plaintiff in the first proceeding is Admiral International Pty Ltd (“Admiral”). In 2018 that company operated a warehouse in a leased industrial unit at 64-66 Burrows Road, Alexandria. The defendant in the first proceeding is Insurance Australia Ltd trading as CGU Insurance (“CGU”). Under an Industrial Special Risks policy (“the ISR policy”) issued for a period of 12 months commencing on 30 September 2017 CGU agreed to insure Admiral against damage to or destruction of property at the warehouse and against loss of gross profit resulting from business interruption.

2. 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. Admiral claims indemnity for the destruction of its equipment and for consequential loss of gross profits. The fire also destroyed the entirety of the stock that Admiral was holding in the warehouse on behalf of its clients, consisting mainly of imported alcohol and tobacco products.

3. Ultimately none of the three parties to the proceedings has argued against a finding that the fire was deliberately lit. CGU has denied Admiral’s claim under the ISR policy on the ground of arson fraud. It alleges that the fire was started with Admiral’s knowledge and consent. CGU further alleges that within 48 hours before the fire large quantities of the goods that were in storage for Admiral’s customers were removed from the warehouse without the customers’ authority. It is alleged that the goods were stolen by persons who acted with the knowledge and consent of Admiral. Admiral disputes that there was theft from the warehouse over the weekend before the fire. It denies fraudulent involvement in the fire or in any such theft. It claims that CGU’s refusal to grant indemnity is in breach of the contract of insurance and involves breach of the insurer’s duty of utmost good faith implied by s 13 of the Insurance Contracts Act 1984 (Cth). Admiral claims damages for the alleged breaches.

4. The second proceeding is brought by Brightcity International Pty Ltd (“Brightcity”) against Admiral and CGU. From about 2008 and continuing through 2018 Brightcity was an importer of liquor and cigarettes. It used Admiral’s services for the storage of both duty-paid goods, otherwise known as free goods, and customable goods on which duty was yet to be paid. Goods in the latter category were held in sections of the warehouse that were licensed under the Customs Act 1901 (Cth) as a bond store. Admiral had two licences in respect of the premises. The first was a depot licence under s 77G, permitting short term storage of imported goods on which duty had not been paid, for unpacking and consolidation. The second was a warehouse licence issued under s 79 of the Customs Act for longer term storage of goods upon which duty was yet to be paid. Brightcity’s goods, to a replacement value of approximately $2.36m excluding customs duty, were not stolen but were destroyed in the fire.

5. Brightcity alleges against CGU that the ISR policy taken out by Admiral responds directly to its losses. CGU denies that the policy responds. If Brightcity succeeds in that claim but the policy does not fully cover its losses, Brightcity claims any balance from Admiral on three alternative bases: first, as damages flowing from Admiral’s breach of an alleged agreement to insure the goods to their full value for the benefit of Brightcity; secondly, as damages for misrepresentations said to have been made by Admiral, to the effect that it had procured such insurance; thirdly, for breach by Admiral of its obligations as a bailee. If Brightcity fails to establish against CGU any entitlement to indemnity under the policy, then it claims the whole of its losses from Admiral on those three alternative causes of action. Brightcity claims against Admiral loss of $246,132.90 in profits that could have been earned from sale of the destroyed stock. There is no claim that the ISR policy issued by CGU responds to Brightcity’s loss of profits or that Admiral is liable for not insuring against that loss. The $246,132.90 is claimed only from Admiral for breach of bailment.

6. Admiral denies that it breached its duties as a bailee. It denies that it came under any contractual obligation to procure insurance, directly enforceable by Brightcity, for the value of its goods and it denies having made any representation in that regard. Admiral says that the ISR policy obtained by it from CGU fulfilled any promise or representation that the Court may find was made to Brightcity.

7. In the proceeding brought by Brightcity, Admiral has cross-claimed against CGU claiming, first, a declaration that under the ISR policy CGU is obliged to indemnify Brightcity directly in respect of its stock destroyed in the fire. Secondly, Admiral relies upon a General and Products Liability Policy issued to it by CGU (“the Liability policy”). That policy covered Admiral’s legal liability and any costs awarded against it in respect of property damage. The Liability policy was also issued on 30 September 2017 and provided cover for a period of 12 months. Under the Liability policy Admiral claims to be indemnified against any judgment awarded in favour of Brightcity in that company’s action for damages for breach of bailment.

Issues

8. In addition to the contested questions of liability that have been outlined above, the parties are in dispute about quantification of Admiral’s loss of gross profits caused by the interruption of its business. The quantum of Admiral’s damages for the alleged breach of the insurance contract, including breach of the duty of good faith, is disputed. The value of Admiral’s property destroyed in the fire is agreed; so is the value of Brightcity’s destroyed stock and the amount of its loss of profits on the prospective sale of stock. A list of the issues that the Court is required to resolve is as follows, with references in square brackets to the paragraphs of these reasons at which consideration of each issue commences:

Liability of CGU to indemnify Admiral and Brightcity under the ISR policy

1. Has CGU proved that the fire in the warehouse was deliberately lit with the knowledge and consent or authorisation of Admiral? – [167]>

2. Do the facts found in resolution of Issue 1 entitle CGU to refuse indemnity under the ISR policy for Admiral’s insured losses incurred as a result of the fire? – [208]>

3. Does Brightcity have a direct entitlement to indemnity under the ISR policy for its loss in respect of destroyed stock? – [213]> Quantum of Brightcity’s loss is agreed.

Quantum of Admiral’s indemnity under the ISR policy

1. In respect of Admiral’s own property destroyed in the fire (agreed value $252,536.66) and its costs of preparing that aspect of its claim (agreed sum $41,029.96), what amount is claimable by Admiral under the ISR policy, applying the under-insurance formula in endorsement AVDELPC4 and allowing for the deductible of $5,000? – [236]>

2. What loss of Gross Revenue is claimable by Admiral under endorsement GREVNCC4 on account of interruption to or interference with its business caused by the destruction of Admiral’s property and the goods of its customers? – [239]>

Liability of Admiral to Brightcity

1. Was it a term of Admiral’s contract with Brightcity for the warehousing of Brightcity’s goods that Admiral would procure insurance cover for the value of those goods, in favour of and enforceable by Brightcity, against perils including fire? – [264]>

2. Did Admiral represent to Brightcity that it had procured fire insurance cover for the value of Brightcity’s goods? – [267]

3. Did Admiral breach obligations owed by it to Brightcity as a bailee of goods that were destroyed in the fire? – [268]>

Liability of CGU to indemnify Admiral under the Liability policy

1. If it is determined under Issue 8 that Admiral is liable to Brightcity for breach of its obligations as a bailee, does the Liability policy respond and require that CGU indemnify Admiral against damages payable to Brightcity? – [275]>

Admiral’s damages claim against CGU

1. By declining to indemnify Admiral in respect of its claims under the ISR policy has CGU breached its contracts of insurance with Admiral, including its obligation of good faith implied by s 13 of the Insurance Contracts Act and, if so, what amount of damages should be awarded to Admiral? – [281]>

Primary facts

9. My findings of fact, necessary for the resolution of these issues, are organised under the following headings. The central matter of factual dispute, to which most of the evidence was directed and which occupied most of the hearing time including counsel’s addresses, is whether Admiral knew of and consented to the deliberate burning of the warehouse and its contents.

