Brescia Furniture Pty Ltd v QBE Insurance (Australia) Ltd

[2007] NSWSC 598

Reported Decision: (2007) 14 ANZ Insurance Cases 61-740

New South Wales

Supreme Court

CITATION:	Brescia v QBE [2007] NSWSC 598 This decision has been amended. Please see the end of the judgment for a list of the amendments.
HEARING DATE(S):	28th, 29th, 30th, 31st May, 4th, 5th, 6th, 7th ,8th, 12th, 13th, 14th, 15th, 22nd, 26th June 2007
JUDGMENT DATE :	6 July 2007
JUDGMENT OF:	Hammerschlag J
DECISION:	Verdict for the plaintiff
CATCHWORDS:	INSURANCE – Industrial special risk policy providing cover against property damage and consequential loss of profits – property destroyed by fire – refusal of indemnity by insurer on basis of insured’s failure to take reasonable precautions as required by the policy and on basis of s56(1) Insurance Contracts Act 1984 (Cth) for fraudulent stock and business interruption claims – insured seeks damages for breach – whether insured took reasonable precautions and test to be applied – whether fraud established in stock and business interruption claims – whether reinstatement value, indemnity value or difference between market value before and after event applies – quantifying loss – extent of insured’s obligation to act with reasonable dispatch after termination of policy by effluxion of time – availability of consequential damages where policy not terminated for breach
LEGISLATION CITED:	Insurance Contracts Act 1984 (Cth)
CASES CITED:	Stuart v Guardian Royal Exchange Assurance of New Zealand Limited (No.2) (1988) 5 ANZ Insurance Cases 60-844 Moss v Sun Alliance Australia Limited (1990) 55 SASR 145 Kodak (Australasia) Pty Limited v Retail Traders Mutual Indemnity Insurance Association (1942) 42 SR (NSW) 231 Legal & General Insurance Australia Limited v Eather (1986) 6 NSWLR 390 Brambles Holdings Ltd v Carey (1976) 15 SASR 270 Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 VACC Insurance Ltd v BP Australia Ltd (1999) 47 NSWLR 716 Entwells Pty Ltd v National and General Insurance Co Ltd (1991) 5 ACSR 424 Fraser v BN Furman (Productions) Limited; Miller Smith & Partners (A firm) Third Party [1967] 1 WLR 898 Albion Insurance Company Limited v Body Corporate Strata Plan No. 4303 [1983] 2 VR Plasteel Windows Australia Pty Limited v Sun Alliance Insurance Limited (1989) 5 ANZ Ins Cas 60-918 Caff v McHenland Nominees Pty Limited (t/a Confoil Containers) (1984) 3 ANZ Ins Cas 60-575 The Committee for the time being of the Casino Show Society v Lyn Maree Norris (1984) 3 ANZ Ins Cas 60-580 Aluminium Wire & Cable Co Limited v Allstate Insurance Co Limited [1985] 2 Lloyd’s Rep 280 Cee Bee Marine Ltd v Lombard Insurance Co Ltd [1990] 2 NZLR 1 Haines House Haulage Co v Goldstar Insurance Co (1989) 5 ANZ Ins Cas 60-937 Mason v Century Insurance Co Ltd [1973] 2 NZLR 216 Hing v Security & General Insurance Company (N.Z.) Ltd (1985) 4 ANZ Ins Cas 60-696 Kelly v The National Insurance Company of New Zealand Ltd (1995) 8 ANZ Ins Case 61-239 Jones v Dunkel (1959) 101 CLR 298 Ghazal v Government Insurance Office of New South Wales (1992) 29 NSWLR 336 State Rail Authority of New South Wales v Brown (2006) 66 NSWLR 540 Briginshaw v Briginshaw (1938) 60 CLR 336 Lucas v The New Zealand Insurance Co Limited [1983] 1 VR 698 Castellain v Preston (1883) ll QBD 380 Grant v Aetna Insurance Co (1862) 15 ER 589 Spina & Spina v Mutual Acceptance (Insurance) Ltd (1984) 3 ANZ Ins Cas 60-554 British Traders’ Insurance Company Limited v Monson (1964) 111 CLR 86 CIC Insurance Limited v Bankstown Football Club Limited (1997) 187 CLR 384 New Zealand Shipping Co v Societe des Ateliers et Chantiers de France [1918-19] All Rep ER 552 Alghussein Establishment v Eton College [1991] 1 All ER 267 Athlone Pty Ltd v General Accident Fire & Life Assurance Corporation (1985) 3 ANZ Ins Cas 60-648 Lawson v Zurich Australian Insurance Limited (Rolfe J, 30 July 1996, unreported) CIC Insurance Limited v Bankstown Football Club Ltd (1995) 8 ANZ Ins Cas 61-232 Tricontinental Corporation Ltd v HDFI Ltd (1990) 21 NSWLR 689 Hadley v Baxendale (1854) 9 Exch 341 Wardley Australia Limited v State of Western Australia (1992) 175 CLR 514 Russell Young Abalone Pty Limited v Traders Prudent Insurance Company Limited (1993) 7 ANZ Ins Cas 61-182 Kassem v Colonial Mutual General Insurance Co Ltd [2001] NSWCA 38 Judd & Judd v Suncorp Insurance & Finance (1988) 5 ANZ Ins Cas 60-832 Green v AMP Life Limited (2005) 13 ANZ Ins Cas 90-124 Motor Accident Mutual Insurance Pty Limited v Kelly (1998) 10 ANZ Ins Cas 61-420 Tropicus Orchids Flowers and Foliage Pty Ltd v Territory Insurance Office (1998) 148 FLR 441 Ferrcom Pty Limited v Commercial Union Assurance Co of Australia Limited (1989) 5 ANZ Ins Cas 60-907 Wenham v Ella (1972) 127 CLR 454 Ronnoc Finance Limited v Spectrum Network Systems Limited (1997) 45 NSWLR 624 TCN Channel 9 Pty Limited v Hayden Enterprises Pty Limited (1989) 16 NSWLR 130 Manly Municipal Council v Skene [2002] NSWCA 385 The Commonwealth v Amann Aviation Pty Limited (1991) 174 CLR 6
PARTIES:	Brescia Furniture Pty Limited QBE Insurance (Australia) Limited Mercantile Mutual Insurance (Australia) Limited
FILE NUMBER(S):	SC 50082/05
COUNSEL:	A.J. Sullivan QC with I.R. Pike (Plaintiff) M.L. Williams SC with J.V. Gooley (Defendants)
SOLICITORS:	Sparke Helmore (Plaintiff) A.R. Conolly & Company (Defendants)

- 48 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

HAMMERSCHLAG J

6 JULY 2007

50082/2005 BRESCIA FURNITURE PTY LIMITED v QBE INSURANCE (AUSTRALIA) LIMITED & MERCANTILE MUTUAL INSURANCE (AUSTRALIA) LIMITED

JUDGMENT

INTRODUCTION

1 HIS HONOUR: On 11 March 2005 at about 9.15am, the plaintiff’s furniture showroom and warehouse at 202-206 Parramatta Road, Ashfield, New South Wales (the “building”) together with all furniture in it, was destroyed by fire. I shall refer to the plaintiff as Brescia.

2 Brescia held insurance with the defendants in the form of an Industrial Special Risk (ISR) Industry Policy (“the Policy”) providing cover against property damage (Section 1) and consequential loss of profits (Section 2) for the period 30 June 2004 to 30 June 2005.

3 Brescia sought indemnity from the defendants in respect of its loss. The defendants refused indemnity.

4 Brescia now sues for damages for breach of the contract of insurance. The defendants put both liability and quantum in issue.

5 Mr A J Sullivan QC together with Mr I R Pike of Counsel appeared for Brescia. Mr M L Williams SC together with Mr J V Gooley of Counsel appeared for the defendants.

BACKGROUND

6 Brescia is a company associated with the Brescia family, the patriarch of which is Mr Antonio Brescia. At the time of the fire his two sons Messrs Vittorio Brescia and Moreno Brescia and his stepson Mr Bruno Brescia were active in its business of importing furniture and furnishings for retail sale. I shall, for ease of reference, refer to each by his first name with no disrespect intended.

7 At all times material to the issues in these proceedings Mr Gregory Cortese has been Brescia’s financial controller.

8 Brescia also has a showroom in Cabramatta. The building was, however, its flagship premises.

9 The building had three levels, a basement level used for bulk storage and furniture assembly, a “ground floor” showroom and a “first floor” which had a studio and which was also used to hold furniture and to store mechanisms. I shall refer to the first floor as the roof level because this was the term used in the evidence. It is also sometimes referred to as the third level.

10 When Brescia acquired it in about 1988, the building had a flat concrete roof. In around 1997 a new sloped roof was constructed with Ashfield Municipal Council (“the Council”) approval. At this time the building already had an additional useable area on the roof level in the form of a studio and storage area.

11 The construction of the sloped roof formed a new roof cavity or void over the warehouse section which became part of the third level. This area was also serviced by a goods lift.

12 The new roof cavity came to be used as a storage area for furniture. It is not in dispute that such use needed development consent from the Council and it was not obtained. Council approval for the new roof structure did not make reference to the use of the roof space.

13 Access to the roof level was exclusively via the goods lift or a lift-up attic type ladder which went through an aperture between the roof level and the showroom below.

14 In about 1997 Brescia installed fire hose reels in the building including two in the roof level. In addition there were about 40 portable fire extinguishers located throughout the building which were serviced regularly.

15 In the course of Brescia’s business, items of furniture needed to be repaired or restored including by french polishing. French polishing involves the application of materials which are (and the residues of which are) flammable. Their use requires ventilation.

16 From at least 1988 french polishing was done in a spray booth in the basement level of the building (“the old spray booth”). Between 1998 and 2002 the french polishing was done by Mr Baez and from 2002 was done by Mr Paul Coulson. Mr Coulson was the principal french polisher at the time of the fire.

17 The original ventilation for the old spray booth was a steel exhaust duct behind a grill in the wall of the old spray booth. It passed through the wall of the building and ran vertically up its side. This was the position as at 2003. The duct had an exhaust fan, the location of which is not clear from the evidence. The outlet faced neighbouring apartments in Chandos Street.

18 In early 2002 Brescia was informed by the Council of complaints from nearby residents about odours emanating from the exhaust duct.

19 There was not to that point, nor had there ever been, any filtration system to inhibit the escape of flammable residues from the old booth into its exhaust.

20 Because of the residents’ complaints, Brescia obtained a quote from Climate Control Installations Pty Ltd (“Climate Control”) to re-route the ducting to run across the roof of the building to face Parramatta Road. Brescia dealt with Mr Kim Stockham of Climate Control.

