Australian Pipe & Tube Pty Ltd v QBE Insurance (Australia) Limited (No 2)
[2018] FCA 1450
•21 September 2018
FEDERAL COURT OF AUSTRALIA
Australian Pipe & Tube Pty Ltd v QBE Insurance (Australia) Limited (No 2)
[2018] FCA 1450
File number: VID 527 of 2015 Judge: BEACH J Date of judgment: 21 September 2018 Catchwords: INSURANCE – business interruption insurance – damage to steel mill – claim for loss of gross profits over indemnity period – reduction in turnover – adjustments for business operating for less than 12 months – adjusted rate of gross profit – adjusted standard turnover – scope and application of insurance policy – counterfactual production profile of steel mill – increased cost of working – additional increased cost of working – claim preparation costs – methodology of quantification – progress payments – allocation of amounts already paid to heads of claim – calculation of interest –
s 57 of Insurance Contracts Act 1984 (Cth)Legislation: Insurance Contracts Act 1984 (Cth) s 57 Cases cited: Australian Pipe & Tube Pty Ltd v QBE Insurance (Australia) Limited [2015] FCA 1135
Fitzgerald & Anor v CBL Insurance Ltd [2014] VSC 493
Honour WB and Hickmott GJR, Honour and Hickmott’s Principles and Practice of Interruption Insurance (4th ed, Butterworths, 1970)
Roberts H, Riley on Business Interruption Insurance (10th ed, Thomson Reuters, 2016)
Dates of hearing: 9 to 13 April, 1 May 2018 Date of last submissions: 15 May 2018 Registry: Victoria Division: General Division National Practice Area: Commercial and Corporations Sub-area: Commercial Contracts, Banking, Finance and Insurance Category: Catchwords Number of paragraphs: 294 Counsel for the Applicants: Mr AR Kirby and Ms BE Slocum Solicitor for the Applicants: Matisse Mitelman Counsel for the First Respondent: Mr PH Solomon QC and Ms MJ O’Sullivan Solicitor for the First Respondent: Hall & Wilcox Counsel for the Second Respondent: The Second Respondent did not appear ORDERS
VID 527 of 2015 BETWEEN: AUSTRALIAN PIPE & TUBE PTY LTD (ACN 132 646 336)
First Applicant
LEANING BACK PTY LTD (ACN 143 001 469) IN ITS CAPACITY AS TRUSTEE OF THE LEANING BACK UNIT TRUST
Second Applicant
AND: QBE INSURANCE (AUSTRALIA) LIMITED (ACN 003 191 035)
First Respondent
INDEPENDENT TUBE MILLS PTY LTD (IN LIQ) (ACN 136 627 186)
Second Respondent
JUDGE:
BEACH J
DATE OF ORDER:
21 SEPTEMBER 2018
THE COURT ORDERS THAT:
1.The applicants within 7 days of the date hereof file and serve proposed minutes of orders and written submissions (limited to 3 pages) to give effect to these reasons.
2.The first respondent within 7 days of service upon it of the applicants’ proposed minutes of orders and written submissions file and serve its proposed minutes of orders and responding written submissions (limited to 3 pages).
3.Liberty to apply.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
BEACH J:
This case concerns the quantification of a loss of profits claim made by assignees of an insured’s claim against the insurer. It is the type of case that ought to have been determined by a special referee, although when I suggested this course early in the interlocutory stages, senior counsel for the insurer displayed little enthusiasm. It was said that there were significant legal issues that it was more suitable for me to resolve. As it turns out, this case has principally involved an exercise of elementary arithmetic applied to counterfactual production profiles of a damaged steel mill, albeit that the selection of the methodology used and the input assumptions have involved uncertainty and estimation. I would note that I have previously disposed of any concern relating to the apparent absence of a federal matter. As I said in Australian Pipe & Tube Pty Ltd v QBE Insurance (Australia) Limited [2015] FCA 1135 at [14]:
Finally, it is necessary to say something about jurisdiction. Section 39B(1A)(c) of the Judiciary Act 1903 (Cth) is a general conferral of original jurisdiction on this Court. It is to be construed as expansively as the plain meaning of its words can tolerate (cf the different approach to construing words excluding jurisdiction). Limitations and implications not found in the plain meaning are to be eschewed unless unavoidable (see Truthful Endeavour Pty Ltd v Condon (as trustee of the bankrupt estate of Rayhill) (2015) 321 ALR 483 at [50] per Allsop CJ, Katzmann and Gleeson JJ). It is difficult to conceive of a contractual dispute involving an insurance contract that would not involve a matter arising under the Insurance Contracts Act 1984 (Cth). Even if the claim is purely a contractual claim, its boundaries will always be circumscribed by the terms of that Act, whether going to the ambit or existence of cover on the one hand, or the scope of recovery under the contract on the other hand. Any contractual dispute between the parties would necessarily proceed on the foundation of the contract within the statutory matrix. For a matter arising under a federal law, it is not necessary that the proceeding itself be founded on federal law or be a dispute about federal law (Truthful Endeavour at [58]). If it were so founded, it would be such a matter, but the converse proposition, viz if it were not so founded it would not be such a matter, does not follow. But where it was not so founded, one would need to point to some subject matter of the contract, or right, liability or limitation applying to the contract, that existed as a result of federal law.
The applicants have litigated three claims against the first respondent (QBE) under an Industrial Special Risk Insurance Policy (“the policy”) being:
(a)first, a claim for business interruption losses constituted by a loss of gross profits claim in the sum of $9,423,887;
(b)second, a claim for increased cost of working in the sum of $2,041,379.50, constituted by $1,000,000 for increased cost of working and $1,041,379.50 for additional increased cost of working; and
(c)third, claim preparation costs in the sum of $450,620.30.
The policy includes the following limits and sub-limits:
(a)Section 1 – unspecified damage to property – $1 million;
(b)Section 2 – business interruption – $26.5 million, which includes the following sub-limits being:
(i)loss of gross profit due to: (A) reduction in turnover; and (B) increased cost of working – $25 million;
(ii)additional increased cost of working – $1 million; and
(iii)claims preparation costs – $500,000.
To date, QBE has made payments of $3.8 million under Section 2 of the policy for business interruption losses. It has also paid $1 million for material property damage. The applicants seek the following additional payments under Section 2:
(a)first, $6,623,887 for business interruption losses, being $9,423,887 less $2.8 million already paid on account of loss of profits;
(b)second, $1,041,379.50 for additional increased cost of working, but subject to the relevant sub-limit; and
(c)third, $450,620.30 for claim preparation costs, but with the applicants no longer seeking $86,000 with respect to the fees of Chris Klenkowski & Associates.
Now although QBE has paid $3.8 million under Section 2 of the policy as I have said, the applicants say that only $2.8 million of this should be allocated to the loss of profits claim. In terms of a further $1 million paid by QBE under Section 2 ($3.8 million minus $2.8 million), the applicants say that this $1 million was paid on account of increased cost of working. But this allocation is disputed by QBE who says that the full amount of $3.8 million paid under Section 2 should be allocated to and subtracted from the applicants’ loss of profits claim, and not allocated to any increased cost of working, which it says has not in any event been substantiated. I would note that the concept of increased cost of working (ICW) is a separate concept to additional increased cost of working (AICW) which I will explain later.
The context for the claims which have been made is material damage occurring in 2010 to a steel mill then owned by the insured, Independent Tube Mills Pty Ltd (in liquidation) (ITM) and located at 2-14 Independent Way, Ravenhall, Victoria (the mill). The material damage comprised a misalignment of some of the mill components by reason of defects in the concrete slab(s) on which the mill was resting. QBE accepts that the mill misalignment had some impact on the efficiency of the steel mill, principally by affecting the speed at which the mill could be run or by increasing down-time. As I have said, QBE has paid ITM $1 million for material damage to the mill. And as I have also said, QBE has also paid $3.8 million to ITM under Section 2 of the policy for business interruption losses. QBE contends that it has fully indemnified ITM within the policy limits for such losses. Such a contention is disputed by the applicants.