Admiral’s corporate structure and personnel            [12]>

Admiral’s warehouse, stock handling and stock recording      [17]>

Brightcity’s dealings with Admiral               [26]>

Security at the Alexandria warehouse            [48]>

Driveway gates                  [50]>

Vehicle and pedestrian entry ways            [55]>

Alarm system  [62]>

CCTV system  [74]>

Morris Gazzara’s delivery of tyres                [87]>

Truck movements, tyre placement on 13 and 14 April   [87]>

Dmitry Fateev’s explanation               [94]>

Morris Gazzara’s explanation               [100]>

Denis Fateev’s departure for Hong Kong on 13 April      [112]>

Activity at the warehouse on 13 and 14 April            [115]>

Dmitry Fateev’s departure for Vladivostik on 15 April      [125]>

Ignition and progress of the fire, combustion of tyres      [127]>

Remnants of the fire compared to Admiral’s stock records      [138]>

Stolen tobacco seized in August 2018            [155]>

Admiral’s proposed move to Lidcombe            [162]>

10. As will be seen I find there to be 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. Dmitry Fateev, now deceased, was the father of Denis Fateev who has been at all material times the managing director of Admiral. Dmitry Fateev worked in the business part time as a warehouseman and driver.

11. For CGU to discharge its burden of proving arson fraud by Admiral, it must 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. The legal principles underlying this proposition are considered at [171]-[175] below. Admiral has not confined itself to contesting that Denis Fateev knew of and consented to his father’s conduct. 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.

Admiral’s corporate structure and personnel

12. Upon incorporation of Admiral in February 1997 its sole director was Dmitry Fateev. He continued as a director until May 2009, apart from an interruption of seven months. His wife, Svetlana Fateev, was either a director or the secretary of the company for most of the period from incorporation up to September 2012. From incorporation until 2008 four other people served as directors from time to time, for periods of between two and seven years. The company appears to have been inactive until late 2012. On 12 September 2012 Denis Fateev was appointed a director and he has been the sole director of Admiral since then. He was 23 years old when appointed and was just short of 28 at the date of the fire in April 2018. Since his appointment Denis Fateev has acted as managing director. He has deposed that his duties were as follows:

I am 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.

That evidence has not been contradicted and I accept it.

13. As at October 2009 there were eight issued shares in the company, all held by Dmitry Fateev. The eight shares were then transferred to Admiral Corporate Group Pty Ltd. Two additional shares were issued in October 2015, one to Admiral Corporate Group Pty Ltd and one to Viktoriia Ivantec. Her share was cancelled on 9 May 2018. Throughout Admiral’s active trading history up to the date of the fire, it has been in the effective ownership of Admiral Corporate Group Pty Ltd. Denis Fateev’s mother, Svetlana, has been the sole shareholder and director of Admiral Corporate Group Pty Ltd since 2009. Denis Fateev said that Admiral Corporate Group Pty Ltd held the shares in Admiral on trust but he did not give any satisfactory evidence that the Court could rely upon as to the beneficial interests in that trust.

14. For some years prior to 2012 Dmitry Fateev operated a freight carrying and courier business through a company named Admiral Management Group Pty Ltd. That company had occupied premises at 15-17 Byrnes Street, Botany but its activities were curtailed as a result of rezoning by a local government authority. Restrictions on the hours during which truck movements could take place caused the business to become unprofitable. A creditors’ voluntary winding up of Admiral Management Group Pty Ltd commenced on 4 January 2016.

15. From about the beginning of 2013 Admiral commenced to conduct a warehousing business at the same address in Botany under the managing directorship of Denis Fateev. This appears to have been a successor to or replacement of the business that Dmitry Fateev had earlier conducted in the name of Admiral Management Group Pty Ltd. Admiral moved its business from Botany to the warehouse at Unit 1, 64-66 Burrows Road, Alexandria in mid-2014 and commenced occupation under a four-year lease commencing 1 May 2014 and expiring 30 April 2018.

16. All members of the Fateev family have worked in Admiral’s business in various capacities since 2013. Up to the time of the fire Dmitry Fateev worked part time, assisting with the reception of goods into the warehouse, dispatching goods and driving delivery vehicles. He was not an office holder of Admiral at any time after it commenced its warehousing business in 2013. Dmitry was aged 52 at the date of the fire. He died on 28 January 2021 in Vladivostok as a result of coronary and vascular disease. Svetlana Fateev has managed Admiral’s bookkeeping since it commenced operations. Denis Fateev’s younger brother, Nikita, was aged 19 at the time of the fire. He worked part-time in a similar capacity to his father, Dmitry. In 2018 Nikita lived with his parents in a house in Zetland, not far from the warehouse.

Admiral’s warehouse, stock handling and stock recording

17. Burrows Road Alexandria is aligned more or less north-south. The properties on both sides of the road are developed with light industrial and commercial improvements. The Alexandra Canal lies to the east of and parallel with Burrows Road. Properties on the east side of the road, such as Nos 64-66, lie between the road and the Canal. In 2018 the improvements at Nos 64-66 comprised an industrial building on a concrete slab with tilt-slab concrete panel walls and a sheet metal roof supported on steel beams. The entire building, comprising four conjoined units with party walls, was about 90m long from north to south and about 40m deep from west (being the street side) to east (being the Canal side). Unit 1 occupied by Admiral was the southern-most unit. The rear of the building is on the bank of the Canal, only a few metres from the water. At the time of the fire Units 2-4, to the north of Unit 1, were unoccupied.

17. Directly in front of the building on the street side, extending along the full length of the property from north to south, was a forecourt about 12m wide. There was a screen of trees and shrubs between that and the front fence. The fence was constructed of cyclone wire on tubular steel posts and rails, with barbed wire on top. There were two vehicle entrances from the street onto this forecourt, one opposite Unit 4 at the north end and one opposite Unit 1 to the south. Each entrance was approximately 6m wide and fitted with double gates, closing in the middle. The gates were also constructed of cyclone wire on tubular steel frames.

18. The front of Unit 1 was approximately 24m wide. At the left-hand, or north, side of the front facade there was a vehicle entrance into the unit, measuring about 4.75m wide and 6m high. The ground floor office area for the unit was at the right side of the front facade. In between the vehicle entrance to the left and the office area to the right there were four undercover parking spaces. The front of the ground floor office area, facing the street, was glazed. This glazed office front was about 4.7m wide and in the middle of it was the entry to the office, through double glazed doors of which one was usually fixed in place at the top by a sliding bolt.

19. Inside the ground floor office area there was a reception desk and other office furniture. At the back of the office, furthest from the street, a door led out into the warehouse area behind. Adjacent to the ground floor office, but accessible only through internal doors leading off the warehouse, there were staff toilets and a kitchen. A set of stairs within the office gave access to further office space on the mezzanine floor. The upstairs office space extended across most of the front of the building, from the southern wall to the vehicle entrance.

20. The warehouse area lying behind the office and the amenities rooms was about 25m wide. It extended for about 30.5m in depth to the rear or east wall. In the south-west corner of this area, adjoining the back of the ground floor office, a wire mesh cage about 3m square and about 3m high was installed. This was required for holding goods under additional security, as might be required from time to time pursuant to the conditions of Admiral’s Customs Act licences. Steel framed pallet racking was installed against the remainder of the south wall stretching to the back of the warehouse. This was capable of carrying pallets of goods on each of three levels above the ground level.

21. Down the centre of the warehouse, running from west to east, were two double rows of pallet racking separated by a middle aisle. Further pallet racking was installed along the north wall. All of the pallet racking was aligned east-west through the length of the warehouse. Thus, progressing from south to north across the storage space, there was racking on the south wall, a south aisle, a double row of racking accessible from both sides, a middle aisle, another double row of racking accessible from both sides, a north aisle and, finally, the racking on the north wall. Towards the front or west of the warehouse there was some clear space across the width of the warehouse for unloading and manoeuvring pallets and for access to each of the respective aisles.