21 In discussion with Council officers it emerged that a development application was required for the work contemplated.

22 On 22 September 2002 Brescia obtained development consent from the Council for the extension of the ducting, for a new exhaust fan and for acoustic installation. A provision of the consent (clause 12) was that:

“The existing spray booth is only to be used for minor touch-ups and small paint job (sic) to be carried out on the premises. Any variation of the existing furniture work activities requires further consideration by Council prior to commencement of work on premises”.

23 Condition 15 of the development consent foreshadowed an acoustic report to identify steps which might prevent the likelihood of future offensive noise nuisance and air impurities.

24 The works were carried out in early January 2003.

25 In May 2003 Brescia received complaints about the operation of the exhaust fan and arranged for modifications to the exhaust system.

26 On 8 July 2003 Brescia received letter from the Council conveying a complaint that the fan was being used for extended hours throughout the day as opposed to its sporadic operation in the past. The letter referred to a verbal assurance that the Council had received from Brescia that only spraying for minor repairs was carried out. The letter further stated that any intensification or expansion of this use would be subject to Council approval.

27 The asserted intensification of use was denied in a letter dated 29 July 2003 from Brescia’s solicitors to the Council.

28 A further letter from the Council dated 18 August 2003 asserted that the ducting and fans were causing unacceptable noise levels at the property boundary and required Brescia to provide an acoustic consultant’s report with recommendations aimed at alleviating the alleged nuisance. Brescia obtained a consultant’s report from Koikas Acoustics Pty Limited.

29 In October 2003 Brescia employed Climate Control to install two attenuators and to move the duct to run under the roof inside the roof level.

30 It is apparent that Council officers were aware of this work. It is also not in issue that no development consent was obtained for it, nor was Brescia informed that one was required.

31 On 30 January 2004, the building was inspected by an Occupational Health and Safety Consultant, Barbara Atkinson, for workers compensation premium discount purposes. The audit was completed over one day. She conducted her inspections in the company of Mr Cortese and for some of the time, in the company of Bruno. She was shown the old booth. She was shown correspondence concerning complaints from neighbours about the smells and noises generated from the old booth. She was not shown the roof level. A number of documents including one entitled “Correct Working Procedures” were apparently brought into existence by Mr Cortese in collaboration with Ms Atkinson. The “Correct Working Procedures” document has a sub-heading: “Department: French Polishing”. It has a series of numbered paragraphs concerning safe operation of the spray booth. No. 5 is “Start spray booth”; No. 6 is “Make sure no electrical appliances are in spray booth”.

32 In a letter from the Council dated 10 March 2004 Brescia was informed of complaints from nearby residents regarding noise and odours emanating from the building. The letter refers to an inspection carried out by Council officers in February 2004 which revealed that:

“… no environmental control equipment/filtration system was installed to the furniture spray booth air extraction in duct system to prevent a (sic) air pollution to the environment”.

The letter referred to the problem having been pointed out to Bruno at the time of inspection for his urgent attention to rectify the problem. The letter required Brescia to consult with an acoustic consultant and environmental (pollution) consultant.

33 A letter dated 15 March 2004 from Brescia’s solicitors to the Council advised that filters were installed immediately after the issue had been brought to Mr Brescia’s attention (presumably Bruno).

34 Thus for a period of the order of sixteen years there was no filtration system to trap flammable materials emitted from the old booth by the french polishing done in it. Some of the ducting from the old booth was exposed to the unfiltered accumulation of flammable residues for a long time.

35 In about August 2004, following continued complaints regarding noise and vapours emitted by the ducting and exhaust fan for the old spray booth, Vittorio, Moreno and Bruno determined a solution involving the erection of a new spray booth with ducting running completely inside the building up to the roof and connecting to the existing outlet and exhaust fan which at that time faced Parramatta Road.

36 In about September 2004 Brescia built the new spray booth (“the new booth”) near to the old one.

37 The new booth was installed by Mr Xian Wen Wu who owns and operates a company called CW Ventilation Services Pty Limited. Mr Wu gave evidence of conversations with Bruno who said he wanted the ventilation ducting for the new spray booth to go straight up through the building slabs and out the roof.

38 No separate or further development consent or building approval was obtained from the Council for the construction of the new booth, nor for the installation of the ducting for it. Bruno gave evidence that he knew a development application was required. In an interview with a fire investigator on 21 March 2005, Bruno said of development consent that they “just hadn’t got round to it basically”. Before me he said that he thought that the installation would have been covered by the original development application.

39 In about September 2004 Mr Wu installed the ducting for the new spray booth. It went straight up into the roof level along to a plenum box and up and out through the roof of the building. He installed two fans under the roof designed to provide the air flow in the new spray booth. There was a connection between the two duct systems at the point of the plenum box in the roof level. The ducting from the old booth was square. The ducting from the new booth was tubular. Various witnesses used the description square or round to denote the difference. References (where they occur) to “the square ducting” are thus to the old booth ducting, and references to “the round ducting” are references to the new booth ducting.

40 There was evidence from Mr Wu, disputed by Bruno, of conversations where Bruno, according to Mr Wu, said he would look after Council requirements for this work and during which, according to Mr Wu, Mr Wu told Bruno that there must be no smoking and no fire in the spray booth, that electrical power tools must not be used in it or within two metres of it and that they could not take the risk of causing a spark from any electrical machine like a drill.

41 Mr Wu arranged for an electrician Mr Jin Zhou to do the electrical work required for the new booth.

42 There is an issue between the parties as to whether, there was, on the side of the new booth, a warning sign in a form asserted to be that usually used by Mr Wu.

43 The sign is A4 page size and is headed “WARNING”. It has seven numbered sentences. Numbers 2 and 3 are as follows:

“No heaters, electrical tools or any machinery to be used inside the spray booth.
No welding or grinding is to take place inside the spray booth for any type of work that can generate a source of ignition.”

44 In December 2004 Brescia obtained an acoustic report from the Acoustic Group after complaints from nearby residents about mechanical plant noise from the exhaust system.

45 By early December 2004 it was decided to have the ducting from the old spray booth connected internally to the new booth ducting.

46 In early January 2005 that work was done by Mr Stockham who was asked to connect the old duct system to the new one. There is no record of any quotation from Climate Control for this work.

47 In a letter dated 1 June 2005 from the plaintiff’s solicitors to the defendants’ solicitors providing further particulars, they stated:

“The old ducting was in the process of being removed at the time the fire occurred in early 2005.”

48 Bruno gave evidence that he instructed Mr Stockham to disconnect it. He did not however, go up into the roof after Mr Stockham’s January work. He knew Mr Stockham had disconnected it. He said he assumed Mr Stockham had capped the end of the old duct work because he had asked him to.

49 It is not in issue that Council permission under the relevant planning laws was required but not obtained in respect of the re-routing of the old ducting beneath the roof level, the installation of the new booth, the installation of ducting for the new booth and the installation of the ducting which ultimately joined the two installations.

50 There is an issue between the parties whether the square duct was left open in the roof level, or whether it was capped in some way.

51 Bruno decided that the hole in the wall of the old booth should be bricked up so as to stop fumes passing from the old booth into the decommissioned ducting, to prevent access through the hole in the wall for security reasons and to prevent the escape of fumes.

52 On 11 March 2005 he instructed a long-time Brescia employee Mr Vito Di Napoli to brick up the hole. It was Mr Di Napoli’s last day before retirement.

53 Mr Di Napoli came back with the information that there was a problem with the grill over the hole. It had been attached to the wall of the old booth by way of metal hinges welded so that the grill could not be removed. Mr Di Napoli and Bruno tried to open it without success. Mr Di Napoli then said he would get a grinder and cut the hinges. Bruno left Mr Di Napoli to do it.

54 Mr Di Napoli applied an angle grinder to the grill. The use of this spark generating device was a catastrophic error which had catastrophic consequences.

55 There is no issue that the use of the angle grinder was the source of ignition for the fire which destroyed the building. Its sparks ignited flammable residues in the immediate vicinity.

56 It is also not in dispute that the fire most probably spread via one or both of the ducts into the roof level where furniture was stored. There is an issue as to the relative importance played in that spread by the respective routes to the roof and what was in the roof level area at the time.

57 Fire fighters were quickly on the scene. Evidence was given by two of them, officers Dryburgh and Bailey. Officer Dryburgh said he thought the fire fighters had effectively extinguished the fire in the old booth and that the building was out of danger. They were about to withdraw from the scene when heavy black smoke was observed coming from the rear roof. Officer Dryburgh returned to the booth to observe a plume of driven flame which he likened to the “after burn” or jet of fire one might observe shooting from the back of a fighter aircraft. The plume failed to respond to hose streams. This indicated to him a possible “large fire load” in the roof area.

58 By this time the showroom was heavily smoke logged and according to officer Dryburgh there was fire “along the rear half of the eastern showroom wall”.

59 The goods lift could not be used to get up into the roof level and the ladder could not be used because of heavy smoke and the fire at the rear of the showroom.

60 The fire lasted for about three days.

61 All that now remains of the building is the concrete slab of its once basement level.

62 Brescia lost its trading premises and its trading stock (furniture) and had its business operations interrupted.

63 Brescia took some steps preliminary to reinstating the building but did not proceed beyond clearing the debris, drawing preliminary plans, retaining consultants and taking steps to obtain development consent.

64 In late March 2005 Brescia located possible alternative premises at unit 4, 476-492 Gardeners Road, Alexandria (“Alexandria”). It made an offer to purchase Alexandria and retained a town planner to provide advice on obtaining necessary approvals to use Alexandria as a retail furniture showroom.

65 On 5 April 2005 Brescia lodged a claim with the defendants seeking indemnity.

66 In late April 2005 Brescia determined not to proceed with the purchase of Alexandria.

67 Also in April 2005 Brescia leased a warehouse at 423 Victoria Street, Wetherill Park (“Wetherill Park”).

68 On 23 May 2005 in the absence of the defendants having accepted indemnity, Brescia commenced these proceedings seeking then only a declaration that it was entitled to indemnity.

69 In their defence dated 18 July 2005 the defendants denied indemnity.

70 In about September 2005 Brescia entered into a lease for alternate premises at level 1, 265 Parramatta Road, Auburn (“Auburn”) for two years.

71 By amended summons dated 7 September 2005, Brescia added a claim for damages. It filed a further amended summons on 5 April 2007 to reflect that it sues as trustee for the Brescia Family Trust. The further amended summons made no substantive amendments to its claim.

THE ESSENTIAL TERMS OF THE POLICY

72 Section 1 of the Policy is entitled ”Property Damage”. It contains clause 2 entitled “Extent of Cover” which provides that:

“Provided the Insured has paid or agreed to pay the premium, the insurer will indemnify the Insured against Damage occurring to Property Insured during the Period of Insurance and shall apply the additional cover referred to in clause 3 up to the value of Limit(s) and Sub-Limit(s) of Liability referred to in the Schedule, but subject to:…
2.3 the amount of the indemnity being calculated in accordance with the Basis of Settlement clause 4.”