Now the central issue in this case has concerned the claim for loss of gross profits. The claim for loss of gross profits turns on a counterfactual or ‘but for’ scenario. The relevant question is what the production and consequent profit of the mill would have been during the indemnity period if the slab(s) had not been uneven and the mill had not suffered from a resulting diminished functionality. The applicants have principally relied on the evidence of Mr Tony Benson, the mill’s production supervisor, as to the ‘but for’ production levels. Based upon Mr Benson’s evidence as to the ‘but for’ production levels, the applicants’ claim for loss of gross profits for the indemnity period has been calculated as $9,423,887 based on an average price per tonne of the relevant product as being $1,396. An alternative and lower claim of $8,434,975 is based on an average price per tonne of $1,300 instead of $1,396.
The principal forensic issues posed for my determination have been the following:
(a)First, but for the movement of the slab(s) and the resulting misalignment issues with the mill’s production, how many tonnes of steel would have been produced by ITM during the indemnity period in excess of the tonnes of steel actually produced?
(b)Second, at what price would ITM have sold those additional tonnes of steel?
(c)Third, did ITM have the capital or access to capital to produce and sell the steel volumes reflected in the assumed counterfactual production levels?
(d)Fourth, as a result of the movement of the slab(s), and its impact on the mill’s operations, what increased cost of working, additional or otherwise, did ITM experience during the indemnity period and is claimable under the policy?
(e)Fifth, what costs have been incurred in preparing the insurance claim that are the subject of indemnity for claim preparation costs?
Now the applicants have relied upon the evidence of Mr Benson, Mr David Brandi, ITM’s chief financial officer, Mr David Luckeraft, sales manager, Mr Michael Doubleday, sales manager, and employees or officers of customers of ITM or the first applicant (APT), namely: Mr Kevin MacGibbon, Mr Terence Wilson, Mr Darren Shelton, Mr Robert Curphy, Mr Neal Douglas, Mr Darren Tredgold, Mr Terence Thorpe, Mr Shane Robinson and Mr Matthew Quick. QBE did not call any lay evidence.
The applicants have also relied upon the expert reports of Mr Greg Meredith, a forensic accountant, of Ferrier Hodgson dated 30 June 2017, 6 July 2017 and 14 February 2018. This expert evidence was responded to by QBE who relied upon the expert reports of Mr Tony Samuel of Sapere Forensic dated 2 August 2017 and 21 March 2018.
I should say now that in terms of the lay witnesses who were cross-examined, credibility issues did not loom large. The principal forensic contest that was pursued through cross-examination concerned the reliability of the opinions expressed by Mr Benson relating to the counterfactual production profile of the mill absent any problem of misalignment. I will say something more about this later. So far as the cross-examination of Mr Brandi was concerned on questions of access to capital and commercial dealings with suppliers, customers and financiers, such cross-examination did not take the matter far. Other cross-examination of other witnesses, for example Mr Luckeraft, was on the periphery of the central issues that I need to resolve. As for the experts, the differences between them more depended upon the underlying factual assumptions that they had made rather than upon methodological differences.
Now I should say at the outset that there are difficulties in precisely quantifying the loss of profits claim. The applicants have not adduced and cannot adduce precise evidence on this question. And necessarily I am dealing with estimates of a counterfactual production profile and other variables. Such a counterfactual profile has also involved a forecasting component from the start of the indemnity period. But I must do the best that I can given the imponderables and uncertainties. Estimation is necessarily involved. Generally, the analysis must be based on the possibilities or probabilities inherent in the selection of the methodology, the input assumptions and the robustness or otherwise of the output, all questions I might say that could as well have been addressed by a special referee. Now the applicants encouraged me to take a “broad brush” approach, but I think I can do a little better than that as should become apparent later. Let me now descend into the detail.
RELEVANT BACKGROUND
It is useful to set out a chronological sequence of relevant events before turning to the key questions.
Some time in 2008, the ITM business concept was first conceived of by Mr Peter Wilson. The ITM business was to be a start-up business. It was proposed that ITM manufacture tubular steel products using an Italian made OTO Mills cold-pressed steel mill, some 125 metres in length, that would mill raw and unfinished steel coil into a range of square, rectangular and circular tubular steel products.
In October 2008 a proposed business plan envisaged that the mill would be purchased in November 2008 and that production and distribution would commence in August 2009. The October 2008 version of the business plan contained no production estimates. Let me set out some relevant extracts of this proposed business plan:
Our initial sales target, reached by implementing the below strategies, will be $27 million in Sales Revenue in Year 1 of production. By focusing our efforts on obtaining a realistic 8% share of the independent distributor marketplace, we will be well on our way to achieving and surpassing our Goals. Expected 1st year Nett Profit (based on the above goals being met) of $2.7 million (Pre-GST).
…
FINANCE
Forecast turnover $22.9 million
Forecast gross profit $5.03 million
Forecast net profit $3.57 million
Independent Tube Mills is seeking an AU$8M term loan to fund initial costs of plant set-up and ongoing operating costs. It is anticipated this loan will be repaid over a ten year period.
On 16 April 2009, ITM was incorporated and the ITM Unit Trust was established with ITM acting as trustee. Its first directors were Mr Peter Wilson and Mr Robert Whitbourne. Mr Wilson had 25 years of experience in the steel industry. Mr Whitbourne came from an advertising and marketing background and had little experience in the steel industry.
Apparently, by at least July 2009, Mr Brandi had become ITM’s chief financial officer and became a director of ITM on 9 September 2009. Like Mr Whitbourne, Mr Brandi had little experience in the steel industry.
On or around 27 July 2009, ITM finalised its business plan. It contained a production forecast of 30,000 tonnes of finished product in the first 12 months of operation with $54.8 million in total sales revenue in that first year. That forecast was said in the “Executive Summary” to be derived from “confidential estimates of the potential market based on intelligence gathered by Peter Wilson, David Luckeraft and Michael Doubleday”. Apparently, the production forecast was based more on anticipated demand rather than on anticipated supply capacity. Further, it was stated that:
Our initial forecast sales target, reached by implementing our business strategies, will be $54.8 million in total sales revenue in Year 1 (Y1) of production. This is based on a conservative production of 30,000 tonnes of finished product. Initial production capacity is up to 50,000 tonnes per annum based on two 5-day, 10 hours production shift (dependent on product mix).
By focusing our efforts on obtaining a realistic and conservative 13% market share of the independent distributor / stockist business, anticipated Y1 Profit (before tax) will be A$25 million.
These forecasts are based on current revenue per tonne of A$1,890 and raw materials cost (steel) of A$880 per tonne.
The business plan outlined the following:
(a)ITM had been established to specialise in the manufacture of high quality steel tubular products, commencing about July 2010 from premises strategically located in Melbourne.
(b)ITM sought to capture a 13% market share of the $1.3 billion tubular steel market in Australia, competing against 2 local manufacturers, namely Orrcon and Australian Tube Mills, as well as imported product.
(c)The total tubular steel market in Australia was approximately 700,000 tonnes per annum, of which Orrcon and Australian Tube Mills supplied approximately 65% with the remaining 35% being supplied through imports.
(d)Orrcon and Australian Tube Mills were both manufacturers and distributors, which meant that other distributors either had to buy from their competitors or had to source imported product.
(e)ITM’s business model involved only supplying to distributors, unlike Orrcon and Australian Tube Mills, so as to avoid competing with its own customers at the distribution functional level.
(f)By producing Australian made product, ITM would be able to distinguish itself from imported product in the marketplace.
(g)ITM’s so described “conservative” production forecast for its first year of operation was 30,000 tonnes.