22. Cases of imported alcohol and cigarettes arrived at the premises in containers. The standard industry units of packaging of cigarettes in wholesale quantities are the “carton” and the “master case” or “shipper”. A carton is a wrapped grouping of 10 cigarette packs, each pack containing 20 sticks, in two layers of five packs side-by-side, one layer on top of the other. A master case or shipper is a cardboard box containing 50 cartons. A master case therefore contains 10,000 “sticks” or individual cigarettes. Master cases of cigarettes within the containers were not on pallets when they arrived. Admiral’s personnel unloaded cargoes of cigarettes from the containers and stacked the goods on pallets in the warehouse, usually around 30 master cases per pallet. It is not clear whether cases of alcohol arrived already stacked on pallets within the containers or whether they had to be palletised in the warehouse.

23. Admiral had a machine for wrapping goods on pallets with plastic. This consisted of a turntable on which a pallet could be rotated while sheet plastic was stretched around the cargo. Under Admiral’s s 79 Customs Act licence, bonded goods were required to be kept intact until duty had been paid. The plastic wrapping was applied in order to comply with this requirement and it was only breached for the purpose of removing cases of alcohol or master cases of cigarettes on which duty had been paid. Licensing under the Customs Act is administered by the Australian Taxation Office (“ATO”) and the Australian Border Force (“ABF”). When one of Admiral’s customers sold goods for consumption in Australia it would pay duty on them and obtain from the ATO an Authority to Deal. The customer would then arrange for Admiral to release the goods out of the warehouse. This was usually case by case rather than by the pallet.

24. For all customers Admiral recorded a unique shipment number for each consignment of goods it received. Against that number the company recorded the date and the number of items, usually cases of alcohol or master cases of cigarettes, and the brand or other description. If duty was paid on the goods, or on any of part of them, when they were received into storage or while they were in the warehouse, the notation “cleared” was recorded by Admiral against the quantity of goods concerned. Admiral’s records further showed the number of items that were released to the customer. Whenever cases of alcohol or master cases of cigarettes were removed from the warehouse the numbers remaining were updated and the number of pallets or part pallets was adjusted.

Brightcity’s dealings with Admiral

26. Since about 2008 Brightcity has conducted a business of importing tobacco and alcohol products from China. It pays duty on some stock and arranges for it to be warehoused as free goods pending sale within Australia. Brightcity arranges for a significant part of its stock to be held in bond. Ms Helen Yao has at all material times been the principal of Brightcity. She caused the company to commence using Admiral’s warehousing services in December 2013 when it was still operating from 15-17 Byrnes Street, Botany. Admiral’s charges at that time were $5 per pallet per week for free goods and $7.50 per pallet per week in bond. Admiral did not have its own licence to operate a bond store at the Byrnes Street warehouse but it held goods in bond under a licence in the name of Admiral Management Group Pty Ltd. Dmitry Fateev had obtained that licence some years earlier for the purpose of conducting the warehousing and logistics business of Admiral Management Group Pty Ltd.

27. Denis Fateev deposed that when Brightcity commenced to do business with Admiral at the Byrnes Street premises an invoice was provided “at an early stage of the relationship”, headed with the words “Insurance at owners cost & responsibility”. The document identified by Denis Fateev is in fact a list of services and rates on the letterhead of Admiral Management Group Pty Ltd, not an invoice from Admiral to Brightcity. Ms Yao agrees that she was given the document when she requested a price list. However, this occurred when she was doing business in a very small way with Admiral’s operation at Byrnes Street. Whatever contractual effect the document may have had in relation to those early dealings, it was superseded by the exchange of emails and the conversations that took place in June 2015 when Ms Yao commenced placing a greater volume of Brightcity’s goods in Admiral’s care at Alexandria and when the topic of insurance was explicitly referred to during the negotiation of storage charges.

28. Denis Fateev and Ms Yao both deposed that when their business relationship commenced in December 2013 Ms Yao asked whether Admiral’s storage fees “include insurance specifically for Brightcity”. Denis Fateev deposed that Ms Yao limited this enquiry, by making reference to cover for damage that might be done to Brightcity’s goods by Admiral itself as opposed to damage occasioned by fire or the actions of third parties. Denis Fateev’s version of his reply to Ms Yao is as follows:

We do have insurance, so if Admiral damages your goods, we should be able to make a claim for that.

Ms Yao’s recollection of the reply was different, as follows:

Storage fees do not include insurance specifically for your goods but Admiral has insurance for the warehouse and the goods stored in the warehouse so if anything happens to your goods we can just claim on that insurance.

29. Denis Fateev was not questioned about this difference and Ms Yao was not required for cross-examination at all. Denis Fateev deposed that he found Ms Yao’s spoken English difficult to understand. It may have been intended by this evidence also to raise a doubt about Ms Yao’s understanding of what was said to her in English. Ms Yao’s affidavits are written in accurate English and they have not been made or affirmed through an interpreter. Comparison of the text of the affidavits with that of contemporaneous emails suggests that the affidavits are not in Ms Yao’s own words. If her evidence of any of the relevant conversations was to be challenged seriously on the ground of a language barrier it would have been necessary for Admiral to require her for cross-examination so that the Court could make an assessment. That did not occur.

30. I am not able to resolve the competing versions of the December 2013 conversation referred to at [28] above. I cannot attach any significance to that conversation in determining whether Admiral represented that it had taken out cover for Brightcity’s goods in the Alexandria warehouse or whether Admiral promised that it would obtain such cover in favour of Brightcity. Brightcity’s case in that respect turns upon documents that were exchanged between the parties in mid-2015 and conversations that took place at that time, as considered below.

31. After Admiral had relocated to the warehouse at Alexandria Brightcity’s free goods were moved there on about 24 August 2014. Admiral did not initially have a bond licence for its new premises. From about mid-July 2014 it made arrangements for storage of Brightcity’s bonded goods with another operator, Pegasus Supply Solutions Pty Ltd (“Pegasus”), at that company’s warehouse in Marrickville. Admiral managed the record keeping of Brightcity’s goods in Pegasus’ bond store but it did not have physical custody of them. Both parties expected that arrangement to last for only about a month until Admiral secured a bond licence for the Alexandria warehouse.

32. In early April 2015 Denis Fateev advised Ms Yao that Admiral had applied for its licence and that the ATO required a deposit of $750,000 as security for duty that may become payable on bonded tobacco goods that would be stored for Brightcity. Denis Fateev requested Brightcity to fund the deposit but Ms Yao declined. This difficulty was eventually overcome when the ATO accepted a lesser security deposit and Admiral paid it.

33. Admiral’s s 77G Depot Licence and s 79 Warehouse Licence were issued on 15 July 2015. The licences were valid until 30 June 2016. They were thereafter renewed from year to year. From 7 October 2015 the ATO required a security deposit of $200,000 as a condition of permission to store up to 20 million sticks of cigarettes. Admiral paid that. The limit of 20 million individual cigarettes would equate to 2,000 master cases, which could be stored on between 66 and 100 pallets. In June 2016 further security of $100,000 had to be paid when Admiral commenced to store loose tobacco (up to 3,500 kgs) and cigars (up to 4.5 million). By email of 24 July 2017 Admiral applied to the ATO to increase its bond storage limit for cigarettes from 20 million to 40 million and for loose tobacco from 3,500 kgs to 7,000 kgs. The limit was not increased.

34. On 2 June 2015 at 11:19 am Denis Fateev sent an email to Ms Yao as follows:

Pegasus have advised that they no longer want to store your cigarettes due to high insurance costs. We need to have a meeting regarding our options.