73 “Property Insured” is defined to mean “all tangible property both real and personal of every kind and description belonging to the Insured.”

74 “Damage” is defined to mean “physical loss, damage or destruction”.

75 Clause 4 is entitled “Basis of Settlement”. It provides as follows:

“For the purpose of this clause 4:
4.1 REINSTATEMENT VALUE is the cost necessary to replace, repair or rebuild the Property Insured to a condition substantially the same as but not better or more extensive than its condition when new.
4.2 INDEMNITY VALUE is the cost necessary to replace, repair or rebuild the Property Insured to a condition substantially the same as but not better or more extensive than its condition at the time that the Damage occurred taking into consideration age, condition and remaining useful life.
4.3 On buildings, machinery, plant and all other property and contents other than those specified in 4.9 to 4.17 below, the Basis of Settlement shall be the Reinstatement Value and provisions of 4.4 to 4.8 shall apply.”

76 Clause 4.4 has its own heading to the following effect:

“Reinstatement Provisions applying to buildings, machinery and all other property other than property referred to in 4.9 to 4.17.”

77 Under that heading, clauses 4.4.1 to 4.4.4 provide as follows:

4.4.1 The replacement, repair or rebuilding may be carried out upon any other site(s) and in any manner suitable to the requirements of the Insured, but subject to the liability of the Insurer not being thereby increased.
4.4.2 Such work must be commenced and carried out with reasonable dispatch, failing which the Insurer shall not be liable to make any payment greater than the INDEMNITY VALUE.
4.4.3 Where any Property Insured is damaged in part only, the liability of the Insurer shall not exceed the sum representing the cost which the Insurer could have been called upon to pay by way of REINSTATEMENT VALUE if such property had been totally destroyed.
4.4.4 The Insurer shall not be liable to make any payment beyond the INDEMNITY VALUE of the Property Insured until a sum equal to the REINSTATEMENT VALUE has actually been incurred by the Insured in the replacement, repair or rebuilding of the property, provided that where the Insured repairs or rebuilds any Damaged Property Insured at a cost which is less than the cost of reinstatement but greater than the value of such property at the time of the Damage, then the cost so incurred shall be deemed to be the cost of reinstatement.”

78 Clause 4.9 is under the heading “Provisions applying to specific items of property” and provides:

“In the case of raw materials, supplies and other merchandise not manufactured by the Insured, the Basis of Settlement shall be the replacement cost calculated at the time and place of replacement, provided that replacement shall have been carried out with reasonable dispatch, or if not replaced the original cost to the Insured of such property of the INDEMNITY VALUE, whichever is the lesser.”

79 Claims 4.21 is under the heading “Election to Claim Indemnity Value” and it provides as follows:

“The Insured may elect to claim the INDEMNITY VALUE of any property and, if so, the Insurer will pay that value or may, at its option, replace, repair or rebuild the property or any part in accordance with the INDEMNITY VALUE, but including the extra cost of reinstatement as set out in Clause 4.5.”

80 Section 2 of the Policy is entitled “Consequential Loss of Profits Insurance”. Clause 9.1 provides that the Insurer will indemnify the Insured in accordance with the provisions of clause 10 (Basis of Settlement) against loss resulting from the interruption of or interference with the Business, provided the interruption or interference is caused by damage to:

“9.1.1 Any building or other property or any thereof used by the Insured at the Premises for the purpose of the Business.”

81 Clause 10 provides that the Insured is indemnified with respect to actual loss of Gross Profit calculated in the manner set out in the Policy.

82 Clause 14 is entitled “Conditions Applying to Sections 1 and 2”. Clause 14.2 is headed “Precautions to Prevent Loss” and provides that:

“The Insured shall take all reasonable precautions to prevent Damage to Property Insured which may give rise to a claim under this Policy.”

83 Clause 14.3.8 provides that:

“If the Insured is in breach of any of the Provisions of this Policy, the Insurer may refuse to pay a claim.”

BRESCIA’S CLAIM

84 Brescia puts its claim as a common law claim for damages for breach of the insurance contract.

85 The asserted breaches are the defendants’ refusal to acknowledge indemnity and to pay, in accordance with their obligations what it asserts is its valid claim.

86 It is not in dispute that the defendants have never acknowledged indemnity.

87 It is not in dispute that Brescia never purported to terminate the Policy for breach or repudiation by the defendants.

88 It is settled law that the failure within a reasonable time by an insurer to pay, or an unreasonable delay in payment or admission of liability without payment, is a breach of the contract of insurance: Stuart v Guardian Royal Exchange Assurance of New Zealand Limited (No.2) (1988) 5 ANZ Insurance Cases 60-844 at 75,279; Moss v Sun Alliance Australia Limited (1990) 55 SASR 145 at 146.

89 It follows that, if Brescia’s claim or part of it is valid, then the defendants are in breach.

90 Brescia's claim has the following components:

a loss of the value of the building (being either its reinstatement value or its indemnity value);

b loss of its trading stock;

c the loss it incurred from the interruption to its business;

d loss of plant and equipment;

e the cost of employing consulting engineers;

f the cost of removing debris;

g the cost of extinguishing the fire;

h the cost of claim preparation; and

i consequential loss incurred from delay on the part of the defendants in conferring indemnity which delay caused Brescia not to acquire a property at Alexandria but rather to lease premises at Auburn which were not as advantageous, and which delay in turn caused a delay in the re-opening of its flagship premises.

91 Apart from the claim for consequential loss from delay, it is common cause between the parties that the Policy would, if the existence of each component is otherwise established, respond to it.

92 Amounts to be attributed to some of the components or parts of them have been the subject of agreement.

93 I proceed now to consider the validity of Brescia’s claim.

THE ISSUES

The defences in bar

94 The defendants plead three defences in bar to the entirety of Brescia’s claim.

95 Firstly, they say that Brescia, in breach of its obligations under clause 14.2 of the Policy, failed to take reasonable precautions to prevent the Damage to the Property Insured. They say that fulfilment of that obligation is a condition precedent to their liability to indemnify and that Brescia, having failed to fulfil it, is not entitled to indemnity.

96 Secondly, they say that Brescia’s stock loss claim is made fraudulently within the meaning of s 56(1) of the Insurance Contracts Act 1984 (Cth) (“the Act”) and that they are entitled, as a result, to refuse payment of the claim (that is Brescia’s entire claim).

97 Thirdly, they say that Brescia’s claim for business interruption is made fraudulently within the meaning of s 56(1) of the Act and that they are entitled, as a result, to refuse payment of the claim (that is Brescia’s entire claim).

The Further Issues

98 If Brescia is not wholly precluded by any of the defences in bar, the following are the issues between the parties.

99 With respect to loss of the building, Brescia says it is entitled to its reinstatement value and as a fall-back position to its indemnity value. The defendants say that on general principles, Brescia’s claim is limited to the amount which is the difference in the market value of the site and premises before the fire and after the fire (which amount is substantially less than indemnity value which is in turn substantially less than reinstatement value). In the alternative they say that Brescia is entitled only to indemnity value and not to reinstatement value because Brescia did not, as is required by clause 4.4.2 of the Policy, commence replacement or rebuilding and carry it out with reasonable dispatch. The parties are at issue also with respect to the quantum of the relevant value (whichever it is).

100 The parties are at issue as to the value of the stock (that is furniture) asserted by Brescia to have been destroyed. This issue overlaps with the second defence in bar which is that the stock loss claim is fraudulently inflated.

101 The parties are at issue with respect to the amount claimed for business interruption. This issue overlaps with the third defence in bar which is that the business interruption claim is fraudulently inflated.

102 On the consequential loss claim the defendants dispute that such a claim is available as a matter of general principle. They further dispute that their alleged delay was the reason Brescia did not proceed to purchase Alexandria or to reinstate the building. They say that the losses claimed were not in consequence of their failure to indemnify and were not reasonably in contemplation of the parties at the time of the Policy’s inception. They put quantum in issue.

The order in which the issues will be dealt with

103 I will deal firstly with the defence of failure to take reasonable precautions which, if successful, would defeat Brescia’s entire claim.

104 Next I will deal with the defences of fraudulent claims for stock loss and business interruption, which will include dealing with those claims generally.

105 Thereafter I will deal with issues specifically relating to the loss of the building, that is the Policy response to it and any issue of quantum that may follow according to that response.

106 I will then deal with the consequential loss claim.

107 Finally, I will deal with any remaining issues.

THE REASONABLE PRECAUTIONS DEFENCE

108 The defendants rely on a number of matters individually and cumulatively in support of their contention that Brescia failed to take reasonable precautions to protect its property from damage which failure they say entitles them to refuse to pay the claim.

109 Before considering the matters put by the defendants it is necessary to consider how clauses 14.2 and 14.3.8 operate.

110 On the face of the provisions, the reasonable precautions must be such that failure to take them may give rise to a claim under the Policy. Breach of the obligation to take them will entitle the Insurer to refuse to pay a claim. Although clause 14.2 relates to a time before a claim has arisen, clause 14.3.8 presupposes a claim having been made. It seems clear that a claim which may be refused must have a relationship with the failure to take reasonable precautions. That is, the failure to take the precautions concerned must have given rise to the claim. The defendants did not put otherwise.

The Law

111 Provisions such as clause 14.2 of the Policy have been the subject of judicial consideration in Australia, New Zealand and the United Kingdom and the United States.

112 Three precepts can be derived from authorities binding on me:

a firstly, where the onus lies depends on the proper construction of the provisions of the policy. If the provision is a condition precedent to indemnity ordinarily the onus lies upon the insured to bring itself within such a condition. If the provision is properly speaking an exclusion, the onus will ordinarily lie on the insurer: Kodak (Australasia) Pty Limited v Retail Traders Mutual Indemnity Insurance Association (1942) 42 SR (NSW) 231; Legal & General Insurance Australia Limited v Eather (1986) 6 NSWLR 390;

b secondly, although on their face such provisions import the objective yardstick of reasonableness, because the commercial purpose of this type of policy is to protect against negligence, the test of existence of risk is determined by the perception of the insured. The test is whether the insured perceived and deliberately courted the risk. The enquiry is in relation to the insured’s perception of risk whether foolishly held or not: Legal & General Insurance Australia Limited v Eather at 395 and following; and

c thirdly, in order to attribute a state of mind to a company, the collective states of mind of officers of the company relevantly connected with it are treated as being the state of mind of the company. A division of function amongst officers of company does not relieve it from responsibility determined be reference to the knowledge possessed by each of them: Brambles Holdings Ltd v Carey (1976) 15 SASR 270 at 279; Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 at 582-583; VACC Insurance Ltd v BP Australia Ltd (1999) 47 NSWLR 716 at 726; Entwells Pty Ltd v National and General Insurance Co Ltd (1991) 5 ACSR 424 at 427 and following.