(h)ITM had recruited a team of what were said to be highly experienced steel operators, including Mr Peter Wilson (operations), Mr Luckeraft (sales) and Mr Doubleday (sales), as well as experienced professionals in complementary fields, being Mr Whitbourne (marketing), Mr Brandi (accounting) and Mr John McKew (business management).
Around mid-2009, ITM appointed Mr McKew as general manager. He later became CEO. Mr McKew had a background in the dairy industry. Like Mr Whitbourne and Mr Brandi, Mr McKew had little experience in the steel industry.
Further, around mid-2009, ITM purchased the mill. The mill was an OTO 1276 Steel Tube Mill, manufactured in Italy by OTO Mills SpA (OTO Mills). Along with the paint line, it cost just under $8 million ($7,818,128). That figure excluded the costs of installation and commissioning. The “nameplate” capacity of the mill was 55,000 tonnes per annum. The mill was capable of operating at a maximum mill speed of 120 metres per minute. The mill produced welded pipes and tubes of different sizes which were made by forming a strip of steel into a round shape and then welding the edges together. The mill could be tooled to produce three types of tubular products: a circular hollow section tube, a square hollow section tube or a rectangular hollow section tube. Products ranged in diameter from 33.7 mm to 124.9 mm, with the wall thickness (gauge) ranging from 1.6 mm to 6 mm. Rolled coil was the raw product used by the mill to produce these products.
On 9 September 2009, one of the ITM directors, Mr Whitbourne, circulated by email to the other directors and ITM executives a budgeted profit and loss statement for the initial 12-month period to be adjusted “as you see fit to send to the bank”. The spreadsheet attached to the email contained a budgeted ramping-up forecast of production tonnes per month. It started at 1,000 tonnes per month at month 1, rising to 3,500 tonnes per month at month 12 although that figure was budgeted to be reached by month 10. Apparently, it was intended that “month 1” be equated to February 2011, being the first month of production after the commissioning process and after the Christmas shut-down.
As at 30 September 2009, three instalment payments had been made on the purchase of the mill.
On 7 December 2009, Mr Brandi hosted a private offering involving potential investors in ITM. From late 2009 to early 2010, ITM was pledged $3.8 million (and received $3.7 million in cash) from investors by way of debt capital pursuant to formal loan agreements. With the exception of one loan (which had an interest rate of 10%), the loan agreements were substantially similar and interest was payable by ITM twice a year at a fixed rate of 20% per annum. At the conclusion of the trial, the evidence remained unclear as to whether any and if so which of those interest payments were made, and if made, by whom. Mr Brandi said in cross-examination that three instalments were paid to lenders, but there is evidence that no payments at all were made to some of those lenders.
On 8 February 2010, the Bank of Queensland (BOQ) provided ITM with approval advice for an equipment finance facility in relation to the mill. The proposed loan was for a term of 5 years, with an indicative interest rate of 11.26%. The limit of the facility was $4.75 million and the repayments were stated to be $102,940.81 per month. This facility was not finalised until 30 August 2010, when a chattel mortgage was executed. That mortgage listed the repayments as $101,693.06 per month.
In around July 2010, installation of the mill commenced. It was completed on 2 August 2010. The mill was a complex machine, although it was not technologically advanced or electronically controlled. Mr Benson described it as “going back another 10 years’ time, where you didn’t rely on technology”. But Mr Benson also said in cross-examination that he was no longer sure if an electronically controlled mill had productivity advantages over the one ITM purchased, because “[y]ou’re relying totally upon electronics. If something goes wrong, you haven’t got a hope in hell of working it out”. Now I would note that the manual set up of the mill made it harder to learn for people who did not know that type of mill.
Prior to August 2010, ITM engaged production personnel to run the mill. But largely the production personnel were inexperienced. Further, few of the production staff had worked in a steel mill before.
Between July 2010 and mid-to-late August 2010, the production staff were trained by one of the Italian engineers. Apparently no further formal training was afforded to the production staff after that point. On Mr Benson’s observation, training stopped too early. On the evidence, it would appear that many of the production staff did not know their job properly. The mill was being stopped because of fundamental mistakes that inexperienced staff were making, including pressing the wrong button at the wrong time and not knowing what to do when situations arose. Many of the staff members had few relevant problem solving skills.
The Italian manufacturer supplied ITM with full manuals which they claimed was their training equipment. But Mr Benson later wrote procedures for positions so other operators could come in and understand what was necessary. Mr Benson said in cross-examination that his procedures were easier to understand and more relevant than the Italian manuals.
Around this time frame, ITM, in conjunction with ProTube Asia Pty Ltd and representatives of OTO Mills (who were on site), conducted a period of performance testing and staff training in relation to the operation of the mill. This testing period, being the “commissioning” or “ramping up” phase, occurred prior to the mill being scheduled to operate at full capacity.
As at the beginning of August 2010, there was an urgency to start production at the mill. ITM had already paid for the mill and was making monthly interest payments of approximately $100,000 to BOQ. ITM had also commenced paying rent of approximately $50,000 per month and had engaged a workforce.
On or about 2 August 2010, ITM commenced operating the mill.
On 2 August 2010, ProTube Asia Pty Ltd provided ITM with a commissioning certificate which relevantly stated:
[The mill] has been delivered, installed and commissioned to applicants satisfaction.
Operator training has been carried out, using the instruction manual.
The machine / system is accepted herewith. The warranty period starts from this date.
On or around 26 August 2010, and notwithstanding the provision of $3.8 million in seed capital loans as I have discussed earlier, ITM applied to Oxford Funding for debtor finance for cash flow purposes.
On 27 August 2010, the first piece of tubular product came off the mill. ITM (and now APT) supplied tubular steel to the wholesale market only as the business plan contemplated, in order to avoid competing with its clients in the retail market.
From August to December 2010, there was a further period of commissioning of the mill. Now ITM encouraged its workers to reach a production target of 2,000 to 2,500 tonnes in the first month, but production in August 2010 was only 70 tonnes (excluding scrap) for that month.
From August 2010, the production staff commenced working as one large crew, but 6 to 8 weeks later they split into two separate crews, each with approximately 5 to 6 production staff and one supervisor. Apparently, this arrangement was different to how Mr Benson would have structured it had he been the decision-maker. If Mr Benson had been making the staffing decisions, he would have started with one crew of 5 to 6 people, working 5 days per week on eight hour shifts per day. After 6 to 8 weeks, if the mill was running to plan, Mr Benson would have taken on a second crew.
For the first few months of production, there was only one crane available for use by the production staff. That crane was used to load the coils into the de-coiler. Whilst that crane was being used, the production staff could not change over the tooling for the next set-up, because there was not a crane available. As a consequence, Mr Benson worked until midnight every night setting up the rafts for the next day.
On 1 September 2010, Mr Brandi ceased as a director of ITM. The reasons for this were not explored during the trial. But I note that he nonetheless continued to have influence in decision making beyond this time. Also on 1 September 2010, Mr Whitbourne ceased to be a director of ITM.
In or around late September 2010, Oxford Funding approved ITM’s application for debtor financing with a maximum draw down limit of $4 million. The term of the facility was 6 months, and Oxford Funding agreed to initially advance 80% of the face value of an accepted invoice. Ultimately however, according to Mr Brandi’s evidence in re-examination, the peak drawdown on the facility was $1.3 million. Apparently, the structure of that facility was sub-optimal for ITM because it excluded funding in respect of invoices that were or could be subject to any set-off or counterclaim. The facility originally precluded invoices from Bluescope, which was both a supplier to and a purchaser from ITM.
In around October 2010, Mr McKew was sacked as CEO of ITM.
By October 2010, ITM was running two separate production crews working 39 hours per week each. There were many unplanned stoppages of the mill. Further, of the production staff, only about 30% had hands-on mechanical aptitude. In Mr Benson’s view, this was in contrast with the production staff he was familiar with at his former workplace (Onesteel) who were highly skilled.
