Cape York Airlines Pty Ltd v QBE Insurance (Australia) Ltd

SUPREME COURT OF QUEENSLAND

CITATION:

Cape York Airlines Pty Ltd v QBE Insurance (Australia) Ltd [2010] QSC 313

PARTIES:

CAPE YORK AIRLINES PTY LTD
ACN 000 627 010
(plaintiff)
v
QBE INSURANCE (AUSTRALIA) LIMITED
ACN 003 191 035
(defendant)

FILE NO/S:

BS 1762 of 2005

DIVISION:

Trial Division

PROCEEDING:

Trial

ORIGINATING COURT:

Supreme Court of Queensland

DELIVERED ON:

27 August 2010

DELIVERED AT:

Brisbane

HEARING DATE:

16 November 2009 – 20 November 2009; 20 January 2010 – 22 January 2010

JUDGE:

Daubney J

ORDER:

There will be judgment for the plaintiff in the sum of $1,942,367.88 plus interest to the date of judgment of $1,229,519, being a total judgment of $3,171,886.88.

I will hear the parties as to costs.

CATCHWORDS:

INSURANCE – THE POLICY – PRINCIPLES OF CONSTRUCTION – ELECTION – where the plaintiff had a policy of insurance in respect of an aircraft with the defendant insurer – where the policy allows for the insurer to elect to pay for, repair, or pay for the repair of, accidental loss of or damage to the aircraft – where the plaintiff made a claim following the ditching of the aircraft –where the plaintiff was not convinced that a repair would return the aircraft to the condition it was prior to the ditching and sought that the defendant pay the amount insured under the policy – where the defendant obtained a quote described as a ‘repair guestimate’ for repairing the aircraft – where the defendant wrote to the plaintiff requesting that they sign an ‘authority to repair’ the aircraft in accordance with this quote and attempting to limit their liability to the amount specified in the quote – whether this was an option available to the insurer under the policy – whether this amounted to an election of an option available to the insurer under the policy

Civil Aviation Act 1988 (Cth)
Civil Aviation Regulations 1988 (Cth)

Champtaloup v Thomas [1976] 2 NSWLR 264, cited
Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) (1993) 182 CLR 26; (1993) 67 ALJR 537, cited
Freshmark v Mercantile Mutual Insurance (Australia) [1994] 2 Qd R 309, cited
Lake v Hartford Fire Insurance Co Ltd [1966] WAR 161, cited
Sargent v ASL Developments Ltd (1974) 131 CLR 634, applied
Surfers Paradise Investments Pty Ltd (in liq) v Davoren Nominees Pty Ltd [2004] 1 Qd R 567, cited

COUNSEL:

DR Cooper SC, with C Francis for the plaintiff
SSW Couper QC for the defendant

SOLICITORS:

Kilmurray Solicitors for the plaintiff
Cooper Grace Ward for the defendant

At about 4.10 pm on 8 February 2004, the plaintiff’s Cessna 208 Caravan Aircraft VH-CYC (“the Aircraft”) suffered engine failure and ditched in the sea about 120 metres off Green Island, near Cairns. The Aircraft was recovered from the sea some 42 hours later, on 10 February 2004. During that time, the Aircraft, which was partially submerged, underwent periods of immersion in salt water by reason of four tidal ebbs and flows.

This action arises out of the plaintiff’s claim on the defendant insurer as a consequence of that incident.

The policy of insurance

The relevant policy of insurance which the plaintiff held with the defendant for the Aircraft was Policy No 04 Q01 0011543 (“the Policy”). It was effective from

30 September 2003.

The relevant coverage provided by the Policy was:
“1. Coverage
(a)The Company will at its option pay for, repair, or pay for the repair of, accidental loss of or damage to the Aircraft described in the Schedule (“the Aircraft”) arising from the risks covered, including disappearance if the Aircraft is unreported for thirty days after the commencement of Flight, but not exceeding the Amount Insured as specified in the Schedule and subject to the amounts to be deducted as specified in the Schedule.”
The Policy specified in relation to the claims procedure under the Policy as follows:
“Claims Procedure
3.Immediate notice of any event likely to give rise to a claim under this Policy shall be given as stated in the Schedule. In all cases the Insured shall:
(a)furnish full particulars in writing of such event and forward immediately notice of any claim with any letters or documents relating thereto;
(b)give notice of any impending prosecution;
(c)give all information, do all things, provide signed statements, provide all documents, records and things, and assist the insurers and their agents in any other way in the investigation and in connection with any proceeding or inquiry as the Company or its agents or representatives may require;
(d)be available and attend conferences and give evidence and/or instructions when required by the Company or its agents, ensure that any employees required by the Company are available to do likewise and take all reasonable steps to ensure that any other person connected with the Insured is available and will assist and give evidence if so required;
(e)not act in any way to the detriment or prejudice of the interest of the Company.”
The Policy also provided cover for loss of the Aircraft’s use as a result of an accident. For this particular aircraft, the amount allowed was $1,500 per day in excess of 14 days for 90 days.

The “Amount Insured” under the Policy was $1,800,000.

The course of events

After the Aircraft ditched on 8 February 2004, the plaintiff’s principal, Mr Arthur Williams, contacted his insurance broker, Mr Toby Palham of Heath Lambert Group, to advise of the ditching. The fact of the incident and the claim arising therefrom was also communicated to the defendant insurer and its loss adjuster, Mr Mike Ellis of GAB Robins, who subsequently attended the Aircraft on behalf of the defendant.

On 9 February 2004, Mr Daniel Nash, the defendant’s relevant national claims manager, sent a “Request for Authority” to the defendant’s general manager, Mr John Buckley. This request stated:
“The above claim exceeds my Delegated Authority in the following respects: Repair quote being obtained, but likely to exceed equivalent of AU$1,000,000.
I seek authorisation to: Manage and settle claim up to Hull Sum Insured AU$1.8 million if necessary.”
On 10 February 2004, Mr Buckley completed the counterpart of this request form, and gave Mr Nash “authority to handle this Hull claim”.

It is not in issue that on 11 February 2004, the defendant accepted that the ditching was an “accident” within the meaning of the Policy.