113 As to onus, it was put for Brescia that breach of clause 14.2 operates to permit refusal of the claim because clause 14.3.8 entitles the insurer to do so. For clause 14.3.8. to apply a breach must be established and the onus, on ordinary principles, requires the person asserting a breach (here the insurer) to prove it.

114 There is force in this submission. However, because of the facts I have found (as occurred in Legal & General Insurance Australia Limited v Eather), the question of onus is of no real significance in the present proceedings. The defendants did not put that onus has a significant role to play in this case.

115 As to construction and operation of reasonable precautions provisions, in Fraser v BN Furman (Productions) Limited; Miller Smith & Partners (A firm) Third Party [1967] 1 WLR 898 at 906 Diplock LJ said:

“… What, in my judgment is reasonable as between the insured and the insurer, without being repugnant to the commercial purpose of the contract, is that the insured, where he does recognise a danger should not deliberately court it by taking measures which he himself knows are inadequate to avert it. In other words, it is not enough that the employer’s omission to take any particular precautions to avoid accidents should be negligent; it must be at least reckless, that is to say, made with actual recognition by the insured himself that a danger exists, and not caring whether or not it is averted.”

116 That approach has been followed in this jurisdiction in, amongst others, see Legal & General Insurance Australia Limited v Eather; VACC Insurance Limited v BP Australia Limited; Albion Insurance Company Limited v Body Corporate Strata Plan No. 4303 [1983] 2 VR 339 at 345; Plasteel Windows Australia Pty Limited v Sun Alliance Insurance Limited (1989) 5 ANZ Ins Cas 60-918 at 75,884; Caff v McHenland Nominees Pty Limited (t/a Confoil Containers) (1984) 3 ANZ Ins Cas 60-575 at 78,458; The Committee for the time being of the Casino Show Society v Lyn Maree Norris (1984) 3 ANZ Ins Cas 60-580.

117 In Albion Insurance Company Limited v Body Corporate Strata Plan No. 4303 McGarvie J delivering the main judgment of the Victorian Full Court put it as follows at 344-5:

“The insured is in breach of the condition if, through a lack of concern and desire to prevent bodily injury, he deliberately adopts a course of action or inaction which he realises exposes him to the risk of someone being injured by the recognised danger.
The test is whether the insured deliberately courts the danger by refraining from taking any measures or by taking measures which he knows to be inadequate to avert it. The word “deliberately” indicates intentional, considered action or inaction. The verb “court” suggests action or inaction which invites the danger of accident. The test requires more than a recognition of the danger and failure to take any measures or any measures known to be adequate to avert it. It requires that this be due to a deliberate decision to court the danger.”

118 In Aluminium Wire & Cable Co Limited v Allstate Insurance Co Limited [1985] 2 Lloyd’s Rep 280 at 287, Mr M Collins QC sitting as a Deputy Judge of the High Court of England, assessed the circumstances in that case against the requirement that there was a perception by the insured of a specific risk of fire attendant upon the particular operation in the particular place at the particular time. The learned presiding judge found the insured to have been negligent but dismissed any allegation that he acted deliberately, or recklessly, or that he adopted an attitude which was careless of risk in the knowledge that he was insured.

119 In New Zealand there have been statements expressing preference for an objective test (of recklessness or gross irresponsibility). See for example, Cee Bee Marine Ltd v Lombard Insurance Co Ltd [1990] 2 NZLR 1; Haines House Haulage Co v Goldstar Insurance Co (1989) 5 ANZ Ins Cas 60-937; Mason v Century Insurance Co Ltd [1973] 2 NZLR 216; Hing v Security & General Insurance Company (N.Z.) Ltd (1985) 4 ANZ Ins Cas 60-696 at 74,142; Kelly v The National Insurance Company of New Zealand Ltd (1995) 8 ANZ Ins Case 61-239.

120 An objective approach has also apparently been favoured in Canada and the United States: see D Kelly and M Ball Principles of Insurance Law, 2nd Ed (2001) Sydney, Butterworths at 12,247.

121 Mr Williams put as a formal submission that the subjective approach test was wrong. He accepted however, that I am bound by Legal & General Insurance Australia Limited v Eather. I propose to follow it.

122 The exercise required is accordingly, to examine the evidence of Brescia’s knowledge and conduct, and to consider any inferences to be drawn from that evidence so as to determine whether Brescia recognised a danger and deliberately courted it by intentional and considered action or inaction: see Kaye J in Caff v McHenland Nominees Pty Limited (t/a Confoil Containers) at 78,459.

123 I was referred to the statement of Cole J in Plasteel Windows Australia Pty Limited v Sun Alliance Insurance Limited at 75,884 that a court may find that an asserted position of an insured that subjectively it did not perceive a risk should be rejected and that the court may be influenced in such rejection by a circumstance that a reasonable person could not have held such a view.

124 In Caff v McHenland Nominees Pty Limited (t/a Confoil Containers) Kaye J at 78,460 said (obiter because the insured failed on a basis not requiring a decision on the point) that the requirement of the condition to take reasonable precautions was not directed to injuries suffered in a particular manner. The precautions required to be taken were to prevent injury to all persons engaged in any manner in connection in operation of the machine in that case and to take reasonable precautions to prevent injuries.

Brescia’s Mind

125 At the outset it is necessary to determine whose state of mind is to be treated as the mind of Brescia.

126 Vittoria, Moreno and Bruno each gave evidence of their respective roles within Brescia.

127 Vittorio described Brescia as a small family business. The evidence showed that he, Moreno and Bruno each participated in its decision making.

128 The defendants put that the relevant directing mind was that of Bruno at all times, although the knowledge of Vittorio is also to be taken into account on some aspects. No submission was directed towards Moreno’s role and no submission was put that Mr Cortese’s mind was relevant.

129 Vittorio described himself as the managing director and as substantially involved in the oversight of the entire company’s activities. He is involved in all major decisions and whilst he has never been formally appointed, having regard to his father’s decreasing role (because of ill health) in the day to day operations of the company, he has gradually assumed the role of managing director. This evidence was not challenged. For present purposes it is clear that Vittorio’s conduct, knowledge and perception is properly to be taken as that of Brescia.

130 Some effort was made on behalf of Brescia to limit and restrict the attribution to Brescia of Bruno’s knowledge and perception.

131 Bruno described himself as employed as warehouse manager, which involved organising and assisting in the unloading of containers of furniture, checking them and ensuring minor repairs or touch-ups as required were carried out, organising delivery and provision of service calls to customers and generally overseeing and managing the warehouse and its staff. The storage of furniture in the roof level was also within his field of endeavour.

132 Where Bruno was unable to resolve problems he would inform Vittorio. He maintained that he was not responsible for the repair, maintenance and upkeep of the building.

133 The responsibility for carrying out the Council’s requirements with respect to the spray booths fell on Bruno. He played a part in liaising with Council officers and with the contractors who did the work. His activities with respect to the old booth, that is with regard to the attempt to remove the grill which caused the fire, were within his ordinary activities as warehouse manager. Mr Di Napoli was acting on his instructions.

134 For present purposes it is clear that Bruno’s conduct, knowledge and perception is similarly to be taken as that of Brescia.

135 Accordingly, I proceed on the basis that the individual and collective conduct, knowledge and perceptions of Vittorio and Bruno are to be considered to be those of Brescia in the present case.

Did Brescia Court the Risk?

136 The defendants put that Brescia knew of the risk of fire, both before and on 11 March 2005, yet deliberately courted that risk in:

a using the roof level for storage having failed to obtain Council consent, knowing that Council would not have permitted it without significant and expensive modification;

b using such of the spray booth system as was constructed without Council consent knowing that Council would not have permitted it without significant and expensive modification;

c using the old booth until 2004 without filters with no adequate system of cleaning or maintaining the booths and ducts so as to reduce the risk of fire;

d using the building (particularly the roof void, but also the spray booths) without adequate fire protection;

e using the booths and ducts connected internally after January 2005;

f failing to disconnect and/or cap the old duct; and

g using the angle grinder which caused the fire.

137 It was put that Brescia’s conduct demonstrated a systemic disregard by it of its obligations under relevant safety legislation and a willingness to flaunt risk in the interest of saving money. It was also submitted that a prime example of this attitude was what was described as Brescia’s “cavalier attitude to the Correct Working Procedures” document created by Mr Cortese.

138 Mr Williams described the approach of relying on the historical and systemic perspective rather than on the critical events on 11 March 2005 as novel. In final submissions he made it clear, however, that that reliance should not be seen as detracting from reliance on the events on the day of the catastrophe.

139 As a response in limine to the way the defendants put it, Mr Sullivan submitted that each of the matters sought to be relied upon (with the exception of the use of the angle grinder) could not be a failure to take reasonable precautions within the meaning of the clause 14.2 of the Policy because the facts relied upon had occurred prior to the inception of the Policy on 30 June 2004. It followed, he put, that those matters could not ground an asserted breach of an obligation which was not in existence at the time of the conduct constituting that breach. I do not accept this submission. As at 11 March 2005 each of the matters relied upon by the defendants (with the possible exception of the use of the booths without filters until 2004) represented an existing and continuing state of affairs which may have played some role in giving rise to Brescia’s claim under the Policy.

140 It is accordingly necessary to consider Brescia’s perception, through Vittorio and Bruno of fire risk in relation to those matters and whether through them Brescia recognised such risk as they posed and deliberately courted that risk by intentional considered action or inaction: Caff v McHenland Nominees Limited (t/a Confoil Containers) at 78,489.

141 The matters put by the defendants (although not transparently so structured) entail a three step approach: firstly, the assertion of a series of facts which they contend constitute the risk or reflect systemic disregard for fire safety; secondly, the assertion that Brescia (through Vittorio and Bruno) knew those facts; and thirdly, the asserted conclusion that Brescia (through Vittorio and Bruno) perceived that risk and determined deliberately to court it.

142 Self-evidently, if the evidence does not establish the primary fact contended for (including that it in fact represented a fire risk), the second and third steps do not arise with respect to it.

143 It is thus necessary to examine the primary facts contended for so far as they arise in each of the matters put and to consider Brescia’s perception of any fire risk attendant upon each of them and upon all of them.

144 The approach I have taken is to consider the matters put by the defendants in turn, examining the primary facts asserted, Vittorio’s and Bruno’s knowledge of those facts and then, their perception (if any) of the risk entailed.

Using the roof level for storage without Council consent

145 There is no dispute that Council consent should have been obtained (but was not) for the storage of furniture in the roof level.