By around early November 2010, ITM began to experience diminished functionality in the operation of the mill, in that products produced by the mill were bent out of alignment during their manufacture. I would note that on 1 November 2010, the indemnity period under the policy commenced. Over the following months after 1 November 2010, the diminished functionality was investigated. It was discovered in February or March 2011 that the issue arose from:
(a)defects in the concrete slab(s) on which the mill was resting, meaning that the slab(s) inadequately resisted the loads associated with the normal operation of the mill; and
(b)misalignment issues affecting the mill and its components, which issues stemmed from such defects.
I am prepared to accept on the evidence that the movement of the mill and the misalignment issues caused:
(a)mechanical parts of the mill being worn out more quickly than they were supposed to;
(b)the requirement to run the mill at a slower speed than desired, to reduce waste;
(c)the use of significant amounts of labour spent in carrying out regular adjustments to the mill alignment;
(d)the inability to operate the mill at full production capacity for any sustained period of time or at all; and
(e)ITM’s inability to produce tubing products at rates and levels that would have been applicable had there been no movement of the mill or misalignment issues.
Let me continue with the chronology.
In November 2010, ITM investigated finance options with the ANZ. On 10 November 2010, ANZ circulated to Mr Brandi a non-binding discussion paper for a refinancing proposal. The ANZ package involved a refinance of the existing BOQ facility, an overdraft to replace the Oxford Funding debtor finance facility, and a facility to fund the purchase of the freehold property on which the mill stood.
In late November 2010, Mr Whitbourne left the business. On 23 November 2010, Mr Whitbourne’s lawyers wrote to Mr Peter Wilson and Mr Brandi, informing them that Mr Whitbourne had resigned as manager of ITM.
By no later than December 2010, Mr Nick Wilson, Mr Peter Wilson’s son, became ITM’s production planner. He had no background in the steel industry.
In early December 2010, Oxford Funding learned that Southern Steel Group (SSG), one of ITM’s customers, was a common debtor/creditor and accordingly ceased invoice funding for that customer.
On 13 December 2010, the Commonwealth Bank approved a loan to RAW United Holdings Pty Ltd (RAW), an entity controlled by the Brandi family, in an amount of $4.62 million for 2 years for the purchase of the freehold of the land on which the mill stood.
On or around 16 December 2010, ITM sacked the second of its production crews. Mr Brandi said that the second production crew was sacked because of cash flow problems in the business. Contrastingly, Mr Benson said that the sacking was related to the unsatisfactory output caused by the bending issues. According to Mr Benson, the second production crew had a greater yield loss on first grade product.
On 20 December 2010, Mr Alexis Andonas of Oxford Funding wrote to Mr Brandi regarding the Oxford Funding facility. He wrote inter-alia:
The account is currently overdrawn by $540K. This is due to the disapproval for the Southern Steel Group, and also various funding limits. The reason that this has increased significantly is due to the fact that the system calculates funding limits on approved debt only.
To assist in improving this position:
•Southern Steel to make payment – As the account is disapproved in its entirety, when payment is made, 100% of the payment value will be updated in your available funds
•Bluescope to make payment – As the concentration limit is exceeded, once payment is made, the available funds position as the account balance will be reduced, and the concentration limit will not be exceeded to the value that it is now
•Factoring Batch – Uploading your sales this week will also assist in this regard as your available funds will update by 80% of the invoices that are approved for funding
On 21 December 2010, Mr Brandi replied to Mr Andonas of Oxford Funding “re cashflow and survival” and noted, inter-alia:
As discussed, we had budgeted for a minimum additional $400k release, which would then bring our Funds in Use to just over $1mil, with a Sales Ledger of over $2mil. Without the proper working capital support structure here, this relationship will not work going forward, especially with the growth we are expecting into 2011.
On 31 December 2010, Mr Brandi wrote to Oxford Funding stating inter-alia that:
Over the past 2 weeks Oxford has shut us down on both Southern & now looking at Bluescope. Obviously we cannot survive running our business during the leanest period like this.
Oxford Funding responded on the same day, noting that if they were aware of the common debtor/creditor arrangements prior to the commencement of the facility they would have suggested an alternative funding tool. The response stated, inter-alia:
As previously advised, the information provided to us over recent months has not given us the confidence that we are aware of the arrangements with your debtors. Whilst we are willing to assist you as much as possible, this leaves us in a difficult position.
We increased the limit on Southern until we discovered post our 30 November meeting that they are a significant common debtor / creditor.
We increased the limit on Bluescope on the basis that you are not buying from them any more. Peter tells us that you will again soon be buying from Bluescope. Peter tells us that this will "always" be the case. As advised previously, we cannot provide funding against this debtor if you are buying from that group. In addition, we were not made aware of the rebate arrangement with Bluescope until we requested the bank statements. As such, we are not able to provide any funding against Bluescope. We are therefore left with no choice but to reduce this limit back to nil.
I outlined to Peter that a possible solution to assist would be a caveat over a property. We have also suggested Non-Offset Deeds in every endeavour to assist you. The Non-Offset Deeds are a usual way of mitigating the common debtor/ creditor risk for us. If these are not available, then unfortunately there is little we can do.
As I outlined to Peter, if we were aware of the common debtor / creditor arrangements prior to the commencement of this facility, we would've have suggested an alternate funding tool. With the reduction in limits for Southern & Bluescope, the Debtor Finance account remains overdrawn.
In late December 2010 and early January 2011 and because Oxford Funding had refused funding in respect of Bluescope’s invoices, Mr Brandi injected around $880,000 into ITM, to address the cash flow problem in the business.
Up to and including December 2010, actual production was as follows:
Month of 2010
Tonnes excl scrap
August
70
September
475
October
503
November
498
December
303
The mill ceased production over the Christmas period from about 17 December 2010 to 9 January 2011.
Shortly after January 2011, Mr Peter Wilson and Mr Brandi started looking at obtaining a more significant finance package, in order to improve the cash flow position of the ITM business.
In February 2011, the second of ITM’s production supervisors, Mr John Dodd, resigned. The production crew that Mr Dodd had supervised had been sacked in December 2010.
In around February or March 2011, Mr Benson reached the conclusion that the slab(s) supporting the mill was uneven.
Production of the mill in 2011 was variable and less than the 2009 forecasts. Production for the first 6 months of 2011 was as follows:
Month of 2011
Tonnes excl scrap
January
422
February
696
March
747
April
621
May
942
June
1,011
Throughout 2011, the mill was subject to various unplanned stoppages from a variety of causes some of which were unrelated to misalignment, including:
(a)unreliable coil supply;
(b)problems with the mill saw;
(c)unplanned stoppages related to the clamps;
(d)stoppages required when changing from galvanised to non-galvanised products;
(e)problems with the quality of the paint (dull paint); and
(f)problems with the filtration system.
In 2011, on the finance side, the business needed cash. On occasion from April 2011, Mr Peter Wilson encouraged Mr Luckeraft to move stock, if necessary by providing discounts. Mr Wilson told Mr Luckeraft that ITM needed cash and instructed him to sell steel in order to get cash in the door. On 13 April 2011, ITM engaged M&A Partners in conjunction with Brandi Financial Services to assist ITM with refinancing. The engagement was negotiated by Mr Peter Wilson and Mr Brandi on behalf of ITM. The scope of work for the services to be provided by these firms set out two stages:
Stage One: Strategy Formulation
•Undertake a review of Independent Tubemills to form the strategy for restructuring the debt;
•Present a ‘Debt Restructure Plan’ to management and the Board, from which M&A Partners/Brandi FS will raise debt for Independent Tubemills.
Stage Two: Independent Tubemills Debt Restructure
•M&A Partners/Brandi FS will prepare a ‘Debt Funding’ plan that will be presented to financial institutions to pursue the appropriate debt requirement.