Mr Ellis began consulting with the GAB Robins’ London office with a view to identifying a repairer who could rebuild the Aircraft. He was referred to a company located in Oklahoma, USA, called Aircraft Structures International Corp (“ASIC”). Mr Ellis was told that ASIC specialised in rebuilds of this particular model of aircraft. On 12 February 2004, Mr Ellis sent an email to the principal of ASIC, Mr Mickey Stowers, saying:
“Thanks for the general information you passed onto me a short time ago. I have attached some photographs which should give you an overall perspective of the event and the extent of the water immersion. As mentioned when we spoke on the telephone, the aircraft was immersed for about 72 hours and subjected to a number of rising and falling tides. It is now located on the barge in the Trinity Inlet in Cairns and because of environmental issues we cannot do any cleaning or inhibiting. We hope to get it back to Cairns International Airport early next week.
I would be grateful if you could give me a ball park figure of the sort of cost that would be involved to do a complete rebuild.
Let me know if you require any additional information and I look forward to hearing from you.”
On 13 February 2004, Mr Ellis sent an email responding to an inquiry from

Mr Stowers, saying:
“Thanks for your email and photos. You certainly seem to have the space and equipment.
Yes your assumption is correct. In view of its age we would only use brand new components if it was the only option available. However I appreciate that in some areas you might have to go for new to satisfy airworthiness requirements, etc. I will leave it up to you.
Look forward to receiving your estimate.”
In the meantime, Mr Ellis had been communicating with the defendant in relation to the matter. He accepted in evidence before me that, as is recorded in a file note dated

9 February 2004 on the defendant’s file, that he advised the defendant insurer on that day that the Aircraft was probably a “CTL”, i.e. constructive total loss. On

13 February 2004, Mr Ellis telephoned Ms Robson of the defendant insurer advising that he had spoken with a repairer in the USA who specialised in these aircraft, that he had been given a figure of between US$700,000 and US$800,000 (including freight) and suggested that the Aircraft, being a 1986 model, was over-insured.

On 16 February 2004, Mr Stowers of ASIC provided Mr Ellis with a “Repair Estimate” for the Aircraft. It is necessary to set out the terms of that Repair Estimate in full:
“Repair Estimate for VH-CYC, Serial Number 20800108
Transport aircraft from Queensland, Australia to Enid, Oklahoma     $25,000.00
for repairs (includes labor to place aircraft into two shipping
containers, airline tickets, meals, car rental, lodging, and two 40ft
containers).
Labor to remove aircraft from shipping containers; remove all
avionics, instruments, and electrical components. Flush interior
of aircraft with fresh water and chase with diesel fuel. Remove
all control cables, pulleys, torque tubes, and bearings. Remove
all wiring. Clean and flush all oil lines, fuel lines, fuel sumps,
pneumatic lines, and brake lines. Remove and replace all nut
plates. Remove firewall and clean structure, prime, and replace.
Remove trailing edge skins from flaps, elevators, ailerons, and
rudder; flush and reinstall trailing edge skins. Coat interior
surfaces of entire aircraft with LPS-3. Install replacement wiring
harness, avionics and instruments. Install new pulleys, bearings,
and torque tubes, reinstall control cables after inspection. Remove
and replace all engine and prop, control cables. Disassemble
pedestal, clean, lubricate and reassemble. Remove circuit breaker
panel and clean, replace all wiring, switches, and circuit breakers.
Install new engine mounts, install used serviceable engine with
similar hours. Overhaul prop, and install. Replace all damaged
cowling and install all overhauled engine accessories. Disassemble
nose gear, clean, reassemble and install. Disassemble main gear
springs, flush internal walls, prime inside walls, and reassemble
springs. Disassemble and clean wheels and brakes. Reinstall
main gear and bleed brakes. Assemble aircraft and rig all flight
and engine controls. Install new carpet and upholstery. Perform
new weight and balance
2,486 hours @ $69.00 per hr.  171,534.00
Parts (see attached list)  298,844.81
Freight (parts only)  500.00
Shop supplies (MEK, paper towels, glue, etc.)  300.00
PT6A-114A engine (comparable time)  200,000.00
Paint (complete strip, etch, alodyne, poly-urethane)  20,000.00
Oklahoma sales tax (delivered out of state 0%)  0.00
Total Repair  $691,178.81
All work is to be completed under a repair station authorization.
Parts prices are good at time of quote; and increases by OEM will
be passed on. Hidden damage discovered after disassembly will
be priced accordingly.
Please don’t hesitate to contact me if you have any questions.”
On 17 February 2004, Mr Ellis sent an email to Mr Stowers, saying:
“Thanks for your estimate and the prompt manner in which you responded. You have obviously done it all before. I accept your comments as discussed on the phone that the proposal is an estimate only and that you would provide me with any variations that were found necessary once you had dissembled the structure and established the extent of the corrosion.
I have referred the estimate to the Insurance company and will get back to you soonest. I agree that we have to act quickly to preserve the bits.”
On 17 February 2004, Mr Ellis prepared a report for the defendant, confirming that he had travelled to Cairns on 8 February 2004 and describing the results of his investigations and observations to that time. In relation to rebuilding the Aircraft, the report stated:
“Rebuild Option:
Given the high sum insured at $1,800,000 we have been somewhat reluctant to simply recommend that the hull be determined a constructive total loss without first establishing the feasibility and costs that would be involved in carrying out a repair/rebuild.
Having said that we have doubts that a rebuild of this extent could be successfully undertaken in Australia, certainly not in the Cairns to Brisbane region. The resources required simply do not exist in this part of the world. We therefore sought the assistance of our London Office who referred us to a company in Oklahoma, USA, namely Aircraft Structures International Corp (ASIC) who specialize in Cessna 208 Caravan rebuilds. ASIC has a solid and proven reputation for undertaking Cessna Caravan aircraft retrievals and rebuilds especially post seawater submersion rebuilds.”
The report described the damage to the Aircraft as follows:
“Damage:
The water landing or ditching took place in calm waters in the lee of the Island on its northern shoreline. Accordingly, and as a result of Pilot Davy’s relatively good handling of the situation the touchdown was smooth. The only impact or landing damage occurring was the splitting open of the fibreglass cargo pod, which Pilot Davy believes acted as a “Boogie Board” as the aircraft decelerated.
The aircraft then floated and drifted for a short while before settling on its wheels onto the reef in the shallow water. It was subsequently tethered to the shore by ropes preventing it drifting out to sea.
The fuselage, wings and airframe in general escaped impact damage and it is therefore virtually free of any denting, holing or distortion to skins and/or frames. The only damage noted is buckling to the rear fuselage tail cone or stinger.
Unfortunately because of the unfavourable tides and shallow water the salvage operation could not take place until Tuesday (10/02/04) morning at approximately 1030 hours. The entire aircraft has therefore been subjected to saltwater tidal rises and falls over a period of some 60 hours during which time complete and total immersion occurred as is illustrated in the attached photographs.
Accordingly, the corrosive effects of the sea are already apparent on many alloy components such as rudder pedals and the numerous alloy housings. The turbine engine is already displaying an advanced stage of deterioration.
Likewise all electrical circuits, wiring looms, control cables and pulley systems together with avionics and instrumentation have been totally submersed to the degree that they are no longer reusable.”
Mr Ellis also described the salvage of the Aircraft:
“Salvage:
The salvage exercise undertaken by Perrott’s involved the use of flotation bags, divers, two barges and tugs. One of the barges carried a mobile crane with which to lift the aircraft from the sea and onto the deck of the other transporting barge.
Because of the shallow water that covers the reef and the possible risk of causing damage to the reef, the raising of the aircraft from the sea had to be accomplished in deeper water approximately one kilometre offshore.
The floatation bags were placed on either side of the fuselage and inflated to raise the aircraft to a level were (sic) it could then be towed to the waiting barges. It was then lifted onto the clear deck of the transporting barge for the voyage back to the Trinity Inlet, Cairns.
At the time of compiling this report arrangements were being made to tow the barge carrying the aircraft to the mouth of the Barron River where it will then be towed upstream a short distance to the Cairns Airport Emergency Services boat ramp located on the northern boundary of the Airport. From here it will be lifted by crane onto the airport taxiway then towed across the main runway to the Insured’s hangar located in the General Aviation area.
Unfortunately some delays have been experienced in obtaining the necessary approvals from the Government Agencies concerned. However, we are now able to report that the approvals have at last been granted and the operation is scheduled to take place in the early hours of Wednesday 18^th February 2004 on a suitable high tide.
The total cost of the salvage operation has yet to be realized. However, we have suggested that you set aside the figure of $20,000.”
The retrieval and salvage was undertaken by Perrott Salvage & Construction Pty Ltd (“Perrott’s”). A report describing the work undertaken in the salvage operation has been obtained from that company which describes the method utilised for lifting the Aircraft, and the Aircraft then being towed to a crane barge. The Aircraft was then lifted slowly out of the water and placed onto the deck of the barge, and then secured for sea transport back to Cairns. In evidence before me it emerged that the Aircraft needed to be towed for a distance of about a kilometre before it was lifted out of the water and placed onto the barge. The barge then steamed back to Perrott’s premises at Trinity Inlet, Cairns. It arrived there late on 10 February 2004. Despite some evidence suggesting that the Aircraft was lifted onto the hard stand at Perrott’s, I accept that the Aircraft in fact remained on the barge which was moored at Perrott’s premises until