146 There is also no dispute that the roof level was used for the storage of furniture.

147 There is a dispute as to how much furniture was stored there.

148 Vittorio and Bruno both gave an estimate of 90 pieces. The defendants contended for a finding that at the time of the fire, the roof level was “full of furniture” stored on floor to ceiling racking for a pending sale.

149 The defendants placed reliance on a conversation recorded by officer Dryburgh in an incident details report prepared by the officer on 14 March 2005 from notes which he had taken and in which he recorded “we were informed that it was an area of approximately 10,000 square metres of storage area with floor to ceiling racking full of furniture for pending sale.” The officer was cross-examined. He could not recall exactly who said it to him out of a small party of Brescia management present, one of whom was someone called “Joe”. It may also have been Vittorio.

150 Vittorio denied having any such conversation and “Joe” transpired to be Mr Giuseppe Screnci, also known as Joe Brescia (Bruno’s brother and Vittorio’s and Moreno’s step-brother) who, after officer Dryburgh’s evidence, swore an affidavit. He was cross-examined and he too denied the conversation.

151 The officer’s note is obviously inaccurate in that the roof level was nowhere near the size of 10,000 square metres. There is also no evidence, but rather denials, of any impending sale as at 11 March 2005.

152 The defendants placed substantial reliance on the expert evidence of Mr Gudmann (a metallurgist) who inspected and analysed the debris after the fire and took some photographs of what there was in the roof level. Mr Gudmann conducted a post-fire examination on 5, 6 and 7 April 2005 which included identifying and quantifying what had been burnt. He did a detailed grid search of the rooftop level. His analysis revealed, on an assumed consumption rate for combustible materials, stock and furniture items in the order of approximately 8.6 – 21.5 tonnes, which he described as a substantial quantity of combustible stock and furniture items. Self-evidently this is a fairly large range. A photograph was relied on to support the existence of floor to roof racking which showed steel tubing structures. Mr Gudmann described these as metal frames. There was no evidence elicited from anybody who knew what they actually were. Their form was unfamiliar to me and they might or might not once have been constituent components of racking. In my view, the evidence fell substantially short of establishing that there was floor to ceiling racking or of permitting any remotely reliable estimation of how many pieces of furniture were in the roof level.

153 Whilst I do not consider that officer Dryburgh’s evidence was other than honestly given and that he considered that someone had said something to him on the day, I accept the denials of Vittorio and Mr Screnci that they made the statements concerned.

154 A submission was put that it was adverse to the credit of Vittorio and Bruno that each estimated about 90 pieces and that each maintained that their estimations were independent. There was, however, nothing to suggest that their evidence in this regard was not truthfully given.

155 I do not consider that the evidence established that the roof level was full of furniture, that is, as having had materially more than 90 pieces, that there was floor to ceiling racking or that the floor was full pending a sale.

156 In any event, the issue as to the amount of furniture in the roof level diminished in significance when the fire conflagration experts called by the parties agreed that whether there were approximately 90 pieces or more than that, would not have altered the course which the fire took.

157 There is no issue that the fire which started in the old booth spread to the roof level and ignited the furniture stored there. There was a dispute as to what route it took, that is, through which of the ducts it spread.

158 Brescia called one expert on fire conflagration, Mr Anthony Cafe, a chartered chemist with extensive experience in the inspection of fire damaged buildings. The defendant called three: Mr Jeffrey Gudmann, who has extensive experience in the field of fire origin and cause determination, materials failure and the provision of technical and scientific input into failure investigations; Mr Richard Duggan a consulting mechanical engineer specialising in mechanical building services including air conditioning, heating and ventilation and industrial ventilation and Mr Ian Moore a metallurgist with additional qualifications in engineering, building fire safety and risk engineering. He likewise has extensive experience as a fire and risk specialist. A report from each expert was admitted into evidence. Prior to the hearing they met in accordance with directions of the Court and produced a document reflecting their points of agreement and points of disagreement.

159 Their viva voce evidence was taken concurrently and their respective positions made clear. There was also cross-examination.

160 I should say that I found each of these experts to be an impressive witness and I was assisted by their clearly significant expertise. The concurrent process spawned frank and open debate and concessions properly made in it produced what I consider to be a clear conclusion supported by the probabilities. It also manifestly saved time.

161 It ultimately emerged that there was consensus between them that the fire went from the old booth to the roof area via one or both of the square and the round duct.

162 Mr Cafe’s opinion was that the fire could have first spread through to the roof level via either the square or round duct. There was, as he saw it, fire damage inside the round duct which indicated that fire had spread up through it which could have initially spread onto the roof top level by igniting a combustible material such as bitumen or sarking. In other words, on obtaining sufficient heat, the round duct could have ignited surrounding material by conduction.

163 Mr Gudmann fairly accepted that the round duct was a possible route but considered that the square duct was the far more probable one. There were a number of reasons why in his view the round duct was not the route and a number of reasons why the square duct was. As to the round duct, his view was that it displayed only moderate heat effect within it. After the fire the insulated wiring running to the motor in the plenum box was still substantially intact. This he considered to be inconsistent with exposure of the round duct to high temperatures. It also displayed no oxidation of metal which results from the application of very high temperatures to metal, whereas parts of the round duct did reveal oxidation. The relative quantity of flammable residue in each of the ducts was also a significant factor. Clearly the square duct revealed a greater quantity of flammable residue than did the round one. This was because the square duct had been in operation far longer than the round one and for a substantial period of time the square one did not have a filter. In Mr Gudmann’s opinion the round duct revealed minimal residue, more of the nature of sooting. The fire originated at the base of the rises of the square duct and its preferential route would be up that path.

164 Mr Moore utilised a computer model known as the Fire Dynamic Simulator (“FDS”). Mr Cafe made a number of points which he considered impaired the reliability of the model. His view was that the issues here are too complex to be computer modelled. Mr Moore readily accepted the model had limitations and was not intended accurately to record the history of the fire over the three days that it burned, but it showed the important physical phenomena which were involved.

165 In simple terms the model demonstrated that with no capping on the square duct, that route was more likely than through the round duct. Mr Gudmann made the point that if it had been sealed, ready access to the combustible materials in the roof area would have been prevented. Mr Moore’s modelling reached the same conclusion.

166 Mr Duggan opined that the square duct was more probably the route because of its proximity to the source of ignition. The sparks from the angle grinder would, from the angle at which it would have been used, have gone directly into the grill and onto the ground. The round duct was, by contrast, some distance away. The route through the square duct was much easier from the point of ignition than it was through the round duct. The older construction of the square duct meant it would not hold up as well in a fire.

167 It was not accepted by Brescia that the square duct was not capped. However, in my view there should be a finding that it was uncapped. Leaving aside matters of dynamics of the fire spread, there is no physical evidence that it was capped. If it had been capped the work would have been done by Mr Stockham and he was not called. Given the possibility of his legal exposure I do not think it would be fair to conclude that he is in Brescia’s camp for the purpose of drawing an inference that his evidence would not have helped Brescia: Jones v Dunkel (1959) 101 CLR 298 at 312 and 319. However, the evidence is left in the state that there is nothing to suggest that the square duct was capped and a number of considerations pointing to the fact that it was not.

168 In my view the route of the fire from the point of ignition to the roof area was via the square duct for the following reasons: firstly, Mr Cafe accepted that if the new ducting had been competently constructed and sealed it would not be a path for the fire except by conduction. There was no evidence (he accepted) of any holes or combustible seals. Secondly, the evidence of what was found in the round duct was not sufficient in my view, to indicate that it reached a temperature high enough to be a source of fire by conduction, which conclusion is consistent with Mr Moore’s modelling. Thirdly, there was no evidence in my view of the presence of bitumen sufficient to have been ignited by the heated round duct or that it had ignited sarking. Fourthly, there was no evidence of the square duct having been blocked so that the most likely explanation for the after-burn was the substantial fire in the roof causing pressure in the roof which was consistent with the square duct having been the pathway. Finally, Mr Cafe’s conclusion was it seemed to me at the level of possibility. The defendants’ experts’ conclusion revealed a cogent probability.

169 Self-evidently, the presence of furniture in the roof level was combustible material which if there was to be a fire would increase the magnitude of it as compared to if there were no furniture there.

170 Turning then to the respective knowledge and states of mind of Vittorio and Bruno with respect to the necessity for Council consent to store furniture in the roof level and to the risk created by having done so.

171 Each of Vittorio and Bruno swore affidavits in the proceedings and each was cross-examined.

172 Vittorio denied on affidavit being aware of the need to obtain Council consent to use the roof level or for the removal of the old ducting and the installation of the new ducting and the construction of the new booth.

173 In his oral evidence he said there was always a storage area in the studio where they had all the archives. On being asked whether there was any reason why there was no disclosure to the Council that they were using the area for storage, he responded that he did not think they had to. He did not accept that he knew that this is a matter which should have been brought to the Council’s attention.

174 He said that at the time the roof was constructed they did not have the intention of using the void created for storage.

175 Vittorio swore on affidavit that he did not consider there was any factor contributing to the risk of fire to the building that had not reasonably and sufficiently been addressed by precautions taken by Brescia, and that he did not consider the creation of the roof cavity in any way increased the risk of fire to the building.

176 He said he did not think there was a risk greater than the risk they had every day.

177 He was cross-examined about the fact that the fire hose reels stored in the roof could not be accessed safely if there was a fire in the roof. His evidence was that he thought they were doing the right thing by installing the fire hose reels.

178 An attack on Vittorio’s credit was made although he was not confronted with any suggestion that his evidence was in any respect untrue.

179 The attack was, in my view, unsuccessful.

180 I did not form any impression that Vittorio was other than a truthful witness.

181 I will deal with various specific points sought to be made by the defendants about his evidence when I deal with the issue to which that evidence relates.

182 Mr Sullivan submitted, and it is well established, that if it is to be suggested to a party that his case is false, even fraudulent, it is a basic obligation of procedural justice to confront that party fairly with such a suggestion, and to clearly identify such a contention, rather than raise it accidentally, peripherally and nonchalantly in the course of litigation: Ghazal v Government Insurance Office of New South Wales (1992) 29 NSWLR 336 at 344 to 345. He drew attention to the fact that Vittorio had not been so confronted. In forming my view of Vittorio’s credit I have left this out of account because it was, I thought, fairly apparent from the defendants’ fraud defences and the opening that his evidence was not to be embraced: State Rail Authority of New South Wales v Brown (2006) 66 NSWLR 540 at 546 and following.

183 I have assumed, although it was neither put nor otherwise established, that there is a fire safety consideration lying behind the necessity for Council consent.

184 I accept Vittorio’s evidence that he did not know that Council consent was required for the storage in the roof or at any time perceived any particular risk of fire with respect of the storage of furniture in the roof. There is nothing to suggest that he deliberately courted any such risk.