•M&A Partners/Brandi FS will advise on options available to the Independent Tubemills for raising debt capital, appropriate structure and costs;
Bankwest was identified as a possible financier to provide refinancing for ITM. Now no application for refinance was adduced in evidence, however a number of internal Bankwest documents were tendered. These documents established that the proposed ITM Bankwest refinance included the refinance of:
(a)the Oxford Funding facility;
(b)the CBA facility to RAW in respect of the freehold of the property; and
(c)the BOQ equipment finance facility.
Further, a credit risk submission by Bankwest dated 7 June 2011 noted that the Bankwest refinance proposal included the refinance of personal property loans of the ITM directors:
•Proposal will consolidate existing Banking arrangements with CBA (debt relating to Land & Buildings), BOQ (debt relating to purchase of Mill) and Oxford Finance (working capital facility).
•Existing Housing Loans relating to Directors will also be refinanced under a Private Banking package with equity utilised to support business borrowings. MPG debt relates to David Brandi and wifes family trust.
On one view, the refinance of the freehold and mill machine facilities was added by ITM to give Bankwest “more comfort” in the proposed lending. I will discuss this aspect in more detail later when I address the question of AICW. The total value of the refinance was $13.1 million.
On 24 June 2011, Bankwest provided ITM with a formal offer letter. That document is not in evidence but is referred to by Bankwest in its loan disbursal letter of 1 August 2011.
On 11 July 2011, upon finalisation of the Bankwest refinance, M&A Partners and Brandi Financial Services issued a joint invoice to ITM in the amount of $465,300 being a “Success Fee as agreed for Provision of Corporate Advisory Services” ($393,000), a monthly fee for their services ($30,000) and GST ($42,300). $232,650 was payable to each of M&A Partners and Brandi Financial Services. On 13 and 14 July 2011, ITM and M&A Partners exchanged communications disputing the invoice. It was pointed out that ITM should not be wearing a fee in respect of finance provided to RAW, which was independent of ITM. But ultimately, ITM paid the full amount of the invoice, being $232,650 to M&A Partners and $232,650 to Brandi Financial Services. As the 60% equity partner in Brandi Financial Services, Mr Brandi took a benefit from the $232,650 payment by ITM to Brandi Financial Services.
On or around 14 July 2011, Bankwest disbursed funds under the refinance. On 1 August 2011, Bankwest provided a loan disbursal letter to ITM, confirming that a total of $12,500,437.99 had been disbursed on 14 July 2011, being less than the $13.1 million apparently set out in the letter of offer. In respect of the BOQ mill machine equipment refinance, the change to Bankwest was cash flow neutral. In respect of the freehold purchase refinance, it too was effectively cash flow neutral. In circumstances where the CBA owned Bankwest, the refinance concerning the freehold purchase was on one view in order to make the refinance simpler.
In July 2011, ITM reintroduced a second production shift. In the months July to October 2011, ITM ran double shifts, but still experienced significant variability in actual production. Further, the mill misalignment, being a constant over this period, provided no sufficient explanation in and of itself for the variability. Mr Benson suggested in cross-examination that the likely reasons for the production variability included:
(a)shortages or delays in the supply of coil; and
(b)lack of demand.
Production for the second half of 2011 was as follows:
Month of 2011
Tonnes excl scrap
July
1,097
August
1,527
September
1,921
October
1,024
November
836
December
532
In October 2011, the second production shift ended. According to Mr Benson, the other crew was inexperienced and produced more scrap. Mr Benson said in cross-examination that mill misalignment was not the cause of the sacking of the second shift in October 2011.
In the latter half of 2011, ITM communicated further with Bankwest. On 2 September 2011, Mr Brandi sent to Bankwest an email in the following terms also attaching the June 2011 ITM management accounts:
Please find attached the Actual 2011 P & L management accounts as requested.
Some of the Budget to Actual variances are summarized with brief commentary below;
MAY
A fair bit of market pressure flushed through the months of May & June, led by Onesteel and Orrcon reducing prices to combat imports, thus driving down both volumes and margin.We also spent some extra costs bolstering the mill floor area in maintenance, as well as the office in regards to uplifts and operational necessities. This is reflected with ~$85k to P & L items such as Office costs and Mill Maintenance.
JUNE
Pricing pressure carry over from MAY led to continued margin squeeze (with carrying stock our resultant go to market pricing meant dearer production costs, and less margin etc).Prices are improving, and this is reflected in July, but mainly August Accounts.
BSS released an Import Parity Rebate to help the Import Pricing margins - also reflective in future months.
We again invested on Mill Floor items and racking that would save us costs going forward as well as maintain the lifetime of our equipment - eg, racking and tool shelving. These costs are isolated in Mill Maintenance within the P & L. Travis, Greg & Amy may have witnessed some of these additions at their most recent visit. We continue to focus on opportunities and long-term cost saving exercises as we run.We also implemented a 2nd shift in late June – hence a slight jump in Payroll.
On 9 December 2011, Mr Brandi sent an email to Bankwest setting out ITM’s performance for the months of September, October and November 2011. The email stated in part the following:
Please find attached Sept Qtr figures FYI.
Commentary:
September
•Was our record month in both tons shipped and production tons.
•Providing there is a steady stream of Coil arriving, we had no trouble converting this coil to completed product and our Mill and operators are getting stronger daily.
•Efficiency was paramount, and we focused on exercises to manage these processes better for the future growth.
October
•Coil Supply was still improving mainly due to cashflow – Bluescope as they were still running roughly a few weeks behind & they took a while to ramp up to over 500t/week
•Margin Squeeze due to import dumping & therefore pricing/margin was affected.
•We mainly concentrated on out (sic) Painted Coil supply backorders – PTD Coil has a lower sale price & margin – so our avg sales price was lower for the month;
•We managed to truck out & Invoice over 1500 tons.
November
•We achieved just shy of 1600 tons shipped out & invoiced.
•We have a large amount of Sales Orders to be shipped ($700k+), as well as achieving an incredible Back Order list (future orders) through from Jan – March 2012. Included from March is Bluescope Distribution’s request at our cap of 1200t per month alone, Steelforce’s Jayco business growing and other import offers we have managed to secure.
•Production throughout the shorter months of Dec & Jan will be full steam ahead in line with order delivery requirements of our clients in Feb onwards. We have requests monthly exceeding 2000t in 2012 already.
There was nothing in these communications concerning misalignment problems, although I accept that ITM may not have necessarily wished to communicate any problem to Bankwest if the problem had become apparent by this time.
On 31 October 2011, the indemnity period under the policy ended.
Let me step away from the chronology for a moment. One particular problem which ITM had during 2011 was coil supply. More particularly, raw coil suppliers refused to supply coil to ITM unless payments including overdue payments were received and/or ITM came within agreed credit limits. A number of ITM’s major suppliers, including CITIC, Bluescope and SSG took this approach.
Bluescope ceased supply to ITM on a number of occasions during 2011 until ITM paid down debt and/or came within agreed credit limits. So:
(a)On 1 July 2011, Mr Steve Weine wrote to Mr Brandi that “Unfortunately, BSL will have to suspend deliveries until the due debt (approx.$lm) is paid”.
(b)On 10 October 2011, Mr Greg Tilden wrote to Mr Brandi that:
We are keen to see ITM continue to grow to ensure more Australian steel is used in the Domestic Pipe and Tube Market. It is with a great deal of disappointment that we have been forced to put a hold on all deliveries and new orders until the ITM account is within the agreed credit limit and all overdue amounts are paid on the account.
To recommence supply we require the overdue amount of $786,189 to be paid immediately and a firm commitment to pay the invoices totalling $1,039,912 by the end of October. All of the current invoices are detailed on the attached invoice summary. At a mutually convenient time we will need to meet to discuss the ongoing status of your account and ITM’s intentions to make future payments on time and operate within the negotiated credit limit.
(c)On 15 November 2011, Mr Tilden wrote to Mr Brandi regarding recent payments made by ITM that:
Based on receival of these payments we should be able to supply the next weeks orders but will need to program further payments in order for us to deliver the December requirements. The account is above the credit limit today and the next payment will bring it back under the credit limit but once the credit limit is again reached we will have to suspend deliveries unless additional payments are made.