18 February 2004, by which time the necessary clearances were obtained to enable the barge to be towed from Trinity Inlet to a position adjacent to the Cairns airport. It was then able to be unloaded from the barge and moved to the plaintiff’s premises within the airport.

In evidence before me, Mr Williams said that the first time he saw the plane was when it was recovered back to Cairns on 10 February 2004. He said that the exterior of the plane looked quite immaculate, but when he got up close to it, it was evident that most of the alloy castings had deteriorated very dramatically and there was significant corrosion. He said instruments and rudder pedals were badly corroded and there was impact damage on the tail of the Aircraft. He said that the Aircraft had been immaculately maintained before the incident.

I should also say at this point that I find that the Aircraft was not washed down at any time while it was on the barge at the Perrott’s premises. Mr Ellis, in his evidence in chief, had a recollection of the Aircraft being offloaded from the barge onto the hard stand at Perrott’s and of asking for it to be washed down there. He also had a recollection of inspecting the Aircraft and seeing water in the interior. Under cross-examination, however, it emerged that Mr Ellis’ recollection was less than accurate. He initially said in evidence, for example, that after the barge carrying the Aircraft arrived at the Perrott’s premises at Trinity Inlet late on 10 February 2004, he next saw the Aircraft on the following day at which time it had been lifted off the barge onto the concrete hard stand. His recollection faltered, however, when he was shown a photograph which depicted him inspecting the Aircraft while it was on the barge late on 10 February 2004. Nor, as was put to him in cross-examination, is there any mention in the relatively contemporaneous report he wrote on 17 February 2004 about the Aircraft being unloaded from the barge and put on the hard stand. Nor is there any mention of the Aircraft being unloaded from the barge in the Perrott’s salvage report. Mr Ellis conceded under cross-examination that he was having “trouble recollecting ... the events at the time”.

Returning to the chronology, on 18 February 2004, the Aircraft on the barge was towed to the emergency services boat ramp at the Cairns airport. It was lifted by crane from the barge onto the taxiway, and then towed across to the plaintiff’s hanger in the general aviation area of the airport. It was then that the Aircraft was washed down; at Mr Ellis’ request, the plaintiff completely stripped out the interior trim, panels and inspection panels throughout the Aircraft. It was washed out and then sprayed with LPS-3 inhibitor.

Mr Phillip Stacy was, at the time, the defendant’s national claims and technical officer. He reported to Mr Nash. He was closely involved in liaising with Mr Ellis with respect to this aircraft claim.