185 Bruno denied that he was conversant with the development application which had been made in 1996 when the new roof was constructed. He denied that he knew that the application was to create a new roof and any awareness of the need to obtain Council consent to use the roof void area. He too denied knowing that a development application was required for consent to use the roof void area or for the removal of the old ducting and the installation of the new ducting and the construction of the new booth. He denied knowing that the storage of furniture in the roof level was illegal or knowing that it represented a fire hazard.

186 A sustained attack was made on the credit of Bruno. I did not find Bruno’s evidence to be satisfactory in every respect as will appear below.

187 However, I consider that the general attack on his credit also failed. As with Vittorio, he was hardly, if at all, confronted on the matters I was urged not to accept, but I have similarly left that out of account in forming my view. Part of the attack concerned answers he gave to the effect that he could not recall. I did not find those answers implausible.

188 With respect to the roof level issues he was entirely undented by cross-examination and I accept that he did not know that Council consent was required for storage of furniture in the roof level and that he did not perceive or court any fire risk with respect to the storage of furniture there.

189 Also, it was not put to him that any risk from the roof level storage was a matter within his perception on 11 March 2005, and in my view there is no basis for a finding to the contrary.

190 A submission was made that there was a deliberate decision to withhold information from Council officers about the roof storage and also from Barbara Atkinson. So far as Barbara Atkinson was concerned, nothing was put to either Vittorio or Bruno about any withholding from her. Mr Cortese was cross-examined about her but it is not suggested by the defendants that his mind is to be attributed to Brescia for this purpose. There is also no basis for a finding that anything was deliberately withheld from the Council. Council officers attended the building in relation to the ducting. I find that there was no deliberate withholding of information from the Council by Brescia.

191 I find that neither Vittorio nor Bruno perceived any fire risk with respect to the furniture stored in the roof. I find that neither deliberately courted any such risk.

Use of the spray booth without filters until 2004 with no adequate system of cleaning or maintaining the booths and ducts and of reducing the risk of fire

192 The evidence established that there was no filter for the old booth until 2004 (when the Council required its installation) and that both Vittorio and Bruno were aware of this.

193 The evidence also established that there must have been deposited in the old duct flammable residues.

194 So far as the filter is concerned, Mr Coulson spoke about a filter with Bruno a few times and asked him to have a filter installed. Mr Coulson did not know how many times he was asked, but said that they were talking about getting the other (that is the new) spray booth and Bruno said he would look into it. The defendants contended for a finding that Bruno ignored many requests over the years from Mr Coulson for a filter system in the booth. The evidence did not establish this.

195 The correspondence from the Council which led to the installation of the filter referred to a system “to prevent air pollution to the environment”. There is no reference in any of the communications between Brescia and the Council to any consideration relating to fire risk. The complaints from neighbours related to noise and vapour issues which were disturbing them.

196 It was not suggested to Mr Coulson that there was, or in what manner there was, any deficiency in cleaning of the booths which was a function which clearly was his. There was some cross-examination about the floor being slippery but nothing emerged from it. Mr Coulson never hosed the spray booth out nor took buckets of water in there and cleaned it, but he did put water on the grate to hold the dust down when spraying tables. It was not put that he should have hosed it out or that this was the appropriate course to take.

197 Nothing was put in final submissions about deficiencies in cleaning the ducts or in their maintenance. Mr Coulson cleaned out the grate or the ducting behind it as far as he could reach into it. It was put to him that his cleaning process would not eliminate any residues which had accumulated on the vertical surfaces of the ducting. His response was once you hit the grate with a hand “most of it just falls off” being only a powder or just a dust.

198 The ducts, that is both old and new, always had extraction fans.

199 Mr Coulson’s evidence was that one would not smell odours indicating he had been working in the spray booths if the fans were on.

200 Vittorio gave evidence (which I find inherently plausible and I accept) concerning the release of fumes through the ducting to the effect that if they were ”going up there, it’s gone”.

201 Bruno denied knowing that the old ducting contained residues of lacquer and that the booths had not been cleaned and were in a highly flammable and hazardous condition.

202 I find that neither Vittorio nor Bruno perceived any fire risk connected with the use of the old booth on the basis that it was without filters until 2004. The evidence does not establish that the booths were not adequately cleaned or maintained.

203 I should say that I do not consider it to be obvious that flammable residues posing a fire risk would remain deposited in the old duct, which always had an extraction fan.

204 As with the storage of furniture in the roof level, it was not put to Bruno that the absence of filters until 2004 or the cleaning and maintenance of the booths and ducts were within his perception on 11 March 2005, and there is no basis for a finding to the contrary.

205 I find that neither Vittorio nor Bruno perceived any fire risk with respect to the use in general of the unfiltered booth. Save for the absence of a filter, the evidence did not establish any deficiency in cleaning or maintenance. Neither Vittorio nor Bruno had a perception of risk in relation to cleaning and maintenance. I find that they did not consciously court any fire risk with respect to the use of the old booth generally.

Use of the building (particularly the roof void, but also the spray booths) without adequate fire protection

206 The issue of use of the roof level for storage of furniture has been dealt with above.

207 In addition, the defendants put that Brescia took “perfunctory and ineffectual steps to control fire in the roof”. The evidence established that Brescia’s fire control steps did not comply, as at the date of the fire, with the requirements of the Building Code of Australia (“BCA”) in that the building required and did not have, sprinklers to be installed throughout, including the roof void. It was not clear, however, what those requirements were at the time the building was constructed or when Brescia acquired it. It was not put to Vittorio or Bruno that they were aware of this non-compliance.

208 The evidence established that the cost to make the building BCA compliant would, together with GST, be just over $1M.

209 Vittorio was cross-examined about access to the roof level and how one might get access to the fire hose reels if a fire broke out in the roof. It was put to him that he knew that the first thing you do not do in a fire is get into a lift. He at first denied knowing that, which I found implausible but he immediately accepted that “I have seen it” which I took to be a concession that he understood the implications of using a lift in a fire. He denied knowing that there was no safe way of getting access to the fire hose reels in the event that there was a fire in the roof. He accepted having ignored the possibility that one would have to get into the roof to use the fire hose reels. He said he thought they were doing the right thing by installing hose reels but that the area was used on a very minimal basis.

210 He said he would go there more often than the warehouse people. He emphasised that it is his property, he loves it and looks at it all the time.

211 Although there was some access to the roof level through the ladder arrangement, the fire protection measures in the roof were inadequate.

212 However, whilst what was done in the roof level by way of fire protection may not have complied with applicable BCA standards, Brescia’s behaviour is not that of a person deliberately courting a perceived risk. It is consistent rather with a lack of perception of any such risk.

213 I find that neither Vittorio nor Bruno perceived any risk with respect to the fire protection measures in the roof level or the spray booths. They did not deliberately court any such risk.

Use of the booths and ducts connected internally after January 2005

214 There was no issue between the parties that the duct work done beyond that contemplated by the Council consent of 22 September 2002 required further consent, and that none was obtained.

215 It was neither put nor established that alleviation of fire risk lies as one of the considerations behind the requirement for consent, but I have assumed that it does.

216 Vittorio’s evidence was that he thought the approval they had was sufficient. This was on the basis that they had been given approval to put the ducting on the outside so once they still had complaints from the neighbours they thought putting the ducting inside was okay. He said he turned his mind to the question (that is of the necessity for consent) before the work was done.

217 A submission was made that his answers on this topic were unsatisfactory (although he was not challenged on his answers). I reject the submission. I do not see his view as inherently improbable and I consider there to be no reason why I should not accept his evidence as truthful.

218 In this regard Bruno is in a somewhat different position. He was interviewed by an investigator, Mr King, on 21 March 2005. During that interview he was asked whether any building application was put in to install the new ducting, to which he replied that the original application for the ducting was done through the Council but when the ducting was redirected through the showroom floors it was not done through Council. His reason was “we just hadn’t got round to it basically”. In his oral evidence he said this answer would have been incorrect and he did not get a copy of the record of interview to go over to see what was actually said by him. He further said that he thought the new ducting would have been “covered by the original DA”.

219 Although he was not confronted as to which of the answers was the correct one, he gave evidence that he believed he was telling the truth during the interview. I do not accept his answer that he thought the new booth and ducting would have been covered by the original DA.

220 In the context of these proceedings, however, I do not consider this to be a significant finding because I otherwise considered Bruno to be a truthful witness whose evidence generally sat favourably with the evidence of other witnesses who I have accepted, and with what I consider to be the inherent probabilities on various issues.

221 Moreover, it was not put to him that he had any perception that the failure to obtain consent had any adverse safety issues with respect to fire. Indeed, the internal duct work was carried out to reduce noise and the emission of vapours which had been causing a nuisance to neighbours.

222 In the context of their case on Brescia’s knowledge or state of mind, the defendants contended for a finding that Mr Wu had affixed the warning sign.

223 The following witnesses gave evidence that there was no warning sign in the terms asserted by Mr Wu at or near the booths: Vittorio, Bruno, Mr Cortese, Mr Coulson, Mr Baez (a french polisher and whose oral evidence was taken on the telephone from Uruguay), Mr Bellos and Mr Tortura. Brescia placed particular reliance on the evidence of Mr Coulson which was, in effect, unchallenged that, when after the fire, the sign warning against use of electrical appliances was put up at the Wetherill Park premises of Brescia, it was the subject of laughter.

224 Against this there was the evidence of Mr Wu. Mr Wu’s evidence was unsatisfactory in a number of significant respects. Mr Wu deposed to three affidavits. In his first affidavit he deposed to the fact that such signs were put up in every booth installed by him.

225 Brescia then put on affidavit evidence referring to various installations carried out by Mr Wu where there were no signs. This spawned a further affidavit in which he modified his version to one of affixing signs only where the entire installation was done by him. There was however, evidence from witnesses who were not cross-examined and a statement of agreed facts which established that installations at other premises (Bovis Lend Lease, Australian Hammer Supplies, Active Radiators, Kenny’s Automotive Paints, North Shore Glass and The Australian Museum Trust) completely done by Mr Wu did not include the affixing of such a sign. This significantly eroded Mr Wu’s credit.

226 Mr Wu gave evidence concerning the affixing of a sign at an organisation called Staging Rentals. His initial version was that he was passing this customer where he had installed a spray booth and needed to use the toilet facilities and took the opportunity to see whether there was a sign. However, a version deposed to in a subsequent affidavit, was that his visit was to check out the sign and he used the toilet incidentally.

227 He also gave evidence that to use the toilet at Staging Rentals he had to pass the spray booth he had installed. However, from the uncontradicted evidence of a Mr Dunn from that organisation, it is clear that Mr Wu’s evidence cannot be correct. The plan in evidence indicates that the toilets are in opposite direction from the spray booth when one enters the relevant premises.