Further, on the other side of their relationship, when ITM did not deliver to Bluescope on the delivery date finished goods specified in Bluescope’s order, Bluescope would cancel that part of the order that was not delivered on time, which left ITM holding a quantity of finished goods that had been produced but not sold. Nevertheless ITM still had to pay for the raw coil supplies that the goods were processed from.
Further, SSG was both a significant coil supplier to ITM and also one of ITM’s largest customers. In the first half of 2011, SSG refused to supply slit coil unless its own orders for final products from ITM were delivered. For example:
(a)Between 6 and 11 April 2011, SSG was in dispute with ITM over a failure to meet orders in a timely fashion. Mr Kevin Smaller wrote to Mr Brandi saying that SSG would only recommence supply of slit coil if ITM could satisfy him of a definite supply schedule for the material on order.
(b)On 29 April 2011, Mr Smaller wrote to Mr Brandi telling him that the slow supply of slit coil was because of ITM’s slow supply of finished product to SSG.
In respect of CITIC’s relationship with ITM, on 15 June 2011 “Griff” from Wright Steel (which had an arrangement with CITIC) wrote to Mr Brandi chasing a $522,000 payment that had been due 15 March 2011 and an $11,000 shortfall payment that had been due on 15 January 2011. On 2 November 2011, ITM was served with a statutory demand by CITIC. There was subsequent litigation between these parties that eventually settled.
These coil supply problems had a significant impact on ITM. ITM had to continually amend and update its rolling program to suit coil deliveries. It also affected ITM’s cash flow. In Mr Brandi’s words to Bluescope “[w]e are being crucified cashflow wise with the timing & required payment of this coil”.
On 20 August 2012, Mr Peter Wilson ceased as a director of ITM. He was replaced by Mr Brandi.
On 10 September 2012, ITM notified QBE of a claim for material damage and business interruption under the policy.
On 26 November 2012, FMG Engineering delivered a report to QBE concerning the slab and mill misalignment. A debate took place between the parties as to its admissibility. I have received it as relevant to the chronology in terms of QBE’s investigation and processing of the claim, but not as evidence as to the truth of the assertions of the opinions expressed. In my view it does not qualify as expert opinion evidence under s 79 of the Evidence Act 1995 (Cth). Further, it is not an admission. Further, even if it were a business record it is not admissible to prove the truth of the opinion expressed, but only the fact of the opinion being expressed. Further, even if s 62 or s 63 of the Evidence Act otherwise apply, the terms of s 67 have not been complied with. But in any event, even if I am wrong about all of this, I would make a limited use order under s 136 of the Evidence Act preventing this report from being used as evidence as to the truth of the opinions being expressed. Let me move to another matter.
By no later than 1 March 2013, the applicants (and previously, ITM) were assisted by Marsh Pty Ltd in the preparation of their claim.
On 1 May 2013, QBE granted indemnity under the policy for both material damage and business interruption. In its letter granting indemnity, QBE stated:
QBE is satisfied that ITM has established that it has suffered “damage” to insured machinery. This “damage” is constituted as physical damage to machinery and also diminished functionality and value of machinery as well as increased wastage and other costs as a result of diminished functionality. It is understood that the physical losses have also led to probable losses in revenue and attendant gross profits and possible increases in costs of working.
From June 2013 to November 2017, Marsh performed work and billed ITM for work done in relation to the claim. Internally, Marsh categorised its work as being either “claims preparation”, “claims management” or “claims reporting”. Some other items of work also appeared on its invoices such as “administration”, “consulting/analysis” and “computer modelling”.
On 29 July 2013, QBE made its first payment under the policy, being a payment of $1 million as a first progress payment said to be in partial settlement of claims under Section 1 and Section 2 of the policy.
On 5 September 2013, QBE made its second payment under the policy, being a payment of $1 million as a second progress payment said to be in partial settlement of claims under Section 1 and Section 2 of the policy. This payment is relevant to the ICW question that I will discuss later.
On 14 November 2013, QBE made a payment under the policy, being a payment of $1 million made in full settlement of claims with respect to material damage. Apparently the $1 million received for material damage was not used to fix the mill misalignment.
On 19 December 2013, QBE made its fourth and final payment under the policy, being a payment of $1.8 million as a third progress payment in partial settlement of claims for business interruption under Section 2 of the policy.
Excluding the payment of $1 million with respect to material damage, QBE has paid a total of $3.8 million under Section 2 of the policy.
By deed dated 16 May 2014 between ITM (as trustee for the ITM Unit Trust) and APT, ITM assigned to APT all of its rights under the policy and any relevant choses in action, including the rights to pursue the claims the subject of this proceeding. On 19 August 2014, APT gave notice of the said assignment to QBE. ITM has been joined as the second respondent to the present proceedings given its position as assignor. Although notice was given to QBE, nevertheless the assignment still remained an equitable assignment as I explained in Australian Pipe & Tube Pty Ltd v QBE Insurance (Australia) Limited (supra) at [5] in the following terms:
On 1 July 2014, ITM became subject to a creditors’ voluntary winding up by virtue of a resolution passed on 1 July 2014. In August 2014, as I have said, notice of the assignment was given to QBE. Normally such a notice would have been sufficient to convert the equitable assignment into a legal assignment (s 134 of the Property Law Act 1958 (Vic)). But as the liquidation of the assignor commenced before the notice, the legal interest was not validly assigned by the operation of the subsequent notice per se. Accordingly, notwithstanding the notice, the assignment continued only to be effective in equity.
By deed dated 1 July 2016 between APT and the second applicant (Leaning Back Pty Ltd), APT assigned to the second applicant all of its rights under the policy and any relevant choses in action, including the rights to pursue the claims the subject of this proceeding. On 1 February 2018, the second applicant gave notice of this assignment to QBE.
RELEVANT TERMS OF THE POLICY
Let me now address the policy and some issues that arise in its application.
The policy describes itself as an Industrial Special Risk Mark IV Insurance Policy.
The policy contains the following preamble:
Preamble
This Policy incorporates the Schedule, Sections, Definitions, Conditions, Exclusions, Endorsements, Memoranda and Warranties (if any) and any other terms herein contained which are to be read together and any word or expression to which a specific meaning has been given in any part of this Policy shall bear this meaning wherever it may appear unless such meaning is inapplicable to the context in which the word or expression appears.
WHEREAS the Insured named in the Schedule has paid or agreed to pay to the Insurer(s) specified below the Premium shown on the Schedule, now the Insurer(s) agree(s), subject to the terms, Conditions, Exclusions, Memorandum, Warranties, limitations and other provisions contained herein or endorsed hereon, to indemnify the Insured as specified herein against loss arising from any insured events which occur during the Period of Insurance stated in the Schedule or any renewal thereof.
PROVIDED THAT the total liability of the Insurer(s) at any one Situation shall not exceed the appropriate Limit or Sub limit(s) of Liability as stated in the Schedule or such amount(s) as may be substituted therefore by Endorsement or Memorandum hereon or attached hereto.
The schedule to the policy describes ITM as the insured, the “Business” as being a “Cold press steel mill/ manufacturers of tubular steel products including some importing of raw materials” and “any other activities incidental thereto” with the “Situation and/or Premises” being 2-14 Independent Way, Ravenhall Victoria. The “Period of Insurance”, as distinct from the indemnity period, is stipulated as 13 May 2010 to 13 May 2011. The schedule later stipulates the “Indemnity Period” as 12 months. In the present case the parties have agreed on the indemnity period being 1 November 2010 to 31 October 2011. The schedule also stipulates the following:
Declared Values (in accordance with the Basis of Settlement) Section 1 All property insured $9,500,000 Section 2 Gross Profit $25,000,000 Insured Payroll Included in Gross Profit Claims Preparation $500,000 Additional Increased Cost of Working $1,000,000
For present purposes I do not need to discuss relevant limits, save to say that the policy refers to some sub-limits relevant to Section 2 – Consequential loss, being $500,000 for “Item 2 – Claims Preparation Costs” and $1,000,000 for “Item 4 – (Additional) Increased Cost of Working”.