This was followed up with a further email at 1:29 pm on the same day in these terms:

Pegasus have asked us to move all [your] stock out by the 14/06/15. Otherwise they will increase the storage charge significantly.

Yesterday I had our insurance broker visit our new warehouse and we discussed your stock.

I am in the process of applying for the ATO licence, but I need to review your rates because of an increase in rent at the new place and Insurance for your amount of cigarettes to be stored. Below are the rates we will need to charge to be able to store your cigarettes in our ATO warehouse when it is approved. If you cannot agree to these rates, it will not be financially viable for us to store your goods as insurance for your stock is very expensive.

35. There were then set out a list of charges for 20ft and 40ft containers and for various aspects of inbound and outbound handling. The following proposed charges for storage were nominated:

FREE GOODS STORAGE: $8.00 per plt per week (Tobacco & Alcohol) inc. insurance

BONDED STORAGE: $1.00 per ctn per week (Tobacco & Alcohol) inc. insurance

36. Ms Yao deposed that she expected each pallet would carry “about 20 cartons” for storage. I understand her to intend by that evidence that 20 master cases of cigarettes could be stored on a pallet, so that the cost per week of a full pallet of bonded cigarettes would be $20. On 2 June 2015 Ms Yao responded to Denis Fateev’s quotation with a request for a discount on container and warehouse fees. Her email concluded as follows:

I agree the storage fee.

37. As at 5 June 2015 Admiral held free goods belonging to Brightcity in the Alexandria warehouse and it was still managing bonded goods that were held for Brightcity in Pegasus’ licensed warehouse. Admiral invoiced Brightcity for the storage of goods in both categories, presumably paying Pegasus on a subcontract basis for holding the goods that were in bond. On 5 June 2015 Admiral invoiced Brightcity for storage of both classes of goods for the period 1 June 2015 to 7 June 2015. A separate invoice was issued for the storage of each shipment that had arrived on a specific date. As an example, the invoice of 5 June 2015 in respect of stock that remained from a shipment that had arrived in late 2013 was in the following terms:

COMMENT: Please note NEW charges apply for this week.

Bonded storage 1/06/15 – 7/06/15 1 weeks (140 cases * $1.00 / 7 PLT) - $140.00

Free goods Storage 1/06/15 – 7/06/15 1 weeks (3 PLT * $8) - $24.00

38. On 5 June 2015 Ms Yao reconsidered her initial agreement to “the storage fee” (see [36] above) because she had expected the bond storage charge for alcohol to be less than that for tobacco and thought that Admiral’s proposed “$1.00 per ctn per week” was too high for alcohol. She sent Denis Fateev the following email at 7:04 pm:

I can’t understand your company’s charge. If you charge under carton, I can’t do this business. I understand your storage fee is pallet charge. I can’t accept this charge.

39. Ms Yao deposed that on about 9 June 2015 she discussed Admiral’s increased storage charges with Denis Fateev at his office at the Alexandria warehouse. According to her affidavit Ms Yao reiterated that the quoted rate of $1.00 per carton per week for bonded alcohol was too high and she contrasted it with the rate that had until recently been charged by Pegasus of $7.50 per pallet per week. She deposed that Denis Fateev replied as follows:

Helen I am unfortunately not able to lower the container fee and warehouse charges due to the higher warehouse rent and warehouse insurance costs.

As for the storage fees, they are now so much higher, and I have to charge by the carton for tobacco, because of the high insurance cost for your goods. However, what I can do is adjust the storage fees for bonded alcohol goods to $7.50 per pallet per week to match Pegasus’ storage rate.

I am not able to go any lower for the storage fee for bonded tobacco goods since the insurance cost is high, not forgetting of the high duty payable for tobacco goods.

Ms Yao says that she agreed to this.

40. Denis Fateev deposed that his reply was in different terms, as follows:

I cannot offer you a discount for your tobacco. Because we are storing your tobacco, we have had to pay an additional security deposit to the ATO, and have had to increase our insurance cover in relation to our liability for duty. This has all resulted in additional costs to Admiral, and so we have had to revise our storage rates. I can reduce the storage fees for bonded alcohol goods to $7.50 per pallet per week to match Pegasus’ storage rate.

41. The difference between these recollections is that Denis Fateev claims he attributed the increased charges for tobacco, not to insurance cover for risk to Brightcity’s goods, but to Admiral’s cost of providing the security deposit to the ATO and “our insurance cover in relation to our liability for duty”. In cross-examination Denis Fateev resiled from that distinction, in the following answers:

Q.   When you were speaking to Ms Yao in the middle of 2015 you were telling her that taking out insurance for Brightcity stock was expensive, correct?

A.   Yes.

Q.   It wasn't for the liability [for] duty, but it was for the actual stock, correct?

A.   Whilst in our possession.

[…]

Q.   Whether it was bonded or unbonded, provided you controlled it, you were talking to Ms Yao about insurance for that stock?

A.   Correct.

Q.   The cover that you were discussing with Ms Yao was for the full value of the goods, correct?

A.   I assume so but we never discussed the value.

42. I accept Ms Yao’s recollection of the conversation, which accords with the terms of Denis Fateev’s email of 2 June 2015 quoted at [34] above. No evidence has been tendered to show that Admiral took out insurance in respect of its potential liability for duty, which could arise in the event of failure to keep the bonded goods secure: s 35A of the Customs Act. If Admiral did have such cover, the evidence does not substantiate that in June 2015 it had incurred an increased premium cost in that regard. On the basis of Ms Yao’s evidence about this conversation I am satisfied that Denis Fateev justified to her the significantly increased storage rate for bonded tobacco, relative to what had been charged by Admiral at the Byrnes Street warehouse and subsequently by Pegasus, on the basis of increased costs of insuring against risk to Brightcity’s goods.

43. The rate of $7.50 per pallet per week for bonded alcohol that was agreed in the conversation on 9 June 2015 was less than the price of $8.00 that had been quoted on 2 June 2015 for free storage. By an email of 24 November 2015 Admiral reduced the rate for free storage for alcohol to $7.00 per week.

44. From October 2015, as Brightcity received new imports of alcohol that were required to be stored in bond, it caused them to be delivered to the Alexandria warehouse, which now had its Customs Act licence. At this time a substantial quantity of Brightcity’s goods were still held in bond at Pegasus’ premises. On 18 December 2015 the remainder of the goods held by Pegasus were transferred to the Alexandria warehouse.

45. On 13 April 2018 Admiral issued to Brightcity invoices for storage for the week from 9 April 2018 to 15 April 2018 and “Stock on Hand” reports in respect of alcohol and cigarettes as at 9 April 2018. Two of the invoices related to shipments that had been received between February and October 2014 and in February 2015. All of the invoices recorded Admiral’s charges for cleared goods, alcohol and tobacco, at the rate of $7.00 per pallet per week; for alcohol in bond at the rate of $7.50 per pallet per week and for cigarettes in bond at the rate of “$1 p/ctn p/week”. This was in accordance with the emails of early June 2015 and the subsequent conversations and emails of that year, as referred to above. Invoices from 2016 and 2017 show that Admiral consistently charged Brightcity for storage throughout those years at the rates that had been offered in mid-2015. Brightcity paid those invoices when due and clearly accepted, by its conduct, the rates quoted in mid-2015 and the terms that were discussed at that time. I will return to the contractual effect when considering Issue 6 at [264]>.