228 I did not find Mr Wu a satisfactory witness and I do not accept his evidence that he put the sign up at Brescia. I accept the evidence of each of the witnesses who gave evidence for Brescia that no signs were affixed. Where his evidence conflicts with Bruno, I prefer Bruno.

229 It also warrants comment that Mr Wu did not say that he himself affixed the sign but that he observed it. The person who affixed the sign would appear from the evidence to be Mr Li who worked for him. Mr Li was not called.

230 It was urged upon me on behalf of Brescia that there should be an adverse inference drawn against the defendants from the failure to call Mr Li. I am not satisfied that he is in their camp. However, the fact is that there is no evidence from him to assist the defendants.

231 There was also evidence from Mr Wu about a conversation with Bruno in which he says he discussed with Bruno that electrical appliances should not be used in or near the booth. That discussion is denied by Bruno. Mr Wu’s evidence was that the discussion took about ten minutes. In cross-examination of him it was revealed it was most unlikely to have taken anything like that time.

232 The defendants also called Mr Zhou, an electrician, in support of Mr Wu’s evidence. However, that evidence turned out to be of no assistance to the defendants because Mr Zhou ultimately said he did not read English and could not and did not read any signs.

233 I find on the balance of probabilities that the sign was not affixed.

234 Given this finding, the asserted presence of such a sign cannot play any role in the perception of Vittorio or Bruno.

235 The defendants also contended for a finding that, contrary to Council consent, there was an intensification of the use of the spray booths.

236 On 8 July 2003 the Council, in its letter of that date, referred to condition 12 of the Development Consent of 23 September 2002 which had required the existing spray booth to be used only for minor touch-ups and small paint jobs. It also provided that any variation of the existing furniture work activities required further consideration by Council prior to commencement of work on the premises. Brescia’s solicitors denied any intensification of use in their letter of 29 July 2003. The further letter from Council of 18 August 2003 referred to unacceptable noise levels. Council acknowledged in its letter of 16 March 2004 that Brescia were corporate citizens of high standing who had expended a good deal of money to address noise and vapour issues emanating from the premises.

499 A similar approach was adopted by Powell JA in CIC Insurance Limited v Bankstown Football Club Limited at 75,596-75,598 and again in Kassem v Colonial Mutual General Insurance Co Ltd [2001] NSWCA 38. It was also taken by Carter J in Judd & Judd v Suncorp Insurance & Finance (1988) 5 ANZ Ins Cas 60-832.

500 This approach was referred to apparently with approval by Campbell J in Green v AMP Life Limited (2005) 13 ANZ Ins Cas 90-124 at 86,632. That case involved a life insurance policy with an obligation on the insurer to make periodical payments while the insured remained totally disabled. At 86,661 His Honour said:

“For so long as the contract remains on foot, that will continue to be AMP’s obligation. The only way in which the plaintiff would be entitled to a lump sum for the present value of net future benefits under the contract is if the plaintiff has, and has exercised, a right to terminate the contract for repudiation. ”

501 In the Court of Appeal in CIC Insurance Limited v Bankstown Football Club Limited a different view was taken by Kirby P and Priestley JA at 75,565 and 75,571 respectively. The view taken by Kirby P was that whether or not general damages are recoverable for the breach of an insurance contract is to be ascertained by the application of general principles of contract law and His Honour concluded, at 75,566 that:

“A claim for general damages for unreasonably tardy payment arising from or the belated recognition of an entitlement to insurance indemnity is by no means heterodox.”

502 Priestley JA said:

“On the basis that the appellant’s obligation was to pay the respondent’s repair/reinstatement costs when incurred, statements by the appellant that it would not pay such costs, when incurred, which had the practical effect of preventing the respondent getting the benefit of the appellant’s promise and obligation, should, in my opinion be treated as breaches of contract, so that any damage that can be proved to flow from them would be payable by the appellant to the respondent.”

503 The decision in the High Court was determined on different grounds and the Court did not express a view on the point.

504 In Motor Accident Mutual Insurance Pty Limited v Kelly (1998) 10 ANZ Ins Cas 61-420 at 74,715 and following, Rolfe AJA, with whom Stein JA and Fitzgerald AJA agreed, applied the rule in Hadley v Baxendale without reference to the approach taken in Russell Young Abalone v Traders Prudent Insurance Company Ltd.

505 Also, in Tropicus Orchids Flowers and Foliage Pty Ltd v Territory Insurance Office (1998) 148 FLR 441, at 486 and following, Mildren J, considered the controversy and concluded that if the insurer fails to pay within a reasonable time it is in breach and the insured may sue for the indemnity under the policy, and for damages for breach of contract. His Honour held further that regardless of whether or not the action is for monies due under the policy or for damages for breach, where the policy is still on foot the insured may also claim damages for loss of the use of the money in accordance with the rule in Hadley v Baxendale.

506 In Ferrcom Pty Limited v Commercial Union Assurance Co of Australia Limited (1989) 5 ANZ Ins Cas 60-907, Giles J considered a claim for damages in accordance with Hadley v Baxendale and held that in appropriate circumstances loss due to late payment of a debt might be recoverable if it constituted special damage within the contemplation of the parties under the second limb in that case. There was no suggestion that such a claim was available only if the policy had been terminated for repudiation.

507 In an article written by Stanley Drummond entitled “Damages for Consequential Loss When the Insurer Fails to Pay” (2005) 16 Insurance Law Journal 1, the learned author in a compelling analysis of the authorities describes as a misconception the idea that repudiation and acceptance of repudiation are prerequisites for an award of damages for consequential loss where the insurer either refuses to pay a valid claim or fails to pay it within a reasonable time, in breach of its contractual obligations.

508 The learned author’s conclusion is that where an insurer breaches the contract by failing to pay a valid claim, the insured’s entitlement of damages is governed by the ordinary rules of contract law which means that damages for consequential loss are available in accordance with the rule in Hadley v Baxendale. He identifies the origin of the asserted misconception and traces its development through a number of authorities.

509 I consider that I am bound by the decision of the majority of the Court of Appeal in CIC Insurance Limited v Bankstown Football Club Limited and by the approach taken in Motor Accident Mutual Insurance Pty Limited v Kelly. Even if I did not consider myself to be so bound, I consider that approach to be correct.

510 The breach by an insurer to meet its obligations to indemnify is no different to a breach by any other citizen of a contract. The general principle remains that when assessing damages for breach of contract the plaintiff should be put in the position that he or she would have been in but for the breach, that is, the position if the contract had been performed; Wenham v Ella (1972) 127 CLR 454.

511 If the contract remains on foot the plaintiff can recover, on ordinary principles, including the rule in Hadley v Baxendale, such amount as is necessary to put him in the position in which he would have been. But his damages must in that case be assessed on the basis that the bargain is still on foot.

512 If the contract is terminated by him accepting the defendants’ repudiation, the damages are assessed on the basis that the bargain has been lost: see Ronnoc Finance Limited v Spectrum Network Systems Limited (1997) 45 NSWLR 624 at 628 and following.

513 By way of example, one of the consequences of terminating is that where there is a contractual right to have instalments paid over a period of time, on termination, damages will be assessed by valuing the right that has been lost so that they will be determined on the basis of the net present value of the lost right. If the contract remains on foot the plaintiff does not become entitled to a lump sum for the present value of net future benefits under the contract but will be entitled to damages equivalent to the amount of each instalment which the defendant fails to pay from the time that it is in breach with respect to that instalment plus such further loss which it suffers as a consequence of the failure to pay, determined in accordance with the rule in Hadley v Baxendale.

514 Whether the contract is on foot or not plays no role in whether or not Hadley v Baxendale applies to a particular breach. It seems to me that the Court in Russell Young Abalone Pty Limited v Traders Prudent Insurance Company Limited mistook the requirement for termination as a prerequisite for loss of bargain damages to be a prerequisite for the application of Hadley v Baxendale to breach of a contract of insurance. There is no principle from which such a distinction is to be derived.

515 I agree with the conclusion reached by Campbell J in Green v AMP Life Limited at 86,661 but for the reason that the contract there remained on foot and the claim was for damages to be assessed on the basis of a lump sum for the present value of net future benefits under the contract. On those facts on ordinary principles the plaintiff was not so entitled, but not because the breach of an insurance contract is to be treated according to some principle different to that which applies to any other contract. The plaintiff was not so entitled because he had not terminated. Damages were accordingly not to be assessed on the basis that his future instalment benefits were to be notionally accelerated and valued now.

516 I accordingly reject the defendants’ submission that consequential damages are not available here as a matter of principle.

Contemplation of the parties and causation

517 Clearly, the actual contemplation of the parties extended to the facts that the building was used by Brescia to trade and that occurrence of the peril might cause consequential loss of profits. A premium was paid for consequential loss of profits insurance. It is accordingly, not difficult to suppose that at the time of the Policy the parties had in their contemplation that if the defendants unjustifiably delayed the acknowledgement of their liability to indemnify Brescia in respect of its losses it would inevitably suffer loss of trading profits as a consequence: cf Kirby P in CIC Insurance Limited v Bankstown Football Club Limited at 75,566.

518 The defendants placed reliance on the decision in Ferrcom Pty Limited v Commercial Union Assurance Co of Australia Limited in which Giles J declined to award consequential damages. The plaintiff had sought to recover damages for the costs of repairing and salvaging a mobile crane which overturned while lifting a load at Darling Harbour in Sydney and was damaged. It also claimed an amount for lost profits resulting from the inability to hire out the crane. The Court awarded as damages the cost of salvage and repairs. It held that, however, the plaintiff had not brought itself within the second limb of Hadley v Baxendale because it did not show that the insurer knew or ought to have known that if it did not provide indemnity the crane would be out of operation beyond the normal repair period because the insured could not afford to pay for the repairs or for some other reason or that it was foreseeable, necessarily within the contemplation of the parties, that that would be so. There was no claim by the insurer for the cost to it for funding the repairs to the crane or the cost of funding its business with borrow money as result of the loss of money paid by it for the repairs.

519 In my view, the decision in Ferrcom Pty Limited v Commercial Union Assurance Co of Australia Limited turns on its own facts and is distinguishable from the present case. Here the Policy expressly contemplates loss of profits from business interruption caused by damage to property and it contemplates a regime for reinstatement of a building which houses a profit generating business. The terms of the policy in Ferrcom Pty Limited v Commercial Union Assurance Co of Australia Limited concerned one piece of equipment and there was no consequential loss of profits cover. What may reasonably be supposed to have been within the contemplation of the parties there does not assist with the equivalent exercise here.

520 The defendants do not plead any failure by Brescia to mitigate its damages, in respect of which the onus would have been on them: TCN Channel 9 Pty Limited v Hayden Enterprises Pty Limited (1989) 16 NSWLR 130 at 158 per Hope JA.