Section 2 of the policy sets out detailed provisions concerning consequential loss.
First, the indemnity clause is expressed in the following terms:
The indemnity
In the event of any building or any other property or any part thereof used by the Insured at the Premises for the purpose of the Business being physically lost, destroyed or damaged by any cause or event not hereinafter excluded (loss, destruction or damage so caused being hereinafter termed ‘Damage’) and the Business carried on by the Insured being in consequence thereof interrupted or interfered with, the Insurer(s) will, subject to the provisions of this Policy including the limitation on the Insurer(s) liability, pay to the Insured the amount of loss resulting from such interruption or interference in accordance with the applicable Basis of Settlement.
Provided that the Insurer(s) will not be liable for any loss under this section unless the Insured’s property lost, destroyed or damaged is insured against such Damage (loss arising out of destruction or damage by explosion of Boilers and/or Economisers excepted) and the Insurer or Insurers by which such property is insured shall have paid for, or admitted liability in respect of such Damage unless no such payment shall have been made or liability shall not have been admitted therefore solely owing to the operation of a provision in such insurance excluding liability for loss below a specific amount.
Second, there are then detailed provisions concerning the “Basis of settlement”, by reference to 4 items set out thereunder. Only Item Nos 1, 2 and 4 and the provisions relating thereto are relevant.
Item No 1
Item No 1 is expressed in the following terms:
Item No. 1
The insurance under this item is limited to loss of Gross Profit due to: (a) Reduction in Turnover and (b) Increase in Cost of Working and the amount payable as indemnity thereunder shall be:
(a) In respect of Reduction in Turnover;
the sum produced by applying the Rate of Gross Profit to the amount by which the Turnover during the Indemnity Period shall, in consequence of the Damage, fall short of the Standard Turnover;
(b) In Respect of Increase in Cost of Working
the additional expenditure necessarily and reasonably incurred for the sole purpose of avoiding or diminishing the reduction in Turnover which, but for that expenditure would have taken place during the Indemnity Period in consequence of the Damage, but not exceeding the sum produced by applying the Rate of Gross Profit to the amount of the reduction thereby avoided;
less any sum saved during the Indemnity Period in respect of such of the charges and expenses of the Business payable out of Gross Profit as may cease or be reduced in consequence of the Damage.
Provided that if the Declared Value of Gross Profit at the commencement of each Period of Insurance be less than the sum produced by applying the Rate of Gross Profit to the Annual Turnover, (or its proportionately increased multiple thereof, where the Indemnity Period exceeds 12 months) the amount payable hereunder shall be proportionately reduced.
In approximate terms:
(a)the Bankwest cash flow facility totalled $4 million;
(b)the re-finance of the freehold property purchase was to the value of $4.6 million; and
(c)the re-finance of the BOQ mill facility was to the value of $4.5 million.
Re-finance of the freehold purchase
I agree with QBE that the part of the M&A/BFS fee charged on the value of the freehold purchase re-finance is not properly owing as AICW.
First, the re-finance of the CBA facility did not occur ‘in consequence of the Damage’. Nothing about the mill misalignment had any effect on the pre-existing CBA loan and mortgage. The evidence given by Mr Brandi for the reason for re-finance was that “Commonwealth Bank owned Bankwest. They just transferred the security across to make this simpler, to tighten up security structure for the Bankwest deal”. In those circumstances, this portion of the M&A/BFS fee was:
(a)not a fee ‘necessarily incurred’;
(b)not a fee ‘necessarily incurred’ … ‘in consequence of the Damage’; and
(c)not a fee incurred for the ‘purpose of avoiding or diminishing the reduction in Turnover and/or resuming and/or maintaining normal business operations and/or services’.
Second, whilst ITM ultimately agreed to foot the bill for the freehold purchase re-finance, ITM was not the purchaser of the freehold. It had no liability to the CBA nor did it end up with any liability to Bankwest in respect of the freehold property. Whilst ITM and RAW were related parties, ITM was essentially a third party to this transaction. Accordingly, this was not a fee ‘reasonably incurred’ within the terms of the AICW clause. As Mr Brandi noted “It was just another added security to Bankwest in this whole refinance. Separate entity. Separate property”.
Further, as QBE correctly points out, there was no direct evidence that Bankwest made it a requirement of re-financing ITM’s debtor funding facility that other facilities and parties get “dragged into the tent” to use QBE’s description. Mr Brandi’s evidence rose no higher than an assertion that Bankwest would obtain ‘comfort’ from having the other facilities included or that it would help to ‘get the deal over the line’. Now these were bare assertions by Mr Brandi. It was within the power of the applicants to adduce direct evidence of these matters. They did not.
Accordingly, I agree with QBE that there is thus no tenable link between the re-finance of the freehold purchase and the mill misalignment. The claim to this aspect of AICW relating to the M&A/BFS fee is rejected.
Re-finance of the BOQ chattel mortgage
Further, I reject the AICW claim in respect of the re-finance of the BOQ equipment finance facility, being that portion of the M&A/BFS fee attributable to the value of this re-finance and also the $357,490.91 early repayment of interest fee on that facility. There is no tenable link between this re-finance and the mill misalignment. The act of this re-finance and the incurring of associated fees was not done ‘in consequence of the Damage’. Further, this re-finance was cash-flow neutral. No funds were thus freed up to permit ITM to, for example, advertise to its customers that it was resuming normal operations or to outsource production temporarily. Indeed, in M&A Partners’ correspondence with Bankwest, they stated that “we have assumed that the new Mill Loan will be a direct replacement of the current term debt and the effect on the cash flow is neutral”. In my view the BOQ liability was a pre-existing and continuing requirement of the business. The fees associated with re-financing that facility are not claimable as AICW.
Cash flow funding/re-finance
The third part of the Bankwest re-finance concerned the re-financing of ITM’s debtor funding facility with Oxford Funding.
The Oxford facility had a limit of $4 million, as did the Bankwest trade finance facility. The difference was that the Bankwest facility could be fully drawn down in a way that the Oxford facility could not, because Oxford Funding refused to fund common debtors/creditors. ITM’s full use of the Oxford Funding facility was constrained by ITM having a number of common debtors/creditors. Now Mr Brandi sought to attribute ITM’s inability to access the full extent of the Oxford Funding facility on bent steel/mill misalignment by asserting that the Oxford facility did not work because ITM could not invoice in turn because of bent steel. But QBE says that this explanation ignores restrictions on that facility, by reason of the fact that some of ITM’s major debtors were also creditors and therefore invoices to those debtors were ineligible for funding. QBE says that the explanation further ignores that ITM entered into the Oxford Funding arrangement in the first place because of existing cash-flow difficulties it was having as early as August 2010. Further, QBE says that the explanation ignores the role that underperformance in terms of production volumes for reasons independent of mill misalignment played in ITM not being able ‘to invoice’.
In summary, QBE says that the fees associated with the Bankwest re-finance of the Oxford Funding facility were incurred because of a pre-existing need of the business for cash-flow finance. The fees were not incurred ‘in consequence of the Damage’.
But I am inclined to agree with the applicants that that part of the M&A/BFS fee attributable thereto should be allowed. By reason of the misalignment, more flexibility was needed. Further, this facility in substance “released” additional funds.Further, invoicing problems were partly attributable to misalignment. I will allow an appropriate amount of the success fee referable to this facility. Moreover, I reject QBE’s contention that I should reduce the allowance further by reason of Mr Brandi’s interest in Brandi Financial Services.