42. After the fire Admiral produced from its computerised records a full schedule of all stock that was held on behalf of each customer up to Friday, 13 April 2018, being the last business day before the fire. Admiral had in the warehouse a total of about 609 pallets of goods on behalf of all its customers. This included 18 Intermediate Bulk Containers (“IBCs”), each with 1,000 litres capacity, containing pure alcohol. I have counted each IBC as equivalent to a pallet. Of the total, 271 pallets were of cigarettes and 129 pallets were of alcohol.

43. Brightcity was a major customer of Admiral. The 13 April 2018 stock record showed that Admiral held 141 full pallets and five part pallets of goods for Brightcity, of which 35 pallets were alcohol and the remaining 106 pallets and five part pallets were cigarettes. Disregarding part pallets, Brightcity’s goods constituted 23% of the total of all goods in storage. There is no reliable evidence of what proportion of Admiral’s total revenue was earned from Brightcity, either in the financial year during which the fire occurred or in any earlier year. Denis Fateev could offer no estimate of Admiral’s turnover in any year although the figures have been presented to the Court through forensic accountants. Denis Fateev was unable to give an estimate of Brightcity’s contribution to Admiral’s turnover, either in dollar terms or as a proportion.

Security at the Alexandria warehouse

48. Security at the Alexandria premises consisted of: the cyclone wire fence on the street boundary; the double gates at each entrance driveway; locking mechanisms for the vehicular entry to the warehouse and for the pedestrian entry to the office; movement sensors at doorways and throughout the storage area, linked to an alarm panel; a data transmission unit (“DTU”) for sending signals, via cell phone towers, to a 24 hour monitored base; CCTV cameras within the warehouse and at the front of the building with a monitor in the downstairs office, a Network Video Recorder (“NVR”) in the executive office upstairs and a mobile phone application by means of which images captured by the CCTV could be viewed remotely in real time.

49. As will be described in more detail below, these security devices were all disabled at the time when the fire was deliberately started shortly after 12:24 am on Monday, 16 April 2018. Some of them had been out of commission or unused for some time prior to Saturday, 14 April 2018. It is common ground that the last person to have access to the warehouse prior to the entry of the person who started the fire was Dmitry Fateev. He came and went from the premises at various times between 5:52am and 11:11pm on Saturday 14 April. On 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.

Driveway gates

50. Admiral’s NVR was not recording feed from the CCTV cameras mounted on the front of the warehouse, or from any of its internal cameras, when the fire was ignited. It had not been recording at any time over the three preceding days. However, 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. Neither 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.

51. When Denis Fateev was cross-examined about the gates not having been secured he first said: “We never close those gates”. He was pressed about Admiral’s representation to the ATO in 2015 in connection with the company’s application for Customs Act licences, that “The entry and exit gates to the complex are locked overnight”. He then gave this answer:

[That] gate was damaged shortly after we moved into that premises and wasn’t operating properly […].”

52. In later answers Denis Fateev said that he was referring to the gate at the southern vehicle entrance and that it was damaged either in late 2015 or early 2016. He said that one half of the double gate was bent so that when the two parts were closed “they didn’t come together”. I do not accept that evidence. There is no mention made of this explanation in Denis Fateev’s affidavits, notwithstanding that it is obviously relevant to issues that have been live at all stages of the litigation. From the outset of Brightcity’s bailment claim there has been an issue as to whether Admiral failed to take reasonable care to protect the warehouse. In CGU’s case on arson fraud, there has always been an issue whether Admiral deliberately left the premises exposed. In the circumstance that Units 2-4 were vacant, the securing of the front gates was entirely within Admiral’s control. If damage to one of the gates was a truthful innocent explanation for them having been left unlocked over the weekend immediately preceding the fire, I would expect it to have emerged well before the point at which it was proffered by Denis Fateev under cross-examination.

53. Further, Denis Fateev’s claim that damage prevented closure of the gates to the southern entrance cannot stand with photographs that were taken very shortly after the fire, showing the two gates across that entrance drawn together and secured with a chain and padlock. Nor can it stand with the evidence of Mr Kozinets, whose company sub-leased from Admiral some office space at the warehouse. He had occupied that space for about two years from approximately May 2016. Over that period he attended the premises on four or five mornings per week on business days. He did not have keys to the premises and usually arrived after Admiral employees had already opened up. Usually he was not still present at the premises when Admiral closed for the day. This routine applied “90% when I was there” but on other occasions he had seen that the gates were closed.

54. At a late stage of his questioning on this subject, Denis Fateev volunteered this answer concerning the gates to the southern entrance:

The key of the lock, the actual key initially, as far as I remember it was provided by the landlord and if my memory is correct, when it [ie the gate] was damaged the lock itself was removed or - so we just - nobody locked it.

This evidence is inconsistent with Denis Fateev’s earlier explanation. If the two halves of the gate could not be brought together then the absence of a lock would be irrelevant. There is a clear contemporaneous photograph showing that the gates could be closed and Denis Fateev’s supplementary attempt to explain the failure to secure them is an implausible afterthought. As there was no other occupant of the site, Admiral could have replaced any padlock that the landlord may have removed for about $50.

Vehicle and pedestrian entry ways

55. The vehicle entrance to the warehouse was capable of being secured at the front facade by a metal roller door that could be lowered by a chain and pulley mechanism operated from within. Inside the roller door two steel bollards could be locked into the concrete floor to prevent the passage of a vehicle. Also inside the roller door there was a steel frame and cyclone wire gate capable of being secured across the vehicle passageway to the warehouse. There is no evidence that any of these three layers of protection against vehicle entry was or were left unsecured at the time of Dmitry Fateev’s departure at 11:11 pm on Saturday 14 April.

56. It has been mentioned that the left-hand panel of the double glazed doors at the front entrance to the office was fixed by a top bolt. This secured it to the underside of the top horizontal member of the doorframe. At waist height there was a striker plate on the edge of the left-hand panel and the right-hand door had a mortise latch operated by a door handle on the inside and outside. There was no floor bolt in the left-hand fixed panel. Security of the double doors therefore depended upon a heavy, lockable patio bolt on the external surface of the right-hand door. The same key operated the locking mechanism of the mortise latch at waist height and the lock of the patio bolt. An electronic card reader had been fitted to the front door but this had never been activated or used.

57. Immediately after the fire, the patio bolt was found to be unlocked. It could therefore be lifted and disengaged readily. Either Dmitry Fateev must have left it in that condition when he departed the premises on the Saturday, or someone must have made one of the six issued keys available to the person who entered at 12:24am on Monday 16 April and started the fire. At that time, even if the mortise latch had been key locked, with the patio bolt unlocked and able to be disengaged from the threshold the front door could be worked back and forth until the mortise latch was released from the striker plate on the fixed panel. As described by CGU’s investigator, Mr Pellegrino, without engagement of the patio bolt the arrangement was “flimsy”. It was feasible to rattle the front door open. Alternatively, the mortise latch may have been left disengaged. If a key was made available to the arsonist, the same key would release both the patio bolt and the mortise latch.

58. Denis Fateev was uncertain whether the mortise latch would automatically lock upon being slammed shut from the outside, without turning the key. If that was the case it would have been very simple for Dmitry Fateev to have ensured that the mortise latch did not lock by tying down the inside handle of the latch at the time of his departure late on the Saturday night. Using a rubber band or similar tie onto a point of attachment below the handle, the latch would not engage. 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 of the above 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 by tying the inside handle down in the open position.

59. The latch of the door from the back of the ground floor office into the warehouse was operated by a card reader. There was no card reader on the warehouse side. Egress from the warehouse to the office was by manual operation of the latch. That was a fire escape precaution. The card reader for ingress to the warehouse was connected to the alarm panel, described below, and the panel would record each time the card reader was activated, irrespective of whether the alarm was armed. About six cards were issued, one to each of the four members of the Fateev family and two to employees. The cards were electronically registered and the alarm panel recorded whose card had been used each time the reader was activated.