521 It was not unreasonable for Brescia not to reinstate in the face of the position taken by the defendants firstly in not indemnifying and then in refusing to. The Policy contemplates payment of indemnity value initially and then when a sum equal to reinstatement value has actually been incurred, payment to the insured of reinstatement value.

522 It could not fairly be said, in my view, that acting reasonably in the ordinary course of its business Brescia should, in the circumstances, have proceeded to reinstate to reduce the loss of profits it would have made if the insurance contract had been honoured: see TCN Channel 9 Pty Limited v Hayden Enterprises Pty Limited at 158 per Hope JA and 161-162 per Priestley JA.

523 Whilst I have held that Brescia is not entitled to reinstatement value even though it did not reinstate because of the conduct of the defendants, I have also found that it would have reinstated had indemnity been conferred.

524 It follows, in my view, that the loss of trading profits suffered by Brescia by the delay in reopening the building, was brought about by the defendants’ breach.

525 This fact is not altered by the fact that Brescia could have, if it wished to, rebuilt from its own resources but determined not to. If it had unreasonably chosen not to, that fact may have grounded a contention of failure to mitigate, but as I have said that contention was not put and its decision not to rebuild was not unreasonable anyway.

526 In my view, the loss which has been suffered as a consequence of the delay in reopening Ashfield is a loss recoverable under the second limb of Hadley v Baxendale.

527 The position is, however, different with respect to Alexandria. In the exercise of its own judgment Brescia determined not to purchase Alexandria but rather to lease Auburn. Even though I accept Vittorio’s evidence that a driver of this decision was the uncertainty brought about by the defendants’ conduct, it does not seem to me to be reasonable to suppose that the parties would have contemplated a delay or refusal of indemnity would affect Brescia’s judgment so as to conclude a lease rather than a purchase, when both options were available to it and it had the financial means to take either. In addition, it seems to me that any damages with respect to Alexandria flow from Brescia’s judgment not to do the optimal thing. I do not consider that the parties would objectively have had in their contemplation loss being suffered out of the exercise by Brescia of a business judgment to lease rather than to buy. In any event, the evidence does not establish that there were not better alternatives than Auburn.

528 In my view, the Alexandria claim falls outside the second limb of Hadley v Baxendale and it fails.

Quantum

529 Having regard to the above finding, it is not strictly necessary to consider quantum with respect to the Alexandria claim. However, given the length of these proceedings and the complexity of the issues involved, I consider it appropriate to record some of my findings with respect to Alexandria quantum. The parties were agreed that if Alexandria commenced operations by 28 June 2005 (which I find on balance to be the case) the loss calculated to 7 March 2006 is $430,073. Thereafter the principal matters in dispute were what level of profit Alexandria would have yielded. The first integer in this calculation was a view and an assumption by Mr McKenzie that Alexandria would have turned over the equivalent of 65% of the sales at Ashfield. Mr Dolman’s response was that the figure was arbitrary, which it no doubt is, but having regard to the fact that Mr McKenzie was not cross-examined and that the exercise is of its nature inexact, I would accept Mr McKenzie’s assumption. The remaining integers in dispute are the same in respect of the delay in reopening of the building and they are dealt with below.

530 I accordingly turn to the quantum of the damages suffered by Brescia as a result of the delay in reopening of the building.

531 The exercise involves an assessment of what profit, if any, would have been earned by Brescia trading from the building from 3 December 2006 onwards.

532 Quantum was the subject of reports once again by Mr McKenzie for the plaintiffs and Mr Dolman and Dr Miller for the defendants.

533 The parties, however, chose to direct no cross-examination to these witnesses on their opinions, and I accordingly received no assistance: cfManly Municipal Council v Skene [2002] NSWCA 385 at pars 20 –23.

534 The parties’ submissions on the subject could at best be described as scant.

535 The Court is accordingly in the position of having to do the best it can approaching the exercise pragmatically having regard to the fact that Brescia bears the onus of establishing the extent of its loss on the balance of probabilities: The Commonwealth v Amann Aviation Pty Limited (1991) 174 CLR 64 at 118 to 120.

536 Mr McKenzie’s approach, reflected in his reports of 26 October 2006, was to calculate the loss in two stages. Firstly, as a lump sum for the period from the fire up to 28 February 2007 (being the end of the month in which the trial of this matter was originally intended to commence) and secondly, on a continuing basis per month thereafter. The experts referred to the first period as “the lump sum period” (and I will use the same terminology). I will refer to the period after the lump sum period as the continuing loss period.

537 The indemnity period was twelve months from the fire which is covered by Brescia’s business interruption claim. I am accordingly only concerned with the period from 12 March 2006 onwards. The applicable part of the lump sum period is therefore from 12 March 2006 to 28 February 2007.

538 Because of the division of the loss period as described above, together with the facts that judgment in this matter has been delivered some months after 28 February 2007 and that the ultimate calculation of damages depends on findings which are dealt with below, there will have to be a further calculation to reach a final result.

539 The principal elements of Mr McKenzie’s calculation (reflecting an orthodox approach to this type of exercise) are:

a the determination of an assumed turnover (sales) that would have been generated in the period being considered;

b the application to that figure of an assumed rate of gross profit to yield an amount of gross profit for that period;

c the addition to the amount of gross profit of an amount representing the increase in costs incurred by Brescia during that period which it otherwise would not have incurred; and

d the deduction from the amount of the total of costs which Brescia saved during that period and which it otherwise would have incurred.

540 The parties are at issue as to what the sales would have been, as to the rate of gross profit that should be applied and as to the expenses that would have been incurred but which have not.

Sales

541 The financial material showed that there had been a continuing decline in Brescia’s sales up to the date of the fire. For any period thereafter it can reasonably be assumed (in the absence of any evidence pointing the other way) that the decline was a trend which would have continued. Dr Miller with whom Mr Dolman agreed, considered that there should be adopted a 10.3 per cent rate of decline for the first year from the fire and a 17 per cent declining trend in the two years from the fire. Mr McKenzie opined that the rate to be adopted throughout was minus 3.3 per cent.

542 Part of the difference between them relates to the period of time examined. Dr Miller placed emphasis on recent movement in turnover whereas Mr McKenzie focussed on the movement of turnover in the year preceding the loss compared to the three years before the loss. Mr McKenzie’s opinion was that the best indication of the likely pattern of turnover decline is that experienced more recently and that comparison to past figures when these are remote in time is unhelpful. Mr McKenzie considered that Dr Miller’s approach overstated the magnitude of the decline. Mr Dolman in agreeing with Dr Miller relied on the fact that there was a significant fall in sales at Auburn and Cabramatta for the 12 months following the fire and that there was a 17 per cent fall in the second year following the fire in the sales at Auburn and Cabramatta compared with the 12 months following the fire. Mr McKenzie considered that post-fire turnover at Cabramatta and Auburn had limited relevance when considering the prospects at Ashfield. There had also been a “fire sale” at Cabramatta which he considered distorted any comparison. Looked at in isolation the decline at Auburn was not 17 per cent but 5.5 per cent.

543 It seems to me that there is merit in both sides of the argument. Comparisons at different locations are relevant but clearly not definitive. Periods adopted for statistical analysis can be argued to be too long or too short.

544 The one matter of agreement between the experts is that there was a declining trend.

545 In the end result it seems to me having regard to the fact that Auburn declined at a rate greater than Mr McKenzie’s assumed rate, that a rate in excess of 3.3 per cent should be applied. However, it also seems to me that there is merit in Mr McKenzie’s position that the Auburn rate of 5.5 per cent is a good pointer that 17 per cent is too high. Both Dr Miller and Mr Dolman took the view that the appropriate rate for the first year from the fire was 10.3 per cent.

546 In my view the appropriate rate, adopting a pragmatic approach, is somewhere in the middle range between 5.5 per cent and 17 per cent for the period from 12 March 2006. This would be consistent with the rate taken by Dr Miller and Mr Dolman for the preceding year remaining close to constant for the next year.

547 In my view, the rate of 11 per cent should be adopted.

Gross profit rate

548 Mr McKenzie took the view that the gross profit rate to be applied throughout was 47.84 per cent whereas Mr Dolman considered 41 per cent to be the appropriate rate.

549 Mr Dolman based his view on the rate of gross profit derived from the management accounts of Brescia for the period from July 2006 to February 2007, that is after the fire.

550 Mr McKenzie’s figure is the product of his reconstruction of the profit and loss account in his assessment of the business interruption claim taking into account the inaccuracies in the stock valuations in Brescia’s financial statements.

551 Significantly in my view, for the year immediately after the fire Dr Miller and Mr Dolman calculated the gross profit rate to be 49.93 per cent which is higher than Mr McKenzie’s rate for that period.

552 It seems to me that a reduction to 41 per cent for the period thereafter is too high and Mr McKenzie’s figure albeit slightly lower than the figure for the preceding year adopted by Dr Miller and Mr Dolman, indicates some decline but not a radical one, which I consider to be more likely closer to reality. I have also taken into account the fact that I accept Mr Cortese’s evidence with regard to the way stock was dealt with in Brescia’s accounts.

553 The rate of 47.84 per cent is to be adopted.

Advertising

554 Mr McKenzie calculated expenses on the basis that Brescia would have incurred the same advertising expenditure as it would have incurred had there been no fire. Mr Dolman considered substantially more would have been spent on advertising. His view was that 11.3 per cent of turnover was the appropriate figure. This controversy reflects the dispute about what Brescia would have spent on advertising which I have considered earlier in this judgment in the context of the business interruption claim.

555 Having regard to the findings which I have made in that regard, McKenzie’s figure for advertising is to be adopted.

CONCLUSION

556 These proceedings were characterised by attacks on the credit of the three principal witnesses for the plaintiff which attacks failed and by claims of fraud which did not come close to success.

557 Brescia is entitled to a verdict in the following amounts.

Indemnity value – loss of building	$9,120,757.00
Loss of stock claim	$3,909,554.00
Business interruption	$2,013,422.00
Plant and equipment	$1,657,110.00
Consulting Engineers	$ 3,203.00
Removable of debris	$ 492,318.63
Claim preparation	$ 50,000.00
Extinguishing the fire	$ 58,911.03
Total	$17,305,275.66

558 In addition Brescia is entitled to a verdict in respect of its consequential loss which the parties envisaged might require further calculation. The parties are to bring in Short Minutes reflecting the outcome of that calculation in accordance with my findings.

559 I will hear the parties on costs.

560 I will stand the matter over so as to enable Short Minutes to be brought in, submissions on costs to be made, and for the parties to bring to my attention any further issues which require to be dealt with.

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02/08/2007 - Insertion of word "not" in third sentence of paragraph 248.Rearrangement of word "if" in third sentence of paragraph 485 - Paragraph(s) 248 and 485