Other Bankwest fees
Equivalent points to those set out above apply in respect of the remaining claimed Bankwest fees, being the $150,000 establishment fee for re-finance, $23,976.09 Bankwest interest, a $4,612.50 business valuation fee and a $10,000 line fee. I will allow directly attributable amounts or pro-rata amounts thereof referable to the Bankwest refinancing of the Oxford Funding facility.
(b) Technician’s fees
The applicants’ evidence in support of their claim for the technician’s fees are two OTO Mills invoices. The first invoice is dated 1 June 2011 for 2 days of travel and 3 working days between 6 May 2011 and 12 May 2011. The narration on that invoice is “Intervention by our technician at your plant site”. The second invoice is dated 24 November 2011 for travel and working days from 5 September 2011 to 19 September 2011. The narration reads “Intervention by our technician at your plant site: On Field Additional Training on tube mil OTO 1276 RTC”.
Now QBE says that on their face neither invoice relates to work performed in consequence of mill misalignment. It is said that given the multitude of non-misalignment production problems experienced by the mill and the hiring and firing and re-hiring of production staff, the work performed by the OTO technicians can reasonably be understood to concern non-misalignment production issues. Further, QBE says that it must have always been within the applicants’ power to produce evidence that these fees were incurred as additional cost of working in consequence of mill misalignment and that the applicants have not adduced that evidence. It is also said that Mr Benson was the production supervisor of the mill at this time but he did not give evidence about these costs being incurred and the reason they were incurred.
Not without some hesitation, I am inclined to accept the applicants’ contentions on this aspect that at least some part of these fees was referable to the misalignment and would satisfy AICW. I think it reasonable to allow 50% thereof given the deficiencies in proof.
CLAIMS PREPARATION
The claims preparation clause in the policy provides as follows:
The insurance under this item is to cover such reasonable professional fees as may be payable by the Insured, and such other reasonable expenses necessarily incurred by the Insured and not otherwise recoverable, for the preparation of claims under the Insured’s Material Damage and Consequential Loss Insurance policies and the Insurer(s) shall indemnify the Insured for such reasonable fees and expenses.
The applicants claim the following claims preparation costs totalling $450,620.30 consisting of:
(a)Marsh Pty Ltd – $419,037;
(b)R I Brown Surveyors – $10,290; and
(c)Professor Allan Manning (of LMI) – $21,293.30.
QBE accepts liability to pay $259,568.19 of the amount claimed. QBE accepts in full the costs incurred with R I Brown and Professor Manning, but asserts that it should pay the Marsh costs only to the amount of $227,984.89. In substance, the dispute relates to those costs paid to Marsh for work performed by Marsh from 3 July 2014, being the date on which QBE formally rejected the claim.
Now as the applicants correctly point out, the policy does not expressly state any temporal limit on claims preparation costs at the point the claim is formally rejected by the insurer. And nor does the policy definition exclude claims preparation work performed to assist an insured to litigate its claims.
Now a review of the relevant later invoices reveals that:
(a)the majority of the work performed was by one person, Mr Colin Gill;
(b)the majority of the activity types recorded in the invoices were either “claims preparation” or “claims management”;
(c)the line item narrations are consistent with much of the work performed for the purpose of preparing the claim; and
(d)there is little discernible change in the nature or activity type of work performed before or after 3 July 2014, with the narrations both before and after 3 July 2014 identifying work such as extracting data, performing calculations and analysis, preparing spreadsheets, collating documents and information relevant to the claim and the like.
Now as was submitted to me by the parties, I could approach the question of the claims preparation costs in any one of the following three ways:
(a)first, permit all Marsh costs up to 3 July 2014 but none thereafter on the basis that the work performed by Marsh post 3 July 2014 did not constitute “claims preparation” as contemplated by the policy;
(b)second, permit all Marsh costs up to a later point such as the commencement of the proceeding and none thereafter; or
(c)third, permit only those costs noted to be “claims preparation” costs in the individual Marsh invoices post 3 July 2014.
Now as I have said, the date of 3 July 2014 is significant because on that date QBE wrote a detailed letter to ITM (via Marsh) setting out its position regarding ITM’s claim and stating that QBE would not be making any further payments beyond the $3.8 million paid in respect of Section 2 of the policy to ITM. Its letter was dated some 10 months after ITM’s claim was made. QBE says that by that stage, ITM had had more than sufficient opportunity to prepare and present its claim to QBE. QBE says that the work performed by Marsh after that date should be considered to be claims advocacy rather than claims preparation, and accordingly not payable under Item No 2 of the Basis of Settlement. I would reject such a broad brush approach. In all the circumstances and given the forensic deficiencies in the case, I propose to adopt the third option. I may reasonably use the internal Marsh allocation or description of work as “claims preparation” as the distinguishing criterion. This approach is reasonable on the basis that the relevant individuals at Marsh performing the work might reasonably be said to have been best placed to assess and characterise the nature of the work performed.
I will leave it to the parties to work out the relevant arithmetic based upon applying such an allocation method.
INTEREST
Now at this stage I am unable to assess whether any amount is due and owing by QBE until the parties apply my reasons and undertake the necessary calculations. But if any amount is due, then the applicants also seek an award of interest thereon.
The applicants seek interest on the amount of the claim under the policy pursuant to s 57 of the Insurance Contracts Act 1984 (Cth). Section 57 provides as follows:
(1)Where an insurer is liable to pay to a person an amount under a contract of insurance or under this Act in relation to a contract of insurance, the insurer is also liable to pay interest on the amount to that person in accordance with this section.
(2)The period in respect of which interest is payable is the period commencing on the day as from which it was unreasonable for the insurer to have withheld payment of the amount and ending on whichever is the earlier of the following days:
(a) the day on which the payment is made;
(b)the day on which the payment is sent by post to the person to whom it is payable.
(3)The rate at which interest is payable in respect of a day included in the period referred to in subsection (2) is the rate applicable in respect of that day that is prescribed by, or worked out in a manner prescribed by, the regulations.
(4)This section applies to the exclusion of any other law that would otherwise apply.
(5) In subsection (4):
law means:
(a) a statutory law of the Commonwealth, a State or a Territory; or
(b) a rule of common law or equity.
The relevant regulations (now reg 38 of the Insurance Contracts Regulations 2017 (Cth), but previously reg 32 of the Insurance Contracts Regulations 1985 (Cth)) prescribe, in substance, for an interest rate of 3% more than the mean of the 10 year Treasury Bond yields over the relevant period rounded down to the nearest quarter of 1%
Under s 57(2), the period in respect of which the insurer is required to pay interest commences on the day on which it became unreasonable for the insurer to refuse to pay the claim. An objectively determined reasonable period is to be given to the insurer to investigate the claim and determine its position. But where that position constitutes a refusal to pay the claim, in circumstances where a court has held that a liability to pay the claim does exist, such refusal cannot relevantly extend this period to the point of adjudication, regardless of whether that position was formed and held bona fide (see Fitzgerald & Anor v CBL Insurance Ltd [2014] VSC 493 at [415] and [416] per Sloss J). In short, the award of interest is to be calculated taking into account a reasonable time for completion of the insurer’s investigation of the claim.
In the present case, the loss first arose on 31 October 2010. Further, the claims the subject of this proceeding were notified to QBE on 10 September 2012. I am inclined to the view that if any amount is ultimately owing by QBE after my reasons have been considered and relevant calculations undertaken, that interest ought to accrue on the amount ultimately found to be owing from 3 July 2014, which is the date upon which QBE notified the insured that it would not make any further payments on the claim. Up to that point in time, in my view it was reasonable for QBE to have taken that time to complete its investigation, given the complex nature of the tasks involved.
CONCLUSION
I have found for the applicants with respect to some of its claims.
The parties will need to consider further my reasons and undertake the necessary calculations applying the methodologies and input assumptions that I have determined to be appropriate in order to determine what sum is owing by QBE. I will give the parties an opportunity to make further submissions on this question.
I certify that the preceding two hundred and ninety-four (294) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Beach. Associate:
Dated: 21 September 2018
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