On 19 February 2004, Mr Nash and Mr Stacy had a telephone conference with

Mr Palham to discuss the claim. The diary note of that telephone conversation records:
“We explained that we had obtained a quote for US$691,178 from ASIC in Oaklahoma, and that after doing some checking we believe they are a reputable organization with sufficient experience to do the repairs satisfactorily. We also advised that we had checked with CASA who are OK with the aircraft being repaired providing it is all done in accordance with Cessna requirements and approval – which will be the case.
Toby advised he was not sure whether this would be acceptable to the insured, but that he would have the insured – Arthur Williams – contact us to discuss.”
There was then a telephone discussion with Mr Williams. Mr Nash’s diary note records:
“Arthur Williams rang. I explained to him that we had a quote which we are satisfied indicates that the aircraft can be repaired. The insured indicated quite clearly that he would not be happy to have the aircraft repaired. He would not be confident that it would be safe to fly, and he would not be comfortable having high profile people – such as the shadow transport minister, the Prime Minister, and senior judges and magistrates – travelling in the aircraft after it is returned to service.
I mentioned to him that the only other option would be for us to offer to cash settle for the repair cost. I added that we would also be willing to consider paying the Loss of Use (90 x $1,500) in cash as an incentive to finalise the claim.
He stated that we should put this in writing to him, and that he would refer the matter to the shareholders for a decision.”
Also on 19 February 2004, Mr Stowers of ASIC wrote to Mr Stacy describing the process involved in restoring an aircraft that had been submerged in salt water. This letter said:
“The restoration of an aircraft that has been submerged in salt water is a simple and straightforward process even though it is a very tedious and time-consuming one. The FAA has no objection to the process and allows these aircraft to be returned to service as long as the manufacturer of the aircraft has no objections. We have restored numerous water-immersed aircraft with great success. Some of the Caravans we have restored are as follows: 20800254, fresh water, 30 days under water and 120 days on the bank before cleanup; 20800292, salt water, 24 hours under water and 3 days before cleanup; 20800289, salt water, 3 days under water and 120 days before cleanup; 20800135, fresh water, 24 hours under water and 2 days before cleanup. The head of Caravan Product Support at Cessna, Steve Charles, states that there is no loss of structural integrity if the aircraft is cleaned and preserved properly.
The majority of structure and skins used by Cessna to produce the Caravan are fabricated from 2024T3 or T4 aluminium, which is clad with pure aluminium, alodined, and then epoxy primed before assembly. There are very few parts that are not primed but those that are not are anodized. The wing spar caps are fabricated from 7075T7511 extrusion and are completely covered with epoxy primer before being bonded to the web. The fuel cell skins are sealed to the spar caps during assembly to form an integral fuel cell. The wings and flight controls having already been removed from the fuselage, the next step to restore this Caravan to an airworthy condition is to remove all attaching components so that only the structure and skins remain on the major assemblies.
With only the basic structure and skins remaining all anchor nuts must be removed as well as the firewall, the control surface trailing edges for better access and all assemblies are thoroughly washed with fresh water. While the aircraft is still wet the entire exterior and interior is flushed with diesel fuel to chase the water from all surfaces, including the lap seams. The aircraft is thoroughly and painstakingly inspected for any corrosion. Any corrosion found is either removed from the part or the part is replaced. Every piece of avionics, instruments, bearings, circuit breakers, and wiring is replaced. All fabric or leather upholstery is replaced.
After the aircraft is assembled and the exterior is completely stripped of paint, the exterior is once again inspected for corrosion, etched, alodined and epoxy primed and painted. The interior of all structural components is then treated with LPS-34, which also creeps into the skin lap seams, to prevent any future corrosion.
Cessna does not require any additional inspections after the aircraft is returned to service and the normal inspection regimen is followed. As with any Caravan if corrosion is ever found it is repaired in accordance with chapter 51-11-00 in the Cessna Structural Repair Manual, D5132-5-13.”
On 20 February 2004, there was a further telephone discussion between Mr Nash and Mr Palham. Mr Nash’s diary note records:
“Toby Palham rang to discuss.
He emphasised that the insured was not satisfied with the repair option. He stated there was no way the aircraft could be repaired for the estimated figure. He said there were CASA requirements which did not apply in USA which would add a further $250,000 to the repair cost. I advised I did not know about this, but would ask Phil to look into.
He stated that the best option would be for us to pay out the sum insured ($1.8 million AU), and keep the aircraft ourselves – either repair and sell, or sell as is. I advised that this was not a valid option. As far as we are concerned, the only two options are to repair or cash settle for the repair cost.
Toby asked about what aircraft the repairer had previously repaired – and where they were from – which country. He asked where the engine would come from, and it’s condition etc ... I advised that we can obtain whatever further information the insured requires to satisfy them that the repairs can reasonably be completed for the estimated cost.”
Mr Nash’s diary notes also record that on 20 February 2004, Mr Buckley telephoned Mr Nash, advising that he had just got off the phone with Mr Palham and saying that he would like to discuss the matter with Mr Stacy and Mr Nash. Mr Nash’s diary note records:
“Phil and I discussed generally with John, who agrees that we should continue to push the repair option – which will probably lead to a cash settlement in due course. We need to do whatever we can to convince and satisfy the insured that the repair is viable, the cost involved is accurate, and that CASA will approve once complete.
We should leave the cash settlement option to one side for the moment until the above occurs.”
Mr Stacy had also been making inquiries with some of his contacts within the aircraft industry with respect to ASIC as a repairer. He received certain advice from a representative of Trans-Pacific Air, and on 20 February 2004 Mr Stacy sent an email to his contact at Trans-Pacific Air saying:
“Thanks so much for our information and input. We had only heard good things about his abilities and workshop [referring to Stowers].
I have spoken to him twice asking him to write to us stating the method, approvals etc for the work.
Personally I think we will convince the owner that cash in lieu of repairs will be the way to go but we still need to go through the process of getting a comparable quote to settle on.
The time taken could be a big factor in all of this and its good to know up front that some jobs take a lot of time. He admitted to me that he’s too busy to come out to Australia even for a couple of weeks to oversee the job done in an Australian W/shop.
I’ll give you a call next week when things are a little less hectic.”
Mr Stacy copied this email exchange with Trans-Pacific Air to Mr Ellis. On

20 February 2004, Mr Ellis responded to Mr Stacy, advising that he did not think that the comments “should deter us from proceeding with the repair option”. Mr Ellis also reported having spoken to Mr Gunter Stern (the plaintiff’s maintenance manager) and:
“... he has assured me they have given the interior a good wash. They are going to spray some Kero around on Monday after it has dried out properly. One point he did mention is that Cape York Air have an anti-corrosion programme in place and had only recently sprayed the entire internals, including inside the wings and tail with an inhibiting wax product. I think he called it Bosguard. That being the case the corrosion should be retarded to some extent.”
On 23 February 2004, Mr Stacy sent an email to Mr Palham to update him on the plaintiff’s claim. This email said:
“To ensure we all make the correct decisions for all parties concerned, I have,
·      Asked our assessor Mike Ellis of GAB Robins to ask Gunter Sturn of CYA to ensure the total aircraft is completely stripped of interior trim, panels and inspection panels throughout the aircraft and it be washed out thoroughly. This is to be followed by a liberal spray of kerosene or jet fuel. Mike informed us today that this was being carried out last week. As an aside Gunter told Mike that the whole of the airframe was treated recently with an anti corrosive liquid as part of CYA’s maintenance program. This will assist the repair of the aircraft. I said we would pay for this dismantling, washing and flushing up to about 50 man hours.
·      Since last Wednesday I have had two long conversations with a Mr Mickey Stowers the President of Aircraft Structures International Corp (ASIC) re the recovery, repair and ultimate return to service of this Australian aircraft. He spent a considerable time with me describing the return to service process, the areas opened up, parts removed overhauled or replaced and how this fitted in to the instructions already laid down within the Cessna Caravan’s Structural Repair Manual (SRM). I also quizzed him of the perceived hurdles that the owner, CASA and QBE Aviation would have on any undertaking by his company to return the aircraft to full serviceability on the Australian register without any loss in value, long term structural integrity, corrosion problems or reduced life within the Cessna Ageing Aircraft program that may be applicable to this early Caravan. If you or the owner wish to speak to me directly regarding this process please do not hesitate to contact me.
·      Mike Ellis and I have independently checked out the capabilities and work carried out by ASIC with people who know them both here in OZ and the USA.
·      I have also discussed carrying out the repair in Australia with ASIC and CASA.
·      From Wednesday to Friday I also contacted a number of CASA airworthiness people I know within the aviation industry (one for 43 years) both in Queensland and Canberra regarding this exercise. After the usual and predicable silence when I said what may happen to
VH-CYC they all said that if it was carried out in an approved shop (be it USA or Australia), to approved data (ie Cessna SRM and or a Reg 35 engineer’s scope of works) the aircraft could be returned to service with out any long term penalties.
·      I have not been able to clarify the extra value $250,000) regarding
VH-CYC that you mentioned to Daniel Nash. Mike Ellis said that as this was an very early Caravan it may have had mods to bring it into line with later ones that had factory IFR capability. He also mentioned it had a camera hatch which was an unusual modification.
I hope this assures you that I am trying to find an acceptable outcome for both CYA and QBE Aviation and that we can all make a decision on it’s outcome as soon as possible.
I will continue to keep you in touch.”
On 24 February 2004, Mr Stacy sent an email to Mr Stowers concerning the correspondence received from ASIC to date. The email said:
“Thanks for the letter and all your help on this project. The owner is stalling us on accepting the repair option so we are waiting to see what will transpire.
We will keep in touch.”
I interpolate that this statement by Mr Stacy was patently incorrect. At the time