60. Under cross-examination Denis Fateev gave evidence that his mother’s card was usually left on a desk adjacent to this door so that any employee could gain access from the office into the warehouse without the inconvenience of having to find his or her card or borrowing someone else’s. Admiral’s Operations Manager in 2018, Artur Russkikh, confirmed that the swipe card of Svetlana Fateev was left on the desk near this door and he said that he routinely used that card to gain access to the warehouse.

61. There was a rear access door through the east wall of the warehouse onto the bank of the Canal. It was a lockable timber door and there was also a sturdy steel grill door on the inside. There is no evidence to suggest that these doors were left unlocked or insecure or that they had anything to do with the arsonist gaining access to initiate the fire in the early hours of 16 April 2018.

Alarm system

62. When Admiral entered into possession of Unit 1 in mid-2014 the warehouse was already fitted with motion sensors connected to an alarm panel manufactured by Inner Range Pty Ltd (“Inner Range”) and a DTU. At some time between mid-2014 and April 2015 Admiral engaged Peter Yammine to upgrade the system. Mr Yammine installed additional motion sensors in the warehouse and office, an electronic lock for the door from the office to the warehouse, with card reader, and reed switches at certain doors including the front door to the office. From April 2015 Mr Yammine subcontracted Securitas Australia to provide back-to-base monitoring of the alarm system.

63. Mr Yammine programmed the alarm system so that it could be armed by the entry of a Personal Identification Number (“PIN”). The keypad for this was mounted in the ground floor office to the right of the front door. It was wired to the alarm panel about 10 m away. Individual PINs were allocated to each member of the Fateev family and to each of three other employees. Upon being armed and after a short delay to allow for exit, the system would record any alarm signals received from the sensors and would transmit those signals to Securitas’ control room. The signals would pass from the alarm panel to the DTU and the latter device would send them wirelessly through the cell tower network to Securitas’ control room computer.

64. Upon re-entry of an authorised person to the premises, keying in a PIN would disarm the alarm. Mr Aslanis, the manager of Securitas’ Operations Centre in Victoria, said that provided disarming took place within a short time limit, no alarm event would be recorded by the software that Securitas used to process signals from this warehouse. Mr Yammine did not program Admiral’s alarm panel to send any signal to Securitas to notify the events of arming or disarming the alarm, only signals of motion detection from the sensors and reed switches while the alarm was in armed mode. Mr Aslanis confirmed that this was the extent of signals that were received and recorded by the control room computer.

65. Mr Yammine required Admiral to nominate people who could be contacted in the event of an alarm event. The names and mobile phone numbers of Denis and Dmitry Fateev were provided and these were recorded by Securitas. Mr Yammine nominated himself as a third point of contact but this was a matter between him and Securitas as his subcontractor and it was not suggested to Admiral that Mr Yammine could be relied upon to respond to any notifications from the control room. The terms arranged by Mr Yammine with Securitas included that it would not send a patrol car in response to an alarm without having first obtained approval from one of the persons on its contact list. I accept the evidence of Mr Yammine and Mr Aslanis that the names and phone numbers of the contacts could be changed or added to, on either temporarily or permanently, by phone call or email.

66. If more than seven days elapsed without Securitas receiving any signal of an alarm event, even of motion being detected followed by disarming, then Securitas’ software would record this as a “delinquency”, with the notation “DTU hasn’t transmitted any event for over 1 week”. Securitas sent periodic reports of delinquencies to Mr Yammine in respect of the premises of all his customers, including Admiral. On about 5 March 2018 a report from Securitas to Mr Yammine showed an entry against that date: “DTU hasn’t transmitted any event for over 1 week”. Mr Yammine has no specific recollection of his response to this notification but his usual practice would have been to attend the property, reboot the system and make sure that it was transmitting any activation of the motion detectors to the Securitas control room when the system was armed. He has deposed that in early March 2018 he would have satisfied himself that there was no fault in the alarm system and that it was operational to detect movement when armed and to transmit signals accordingly.

67. In Mr Yammine’s opinion Admiral’s alarm system including its DTU was working properly in March and April 2018. I am satisfied from his evidence that the delinquencies during those months with respect to transmission of alarm events arose because, for extended periods, the motion sensors were not triggered with the system in armed condition. As the system was not programmed to send a signal to Securitas upon arming or disarming, those actions would not have been detected by Securitas’ monitoring software and would not have averted the delinquency of “DTU hasn’t transmitted any event for over 1 week”. Prior to the fire early on 16 April 2018, the last signal received by Securitas’ software of an alarm event from the premises was on 26 March 2018. After that, Securitas’ system recorded on 3 April and again on 11 April that no event had been transmitted for over a week

68. I accept Mr Yammine’s evidence 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, for example the reed switch on the front door or one of the sensors within the office area. Mr Yammine said that if the alarm was armed the transmission of an alarm signal to Securitas would not have been prevented by cutting power to the building as there was a back-up battery for the alarm panel. The DTU was powered from the panel so it also had back-up. Disablement of the alarm panel or DTU could only have been effected from within the premises. If the alarm was armed, disablement could not have been achieved without triggering at least the front door reed switch and causing an alarm event to be signalled to and recorded by Securitas. No such event was signalled or recorded. The alarm must have been left in an unarmed state at least from the last time one of Admiral’s personnel was at the warehouse, that is, from 11:11 pm on 14 April 2018 when Dmitry Fateev departed. No alarm event at all was signalled to Securitas after that time.

69. Irrespective of whether the alarm was armed, the DTU was configured to transmit to the cell phone network every 60 seconds to confirm that it was operating. This is referred to as “polling”. Its purpose was to raise an alert in the system of the cell tower wireless network if the DTU was not maintaining wireless connection. The DTU was part of the cell tower network operator’s supply and this polling function, to verify continuity of connection, was entirely independent of the signalling of alarms from the alarm panel via the DTU to Securitas. If the network operator did not receive polling signals from the DTU, its software automatically reported this to Securitas’ software, where it would be recorded as “Direct wireless complete communications failure”. Securitas’ recording and reporting software was divided into “areas”, one area comprising the transmission of alarm event signals from the alarm panel and another area comprising any reports from the network concerning delinquency with respect to the operation of the DTU. Mr Yammine said that a loss of connection through the DTU can be caused by “failures or other glitches” in the cell tower network.

70. None of that evidence appears have anything to do with the status of the alarm system at the time of the fire. There is no evidence that the DTU did not have a stable connection with the network over the weekend leading up to the fire. On 16 April 2018 at 12:28:53am Securitas recorded “Direct wireless complete communications failure”. I conclude that this was due to the fire and explosion that occurred within the building at about that time. The CCTV cameras from across Burrows Road recorded an explosion at 12:31am. The CCTV timestamp may not be precisely accurate. Also, the developing fire may have interfered with the DTU transmission even before the explosion was recorded by the cameras.

1. A bailee for reward […] assumes a duty to take such care of the bailed goods as is reasonable in the circumstances. It is essential to bailment that, unless forgiven by the law, the bailee should restore the property bailed to its lawful owner.

2. In the event of loss of goods during the bailment, the onus is upon the bailee to disprove that the loss is the result of any negligence on its part. This exceptional shifting of the onus of proof to the defendant derives from the essential obligation of the bailee to restore the property to the bailor and from the obligation imposed by the reward which the bailor pays to the bailee for the work and labour done and the safe keeping of the goods.