Mr Stacy sent that email, the only information which had been provided to the plaintiff was that which was passed on in the telephone discussions with Mr Williams and

Mr Palham on 19 and 20 February 2004. When challenged on this in cross-examination, Mr Stacy was quite evasive. He initially contended that the plaintiff was “stalling” through lack of communication with Mr Ellis and Mr Palham, then resorted to asserting that the insurer wanted the plaintiff to sign a release. But when it was pointed out to him that no release had been provided to the plaintiff at that stage, he finally conceded that he had no basis for saying that the owner had been “stalling us on accepting the repair option”.

On 26 February 2004 Mr Palham received, and on-forwarded to Mr Williams, a letter addressed to Mr Williams from the defendant. That letter said:
“Dear Mr. Williams,
Re: Claim 674 – Engine failure and ditching 8^th February 2004 –
VH-CYC
We refer to the above claim and your telephone conversation with Mr Daniel Nash our National Claims Manager on 19^th February 2004. We have also discussed this claim on numerous occasions with your broker – Toby Palham.
We are writing to confirm that we have obtained repair estimate from Aircraft Structures International Corporation (ASIC) in Oklahoma. Please find attached a copy of that estimate totalling US$691,178.81 (equivalent of approx AU$895,000).
Under your policy, we have the option to “... pay for, repair, or pay for the repair of accidental loss of or damage to the Aircraft ...” (refer Aircraft Insurance Policy Section 1, subsection 1(a)). As the aircraft is insured for AU$1,800,000, and in it’s post damage condition would be valued at no more than AU$150,000, it is clear that it is repairable based on the above mentioned estimate.
We have made enquiries with several aviation industry contacts in the United States, and we are satisfied as to the integrity and capability of the repairer to complete the work required. This work will be carried out in accordance with the Cessna Structural Repair Manual (SRM) and the FAA repair station standards, and be returned to service with CASA acceptable paperwork.
We have also made initial enquiries of CASA in Canberra, Brisbane and Townsville to ensure that they have no concerns with the repair and return to service of this aircraft. We are assured that they have no concerns with this process, however we will formally notify CASA of our intentions to ensure that there is no misunderstandings. We will provide you with a copy of our formal notification.
We also refer you to your obligations under the policy to make every effort to strip all the interior trim and fittings out of the aircraft, all access and inspection panels have been removed, all interior areas of the aircraft and its structure has been washed thoroughly with fresh water and it further sprayed with kerosene.
Could you please instruct Aircraft Structures International Corporation to proceed with the repairs to the aircraft as per their estimate.
We enclose an Authority to Repair for your signature. Could you please pass this on to Aircraft Structures International Corporation as soon as possible and send a signed copy to us for our files.
We take this opportunity to remind you that the work undertaken by the above company to repair and restore the aircraft to its former state being the subject of this claim is performed in accordance with the terms and conditions of the policy and our interest is limited to the cost of the accident repairs as quoted in accordance with your entitlement under the policy.
Cape York Air will be required to pay the excess of AU$18,000 and the repair or maintenance of any non accident related damage, the repair of any fair wear and tear items discovered in the course of these repairs, contribution towards lifed items and any other work to bring the aircraft to an airworthy condition to Aircraft Structures International Corporation on completion of the repairs.
At the completion of the repair you will be required to sign a release accepting the repairs as being complete and satisfactory.
Should you have any enquiries on the repair of your aircraft please do not hesitate to contact me at this office at any time.
Yours faithfully,
Phillip Stacy
National Technical Claims Consultant”
Enclosed with that letter was a document entitled “Authority to Repair”, which provided:

“AUTHORITY TO REPAIR
I/We .................................................
For and on behalf of Cape York Airlines hereby authorise Aircraft Structures International Corporation and their sub-contractors to proceed with repairs to the Cessna 208 Caravan aircraft Registration VH-CYC.
All other costs and non-accident related repairs will be borne by Cape York Airlines.
Signed: _____________________________
Address: ____________________________
Date: ____/____/2004
Witnessed: __________________________
Address: ____________________________
Dated: ____/____/2004”

A copy of the ASIC repair estimate was also enclosed.

On 2 March 2004, and as a consequence of discussions which Mr Stacy had already held with representatives of the Civil Aviation Safety Authority (“CASA”), Mr Stacy sent an email (copied to Mr Palham) to Mr Ron Simon and Mr Neville Probert of CASA. This email relevantly stated:
“I’m formally writing to you regarding our intentions with the airframe of Cape York Airlines Cessna Caravan S/n 20800108 VH-CYC.
As you know the aircraft landed in the sea without structural damage on the 8/2/04. In due course it was totally submerged by the in coming tide. It was later recovered to Cairns Airport by barge without further damage. The interior has been removed, the whole airframe then has been thoroughly rinsed, flushed, treated with kerosene (sic) and preserved as much as possible in accordance with instructions from Cessna and Aircraft Structures International Corp. (ASIC) of Oklahoma who specialize in Cessna Caravan major maintenance and repair.
ASIC has been recommended to us by a number of repairers, insurance companies and assessors in the USA, Britain and operators in Australia. I have attached a number of letters from ASIC for your information. It further expands the return to service process, parts replaced and capabilities of the company.
It is our intention to suspend the C of A, dismantle the airframe, ship it to ASIC in the USA, it be repaired, test flown in the USA, dismantled, shipped back to Australia and returned to service on the Australian register. The engine is being stripped and inspected by P & W Brisbane & ATSB and then parted out in a responsible manner.
As per our discussion Ron, the airworthiness process by which the aircraft returns to service onto the Australian register would have to be through a full C of A process with a inspection as to the adequacy of the ASIC repair, conformance to type design and all the releases and paperwork from ASIC and its contractors and suppliers is adequate, traceable and meets Part 21 and 25 (CAR 24) Certificate of Airworthiness.
At the end of the day it will be the owner’s decision as to whether he authorises the repair or accept another form of settlement.
If he chooses not to retain the aircraft, then you need to be aware of the situation as there have been a number of people interested in buying the aircraft and either repairing it with the view of a return to service or parting it out.”
Mr Simon responded on 3 March 2004, raising a query as to the insurer’s authority to suspend the certificate of airworthiness. Mr Stacy replied by email on 3 March 2004 clarifying that he would recommend that the owner do the suspension “once he has agreed to the repair which at this moment he has not”.

On 16 March 2004, Mr Palham wrote to Mr Stacy by fax, advising that the “insured is ... formulating a detailed response to your earlier letter”. He referred to a request by Mr Ellis that the plaintiff compile a list of additional equipment fitted to the Aircraft, and enclosed with this fax, a copy of a fax received from Mr Williams concerning this extra equipment. That fax from Mr Williams stated:
“Re: VH-CYC additional equipment & turbine specifications
Mike Ellis asked me to compile a list of additional equipment fitted to VH-CYC and to obtain pricing for these items. This has been a somewhat lengthy process, but I’ve managed to obtain costings for either the fitted item or the current equivalent. The prices reflect the cost of adding the items as a factory option and may differ in price if they need to be retro-fitted.
The table below reflects the current times for the PT6-114A, which only needed a new impellor and CT disc hub to return it to full service for another 5,000 hours. Most of the accessories were also low time.”

Mr Williams then set out several pages of parts, particularly avionics and extras, and the cost of those which he calculated to total AUD$829,580.

On 16 March 2004, Mr Ellis sent an email to Mr Stowers attaching a copy of the extra parts schedule which had been prepared by Mr Williams, but which redacted out the pricings which Mr Williams had included. The covering email stated:
“We are still trying to convince the Owner that a repair is feasible.
I have attached a copy of the Owner’s list of the avionics and additional equipment that is installed in the subject Caravan and which they claim will make a large difference to your repair estimate.
I believe the fibreglass Cargo Pod is repairable. It sustained a split through the right side at the door opening.
The Camera Belly Hatch is not really an issue as it is simply a round hole cut out in the floor and cover plate. I am sure you have seen it before.
I am not certain what the Parachuting Kit involves. Probably something to do with the rear cabin door arrangement. Have you had any previous experience with this?
Some of the other items we have already discussed, but I would be grateful if you could compare the complete list with what you allowed in your own estimate and advise me of any additional costs over and your initial estimate.”
On 17 March 2004, Mr Stacy sent an email to Mr Ellis and Mr Palham thanking

Mr Ellis for sending the plaintiff’s list of additional items on the Aircraft, and saying:
“I will be interested in ASIC’s comments about this but from my viewing of the list there are only a couple of items that may not be on ASIC’s quote which may effect their repair cost.
I will also talk to Cessna Product Support tomorrow morning about their policy on the impact of the repair on the aircraft’s long term value and any additional long term maintenance requirements.”
On 22 March 2004, Mr Ellis sent an email to Mr Stacy which said:
“I have received a final response from Mickey Stowers regarding the additional items raised by the Insured plus a couple of other items that I had previously asked Mickey to price.
The following is a summary of the current position.
Original ASIC Repair Estimate          US$691,178.81 (includes dismantling
and shipment to Oklahoma)
Plus Wheel Assemblies  $1,729.00
Rudder Pedals  1,036.00
Engine Trend Monitor  20,000.00
Oxygen Gauges/Regulator  1,000.00
Air Conditioning components  10,000.00
Avionics/equipment variations  7,000.00
Electric Vacuum System  4,500.00
Shadin Fuel Management System              15,000.00
Return aircraft to Cairns  20,000.00
Total Revised Estimate                  US$771,443.81
Convert to AUS Dollars @0.73        A$1,056,772.34
The ASIC Estimate allowed US$200,000 for a replacement PT6 engine. Pacific Turbine in Brisbane has advised they have a suitable replacement in the USA which we could have for US$150,000. This would give a saving of US$50,000. The Revised Estimate could therefore be reduced to US$721,443.81 or A$988,279.20.
Pacific Turbine also indicated that the engine they are offering was apparently being considered by Cape York Airlines, prior to the incident, as a replacement for the engine that got wet in view of the low hours remaining on that unit. The replacement has very similar hours remaining on the main components as the wet engine.
I spoke with Toby Palham on Friday, you are correct he is moving to Singapore and finishes up with Heath Lambert on the 8th April. Toby’s comments were that the matter is likely to get legal because Arthur Williams was not prepared to accept either a repair or a cash settlement in lieu. Have you heard anything today? I haven’t.
Regards
Mike Ellis”
Mr Stacy forwarded that email on to Mr Buckley on 22 March 2004 with the following message:
“This is the latest from the assessor Mike Ellis re the “wet” Cessna Caravan.
This has not changed our intention to repair or cash settle the claim, preferably the later.
We will write to him via Toby P today and reaffirm that the next thing he has to do is sign an “Authority to Repair” ASAP and if he procrastinates he could be liable for any additional repair do (sic) to continuing deterioration.”
Mr Stacy then wrote Mr Williams a letter wrongly dated 26 February 2004 but accepted by the parties as having been sent on 22 March 2004, in which he said:
“Further to our letter of the 26^th February with the attached Authority to Repair we thank you for the aircraft’s equipment and additional costing’s received from Cape York Airlines that may affect the cost of repairs.
We sent those aircraft details to Aircraft Structures International Corp. (ASIC) for their review and to adjust the repair quote accordingly. Mr Stowers of ASIC has replied and the repair costing including freight both ways and the other installed equipment as notified has risen to USD 771,443.81 or AUD 1,056,772.34 @ .73 to the USD.
We reiterate that under your policy, we have the option to “... pay for, repair, or pay for the repair of accidental loss of or damage to the Aircraft ...”, and it is clear that the aircraft is repairable based on the above-mentioned estimate.
Could you please instruct Aircraft Structures International Corporation to proceed with the repairs to the aircraft as per their estimate. We have enclosed a copy of the Authority to Repair for your signature. Could you please pass this on to Aircraft Structures International Corporation as soon as possible and send a signed copy to us for our files.
We take this opportunity to remind you that the work undertaken by the above company to repair and restore the aircraft to its former state being the subject of this claim is performed in accordance with the terms and conditions of the policy and our interest is limited to the cost of the accident repairs as quoted in accordance with your entitlement under the policy.
We are concerned that the assured may have to bear any additional cost due to further deterioration if the repair decision is delayed.
Should you have any enquiries on the repair of your aircraft please do not hesitate to contact me at this office at any time.”
Another form of “Authority to Repair” was enclosed with that letter.