3. The duty of the bailee is not that of an insurer. Thus, the bailee is not obliged to take every conceivable or possible precaution to prevent loss of the goods. Its duty is simply to act reasonably. It is to take reasonable care such as a person would take in respect of that person's own goods. The duty is stringent so that the responsibility assumed by the bailee cannot, at least without consent, be delegated to another.

4. In respect of goods lost during bailment by theft, the bailee must show that it took steps which were reasonable in the circumstances to keep out intruders who might otherwise be tempted to misappropriate the bailor's goods or damage them. The relevant circumstances will include such matters as the value of the goods bailed; the location of the place of bailment; the costs paid to the bailee by the bailor; the extent of knowledge of the bailor of the circumstances of safe keeping; and the extent (if any) of evidence of thefts of goods in the vicinity of the place in which the bailee held the subject goods.

5. […]

6. […]

7. Foreseeability of damage or loss has been described as invoking an "undemanding test". See Shirt v Wyong Shire Council and Ors [1978] 1 NSWLR 631 at 641, approved The Council of the Shire of Wyong v Shirt and Ors (1979) 146 CLR 40, 44. Although this description was used in a context of personal injury litigation framed in negligence, it applies equally to the alleged negligence of a bailee. The test is "undemanding", in the sense that it embraces a duty to take precautions not only for events which are "likely to happen" or "not unlikely to happen" but also for events which are "not unlikely to occur". […] Of obvious relevance to that question are the valuable and mobile qualities of the goods typically bailed to the bailee, the ready market for their sale and the ease of their removal once the security of the building was breached.

8. If the bailee, bearing the onus of proof, discharges that onus by establishing that the theft of the bailed goods occurred without negligence on its part, and the evidentiary burden is borne by the bailor to establish the precautions which reasonably could and should have been taken by the bailee to prevent the loss of the goods [… it] is then for the bailor to adduce evidence of what those further precautions might have been and from which the decision maker can infer that it was reasonable to expect that they would have been taken having regard to all of the circumstances.

9. […]

269. Tottenham Investments Pty Ltd v Carburettor Services Pty Ltd was concerned with theft of a bailor’s goods. The present case is concerned with destruction by fire of bailed goods after theft of other goods from the warehouse, as a means of concealing the theft. The first consideration relevant to the extent of precautions against arson that it would have been reasonable for Admiral to take is that Brightcity’s goods were highly valuable. Secondly, they were vulnerable to destruction by fire, the cigarettes particularly. Thirdly, Brightcity’s goods were stored together with the goods of other customers that were of high value, especially large volumes of cigarettes that were transportable, readily saleable as stolen goods and, hence, attractive to thieves. Fourthly, the significant risk of theft from the warehouse carried with it the risk of fire. Deliberate destruction of residual contents to conceal a theft or to eliminate forensic evidence of the identity of the perpetrators was a likely sequel. Fifthly, physical security such as locked gates and doors, an activated alarm system and remotely monitored CCTV were, in any event, required in order to meet ABF and ATO expectations for protection of the revenue, so that proper use of these security measures was not an additional burden that Admiral would have to assume solely for the protection of Brightcity’s goods.

270. Admiral has failed to disprove that the destruction of Brightcity’s goods was the result of negligence on its part. Reasonable steps that could have been taken to protect the contents of the warehouse, and that were not taken from when the premises were last attended by an Admiral employee, Dmitry Fateev, at about 11:00pm on Saturday, 14 April 2018, include the following:

1. Locking the front gates to the warehouse forecourt.

2. Locking the patio bolt of the front office door, with the bolt engaged in the threshold.

3. Closing the electronically latched door from the office into the warehouse and not leaving any readable card key in the vicinity.

4. Arming the alarm.

5. Notifying the alarm monitoring service, Securitas, of one or more persons in Sydney, additional to Denis and Dmitry Fateev, who could be contacted in the event of an alarm signal being received during the absence of those two persons overseas.

6. Maintaining the capability to monitor CCTV within the warehouse remotely and ensuring that that capability was at all times in the hands of someone present in Sydney and nominated to Securitas as a contact.

271. The first three of these measures, alone, would have been capable of preventing the arsonist from gaining access to start the fire by which Brightcity’s goods were destroyed. At the least, those three basic steps could have impeded the arsonist to such a degree that he would not persist with trying to force entry for fear of being discovered. The impediment and deterrent would have been further increased by the addition of steps (4), (5) and (6), pursuant to which a patrol car may have been dispatched to the warehouse before entry could have been forced. The failure to take any of these steps has been clearly established and Admiral has not disproved that they were causative of the arsonist gaining entry to ignite the fire.

272. On the findings that I have made, Admiral’s failure to take reasonable care to preserve Brightcity’s went well beyond the omissions referred to above. I have found that Dmitry Fateev deliberately left the premises in a state that would permit ready access and that he arranged for and consented to the attendance of the arsonist. Further, I have found that he caused combustible motor tyres to be distributed through the warehouse aisles in order to fuel the fire and promote its destructiveness.

273. There has been the clearest possible breach of the obligations of Admiral as a bailee. It is liable to Brightcity in damages for the replacement value of its goods and for the loss of profits that could have been earned on the sale of those goods. The agreed figure for loss of profits is $246,132.90 (see [5]) and Brightcity shall have judgment against Admiral in that sum. As recorded at [5] and [233], the agreed figure for the value of the goods is $3,337,854. Brightcity would also be entitled to judgment against Admiral for that amount but closing arguments left it unclear whether Brightcity seeks that relief in view of its entitlement to judgment against CGU for the value of its destroyed goods. The parties will be heard as to that after these reasons have been handed down. The question is affected by the circumstance that such a judgment for Brightcity against Admiral for the goods’ replacement value of $3,337,854 would rightly be for the benefit of CGU, for the following reasons.

274. CGU has not filed a cross-claim against Admiral in exercise of any claimed right of subrogation to Brightcity’s entitlement to damages for Admiral’s breach of its duties as a bailee. CGU may pursue, by subrogation, any right of action that an Insured Other Party such as Brightcity has in respect of the subject matter of the loss: ss 64 and 67 Insurance Contracts Act; Mann’s Annotated Insurance Law at [48.20.1] and [64.10]; Kelly & Ball Principles of Insurance Law at [9.0060.20]. The ISR policy is composite, rather than joint, according to the distinction drawn by Sir Wilfred Greene MR in General Accident & Life Assurance Corp Ltd v Midland Bank Ltd [1940] 2 KB 388 and recognised, for example, in Lombard Australia Ltd v NRMA Insurance Ltd (1968) 72 SR (NSW) 45; Federation Insurance Ltd v Wasson [1987] HCA 34; (1987) 163 CLR 303; MMI General Insurance Ltd v Baktoo (2000) 48 NSWLR 605; [2000] NSWCA 70. The interests of Admiral and Brightcity under the policy were several and separate. A claim for recovery in exercise of the insurer’s right of subrogation may be brought against an at fault insured party under such a composite policy where the at fault insured is denied indemnity by reason of fraud or some wrongful act on its part that has brought about the loss: P Samuel & Co Ltd v Dumas [1925] AC 431 at 445-446 (Viscount Cave), cited in MMI General Insurance Ltd v Baktoo at [9].

Issue 9: Admiral’s claim against CGU under the Liability policy

275. The insuring clause in the Liability policy is in the following terms so far as relevant:

We 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:

[…]

(b) Property Damage

[…]

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

276. The limit of liability for all claims arising out of any one event is $20 million and the deductible for any one occurrence is $5,000. The definition of “Occurrence” includes the following:

Occurrence means an event which results in […] Property Damage […], neither expected nor intended from Your standpoint.

277. On the findings I have made, Admiral’s claim for indemnity under this policy against its liability to Brightcity for breach of bailment fails because there was no Occurrence. The “event which [resulted] in […] Property Damage” was the fire and I have found that that was both expected and intended from the standpoint of Admiral. Further, and independently of the definition of Occurrence, Admiral is disentitled from indemnity under the policy in circumstances where its connivance at the arson plainly amounted to fraud. In Beresford v Royal Insurance Co [1938] AC 586 at 595, Lord Atkin said:

On ordinary principles of insurance law an assured cannot by his own deliberate act cause the event upon which the insurance money is payable. The insurers have not agreed to pay on that happening. The fire assured cannot recover if he intentionally burns down his house […].

278. In Entwells v National and General Insurance Co Ltd, after quoting the above passage, Ipp J said this:

Similarly if the insured connives at someone else burning down his property he cannot recover under the policy. This rule is based on two separate principles of law. It follows as a result of the construction of the contract of insurance; the policy is not intended to cover the loss caused by the insured’s deliberate act: Beresford v Royal Insurance Co at 595. Further, it would be against public policy to allow an insured to recover indemnity for the consequences of his own criminal or civil wrong: Gray v Barr [1971 2 QB 554.

279. CGU also invoked Exclusion 5.15 of the Liability policy. That provision excludes from cover any liability of Admiral for damage to property that is owned by Admiral itself, or leased by it, or in its physical or legal control. Exclusion 5.15 is subject to some exemptions, so that the cover does extend to Admiral’s liability for damage to property that is in its possession or control in limited and defined circumstances. An endorsement to the policy purports to delete Exclusion 5.15 and to replace it with different wording. The endorsement is ineptly drafted and it is extremely doubtful whether it is really intended to replace the entirety of the Exclusion or only par (e) of the exemptions thereto. Either way, it is difficult to make any sense of the substitute wording. This raises a question purely of construction, not dependent upon any additional finding of fact that I would need to make in order to resolve it. Having regard to my conclusions at [277] above, it is not necessary to determine the scope of Exclusion 5.15 or the endorsement in order to decide the case. I will therefore not embark upon the very considerable challenge of trying to reconcile and construe these provisions.

280. CGU also invoked Condition 8.16 of the Liability policy, pursuant to which Admiral was obliged to “take all reasonable care to prevent […] Property Damage”. Admiral argued that breach of this condition, if proved, does not warrant refusal of indemnity. It relied upon ss 52(1) and 55 of the Insurance Contracts Act. There most certainly was a breach of Condition 8.16, constituted by the aspects of neglect referred to at [270] above and by the deliberate actions identified at [272]. It is unnecessary for me to determine the consequences of the breach of Condition 8.16, pursuant to relevant sections of the Act, because of the more fundamental objections to Admiral’s claim for indemnity, arising from its knowing concern in and approval of the arson.

Issue 10: Admiral’s damages claims against CGU

281. I have found that CGU’s refusal of Admiral’s claims under the two policies is contractually justified. Against the eventuality of this finding being displaced on appeal, it may be said that the damages that would be assessed against CGU for wrongful refusal to pay Admiral’s claim would be the amount of the contractual indemnity, as assessed in relation to Issue 4 (see [236]>) and Issue 5 (see [239]>). Admiral contends that in declining the claim CGU also breached its obligation of utmost good faith, implied by force of s 13 of the Act. Particulars of breach of the obligation of good faith, going beyond the refusal of indemnity, are alleged to the following general effect:

1. failure to make a decision on Admiral’s claim for indemnity within a reasonable time;

2. alleging that the fire was deliberately lit and

3. declining claims for indemnity made by Admiral’s customers, including MOS and Brightcity.

282. Quantification of damages under the cause of action for breaches of CGU’s duty of good faith in any of these respects would be inextricably bound up with the question of what causative effect any established breach of that implied duty may have had. The first aspect of Admiral’s case on causation concerns its inability to secure variation of its Customs Act licences to enable it to undertake bond store operations at Lidcombe. The circumstances are referred to at [247]-[251] above. Admiral contends that its inability to obtain the variation has been caused by CGU’s refusal of the claim and its allegations of fraud. That contention is founded upon the following statement by investigating police in a letter dated 17 March 2021:

Police have not finalised the investigation and are awaiting the outcome of the civil matter between Admiral International Pty Ltd and CGU which may impact the criminal investigation.

283. I do not accept, on the basis of this letter or otherwise, that CGU’s contest of the insurance claim has caused the police investigation to remain open. Although the letter states that police are “awaiting the outcome of the civil matter”, it does not state that that is preventing finalisation or that there are no other lines of inquiry that remain to be pursued. Irrespective of the outcome of this case the police may continue to regard their investigation as open indefinitely. There may never be a “completed police report” as required by the ABF and the ATO. As a result of suspicious and unresolved circumstances of the fire, the Commonwealth authorities may therefore never be satisfied to grant Admiral’s application for variation of its licences to enable it to resume bonded warehouse operations. In those circumstances it cannot be said that CGU’s denial of the claim has caused there to be no “completed police report” and thereby caused the ABF and the ATO to refuse to vary the licences to the Lidcombe warehouse.

284. Secondly, Admiral claims that each of the above breaches, or a combination of two or more of them, caused damage to Admiral’s reputation amongst customers who, otherwise, might have utilised free and/or bonded warehouse services provided by the company at the new location. This loss of reputation is said to have caused ongoing loss of revenue, well beyond the 12 months Indemnity Period. It is not practical to determine on a contingent basis this aspect of Admiral’s case on causation of loss. It depends upon precisely what findings might be made, contrary to my own conclusions, as to respects in which CGU may have departed from its obligation of good faith.

285. If CGU is entitled to refuse Admiral’s claim, as I have held, none of the particulars of want of good faith, including that regarding delay in reaching a decision, could be sustained. If the finding that Admiral knew of and consented to the arson should be disturbed, then the question whether CGU’s refusal of the claim lacked good faith would still have to be determined. I cannot ponder alternative findings regarding particulars of bad faith or their causative effect and it would therefore be futile to attempt a contingent assessment.

Orders

286. Subject to any application concerning the relief that is appropriate to be granted in accordance with these reasons – such application to be notified to the Associate within seven days – the following orders will be entered:

In Admiral International Pty Ltd v Insurance Australia Ltd trading as CGU Insurance – No 2018/00343393:

1. Verdict and judgment for the defendant on the plaintiff’s claims for damages.

2. The statement of claim is in all other respects dismissed.

3. The plaintiff is to pay the defendant’s costs of the proceedings.

287. On the same basis the following orders will be entered:

In Brightcity International Trading Pty Ltd v Admiral International Pty Ltd and Insurance Australia Ltd trading as CGU Insurance – No 2019/00191443:

1. Judgment for the plaintiff against the first defendant in the sum of $246,132.90.

2. The first defendant is to pay two thirds of the plaintiff’s costs of the proceedings on the statement of claim.

3. Judgment for the plaintiff against the second defendant in the sum of $3,337,854.

4. The second defendant is to pay one third of the plaintiff’s costs of the proceedings on the statement of claim.

5. The first cross-claim is dismissed with costs.

288. There will be entered forthwith a direction that each of the parties in whose favour judgment is to be given shall within seven days of the publication of these reasons submit to the Associate a calculation of interest claimed, including a current daily rate. The liberty that is reserved to all parties to make application with respect to the appropriate form of relief extends to the incidence of costs of the proceedings.

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Decision last updated: 08 November 2021