On 23 March 2004, Mr Palham sent Mr Stacy a fax enclosing correspondence which had been received from Mr Williams. That letter from Mr Williams stated:
“Re : VH-CYC Repair
We are in receipt of the copy of the email from Phil Stacy of 11 March 2004, which states:
“We are concerned that the assured may have to bear any additional repair costs if we are prejudiced as a result of any further delays in this decision.”
We utterly refute that we are delaying the process. It should be noted that Mike Ellis requested that we compile a list of additional equipment fitted to VH-CYC and obtain pricing for these items – a process that we believe the underwriters should have performed. This has been a time consuming process, but nevertheless we supplied the requested information on 16 March 2004. To date we have received no response from the underwriter to this information.
We are concerned about the proposal to repair the aircraft for a number of reasons which are dealt with briefly below.
ASIC Repair Schedule
To date there has been no inspection from an Aircraft Structures International Corporation engineer or any direct contact with our company. It appears that the repair estimate has been based solely upon digital photographs and prior experience. The repair of tropical salt water damaged aircraft is highly controversial and we are not aware of any aircraft returned to service after an extended period of submersion in countries that come under the same level of regulatory surveillance as Australia. The ASIC repair schedule does not involve any significant disassembly and reassembly of the aircraft, or consider the replacement of corroded and damaged parts. In our opinion, the repair schedule is superficial, contains a significant number of engineering assumptions which are unsupported and does not provide for restoration of the aircraft to a condition equivalent to that prior to the ditching.
Given the differences in regulatory requirements between Australia and the USA has any consideration been given to the supervision of the repair by an Australian CAR35 certified engineer? Furthermore, has any documentation been provided for the on-going corrosion control assessment of other Cessna Caravans that have been repaired after tropical salt water immersion? What warranty is ASIC prepared to provide in support of the repair and what type of insurance coverage are they able to provide against a claim in the future?
To date, we have been unable to find a qualified engineer who believes that the repair would be satisfactory or would be prepared to work on or certify such a repaired aircraft as airworthy. Have Cessna USA or the FAA provided written approval of the proposed system of repair for an ASETPA Cessna Caravan? Cessna Pacific are deeply concerned about the possibility of this aircraft being put back into service and a representative will be inspecting the aircraft later this month. It is our opinion that CASA may not be prepared to reinstate the Certificate of Airworthiness following the repair.
Future Liability
We remain deeply concerned about the possibility of unlimited legal liability against all parties in the event of any future incident or accident. As a responsible aircraft operator, we are not prepared to expose our clients, staff, company or underwriters to a situation where it could reasonably be argued that we had negligently operated the aircraft. In any event, it appears that given the aircraft’s history we will be unable to get LAMEs to work on the aircraft, or pilots to fly it.
Commercial Considerations
From a commercial perspective, we don’t believe if the aircraft is repaired that we would be able to sell the aircraft for a fraction of its prior value. As you are aware VH-CYC was highly equipped for ASETPA RPT operations and was also one of only three Caravans built with a camera hatch and certified to 30,000 feet.
It is our opinion that even if a repair was feasible from an engineering point of view, that the cost of doing so would be uneconomic. The liability issues of operating such an aircraft are potentially unlimited. It is now six weeks since the aircraft was ditched, we do not believe that it is repairable to Australian standards, and the company requests settlement of this matter as soon as possible.”
In the meantime, Mr Stacy had sought to obtain confirmation from Cessna concerning the repair of an aircraft which had been subjected to salt water immersion. On

24 March 2004, Mr Stacy received a letter from Mr Steve Howard, Cessna’s manager of Field Service. This letter stated:
“Cessna’s Maintenance Manual (MM) and the Structural Repair Manual (SRM) do NOT cover the disassembly, repair and return to service after a salt-water immersion.
The MM and SRM provide maintenance, disassembly, repair, and return to service of components requiring inspection, replacement or repair.
Cessna has no data concerning the repair or long term effects that might be caused by salt-water immersion.
ASIC and Mr. Mickey Stowers is known to Cessna Aircraft for the rebuilding of model 208 Caravans. ASIC has been inspected by Cessna and ASIC does have the tooling necessary to do major repairs and rework to the Cessna model Caravan.”
On that same day, i.e. 24 March 2004, however, Mr Ellis wrote directly to

Mr Williams, saying that he had been requested by the defendant to provide

Mr Williams with “some general information and case examples concerning aircraft that have been repaired and returned to service following long term salt water immersion and as such have been the subject of an insurance claim”. The letter then summarised details of some other aircraft immersion incidents in which Mr Ellis or his colleagues had been involved. This letter concluded:
“In this instance ASIC have confirmed that the airframe/wing skins and panels would be opened up and all airframe corrosion would be removed (including that hidden corrosion that might have existed prior to the incident) and if it cannot be removed then the skin/rib/frame is replaced. This is in fact the case with the engine firewall because of its laminar construction. All electrical/avionics/instrument systems, wiring looms, motors, control cables, pulleys, hinges and hydraulics are either replaced or overhauled and returned to either new or zero time condition. The engine and propeller would be replaced with fully overhauled similar status units to that which existed. All work is carried under scrutiny of Cessna Aircraft Company and in accordance with their SRM.
ASIC has advised that they rely on their reputation, which has not been questioned either by the FAA or Cessna Aircraft Company over the years they have been undertaking rebuilds of this nature.”
Also on 24 March 2004, Mr Stacy sent a fax to Mr Williams which stated:
“Thank you for your letter of the 22^nd March 04 received via Heath Lambert Group. As noted in my letter posted/faxed to you Monday (my apologies for it being captioned under the date 26^th February 2004), we received your additional equipment list and forwarded this on to Aircraft Structures International Corp. (ASIC).
Mr Stowers of ASIC has replied to us with regard to your listing and the repair quote including freight both ways and the other installed equipment as notified is now USD 771,443.81 or AUD 1,056,772.34 @ a conservative A0.73 to the US$. This includes all ASETPA items and the ASETPA approval would remain valid.
We can assure you that we have gone into the acceptability of ASIC’s repair scheme thoroughly. We have spoken to the principle of ASIC on a number of occasions about the method of repair, the amount of disassembly such as the removal and replacement of the engine propeller, firewall, all general hardware, nuts, bolts, anchor nuts, bearings, pulleys, wiring loom, instruments, avionics, circuit breakers, etc the list goes on and on.
The aircraft would be test flown in the USA and in Australia before it’s return to service. The Australian Certificate of Airworthiness would be reissued under the watchful eye of CASA before returning the aircraft to service. This has been taken into account in the repair budget.
CASA accepts the FAA’s approval of ASIC’s FAA Repair Station approval and any certification issued by that Repair Station and the repair process under existing reciprocal ICAO Airworthiness procedures and Certification as it is being carried out in accordance with the Cessna Structural Repair Manual (SRM).
To ensure the credibility of the repair process we have contacted the following entities,
·ASIC themselves and quizzed them as to the repair process, past projects, how and where these projects became inundated and the airframe’s long-term corrosion control program.
·Cessna Product Support in Wichita KA USA. They said they will write to us about the acceptability of the ASIC repairs
·Other insurance companies who have used their services in the USA.
·Assessors in America who have been involved in these “wet” aircraft repairs.
·We asked a number of USA based aircraft suppliers and companies we deal with to independently check ASIC out for us.
·The Australian CASA airworthiness both on a state and federal level.
·A number of Australian Cessna Caravan operators who have dealings with ASIC
To date we have not received any negative response either with regards to the company’s capability to carry out the repair or the acceptability of these repairs to either the FAA USA, other Airworthiness Authorities in a number of foreign countries, or the Australian CASA Airworthiness both Head Office in Canberra or your local office in Townsville.
We might add that many other types of aircraft, from Cessna 180, 185 and 206 series to De Havilland Twin Otters have been returned to service after salt-water submersion and Airworthiness Authorities around the world accept these repairs when carried out in accordance with the manufacturers instructions and SRM. This will be the case for VH-CYC.
Cessna Product Support have assured us they accept the repair process as carried out by ASIC in accordance with the Cessna 208 SRM. There would be NO additional long-term inspections or operational penalties or airworthiness risk to the basic airframe of VH-CYC if the repair is carried out in accordance with the Maintenance & SRM. CASA have also indicated the same. We can assure you that it will be repair to the highest standard.
In accordance with the policy provisions we would, as is our obligation, return the aircraft to your organisation in the same or in this case a better condition as many of the parts (pullies, bearings circuit breakers and wiring loom etc) would be new rather than up to 18 years old.
The repair would not affect the aircraft’s high altitude photography or ASETPA capabilities with no issues affecting its basic airworthiness.”
On 25 March 2004, Mr Palham sent Mr Stacy a facsimile asking the following questions:
“1. Please can you advise how QBE came to the conclusion that the ASEPTA approval would remain valid as certain certification processes are involved.
2.    With regard to the Aircraft being certified for its airworthiness upon return to Australia can you please advise the cost of this certification process which you say has been taken into account in the repair budget.
3.    Please could you provide a copy of the Cessna Product Support letter with regard to the acceptability of the ASIC repairs.
4.    Can you please confirm what Warranty will be provided by Cessna or ASIC on the aircraft after repairs have been completed.
5.    Please can you advise when the Insured may expect to receive the Loss of Use payments as currently the Insured is without one aircraft and we are beyond the 14 days excess period.”
On 30 March 2004, Mr Palham sent Mr Stacy an email (copied to Mr Nash and

Mr Ellis) advising that he was going on leave for two weeks, and asking whether there was some direction in the matter.

On 31 March 2004, Mr Stacy responded to Mr Palham’s list of queries with an email to Mr Doug Williamson (who had stepped in to act as the plaintiff’s broker in the place of Mr Palham). In relation to questions 3 and 4 which had been posed by Mr Palham,

Mr Stacy’s email response said:
“Para 3 – We have the letter but are clarifying a point with Cessna and Mickey Stowers of ASIC
Para 4 – We are clarifying this with ASIC. As Cessna is not specifically involved with the actual restoration they would not be able to give a warranty”
On 30 March 2004, Mr Ellis sent an email to Mr Stowers inquiring as to whether

Mr Stowers had been able to contact Steve Charles at Cessna. Mr Stowers responded by email on 3 April 2004, saying that he had spoken with Mr Charles (who was in Peru) and “as we expected, he was reluctant to sign anything”. Mr Stowers said that Mr Charles did reiterate that an aircraft that had been submerged, if properly cleaned and preserved, could be returned to service, and said to Mr Ellis that he could call

Mr Charles for verification “but he won’t put it in writing”.

On 30 April 2004, Mr Stowers sent an email to Mr Ellis asking for an update on the status of the matter and saying if Mr Ellis was still negotiating with the owner he would continue to wait but if it had been decided to settle, he would forward his invoice. It would appear that Mr Ellis replied to this email on 7 June 2004, in which he said to Mr Stowers:
“Phil Stacy and I have been discussing the proposed repair with the client and his Insurance Broker and would now ask if you could obtain written confirmation from Cessna Product Support to the effect that the repairs can be done in accordance with the 208 SRM.
This will provide the client with some comfort should they decide to sell the aircraft at some point in the future following the repairs carried out by ASIC.
I look forward to your response and hopefully Cessna’s assistance.”

For his part, Mr Williams had arranged for the Aircraft to be inspected in April 2004 by Mr Chad Brown, international field service engineer of the Cessna Aircraft Company. In response to an email from Mr Williams asking Mr Brown to advise whether there was “an approved Cessna repair scheme for a Cessna Caravan which has been immersed in tropical salt water for an extended period of time”, Mr Brown responded on 12 May 2004:
“No unfortunately we do not have a repair scheme for immersion in salt water. As you can imagine, we never designed these aircraft for flying in salt water!”
Mr Williams forwarded this email exchange with Mr Brown to Mr Ellis on

15 June 2004.

On 20 May 2004, Mr Ellis sent an email to Mr Williamson, copied to Mr Stacy and

Mr Nash, saying:
“Phil is away from his office until next week. I appreciate this matter is urgent and therefore feel I should just make a few comments to clarify a few issues in Phil’s absence.
Cessna doesn’t and never has issued specific approval for any type of repair work, whether it be due to water immersion or airframe structural damage. They simply say that the repairs should be carried out in accordance with the Cessna Structural Repair Maintenance Manual, D5132-5-13 by an FAA approved facility. ASIC is an FAA approved facility and has assured us the repair would be carried out in accordance with the Cessna Manual.
Cessna does not have a specific repair scheme for water immersion because in effect water immersion alone does not cause structural damage. It is simply a drying out and inhibiting procedure. This does not mean that it cannot be done.
Although Cessna will not put anything in writing (for obvious liability reasons) their representatives have inspected the ASIC facility on many occasions. Cessna has demonstrated its approval of the ASIC facility by supplying them with all the assistance and parts they require to undertake work of this nature. The Cessna representative expressed this view to Phil during recent telephone conversations on the subject. If Cessna or more importantly the FAA did not approve then I am sure the ASIC operation would have closed down years ago.
In terms of the subject of Cessna warranty. Cessna never has and probably never will provide a warranty on work performed by another entity, whether it be a straight forward maintenance inspection or major structural repair work. In fact no manufacturer does, whether it be Cessna, Beechcraft, Airbus or Boeing. They will only give a warranty of work they actually perform themselves. It is the industry or the repair/maintenance organisation that provides the warranty.
If the aviation industry had to rely on first obtaining a manufacturer’s warranty or specific repair approval prior to undertaking repairs then the industry would come to a standstill. Certainly there would not be any structural repair work undertaken or indeed any insurance related repair work performed.
I have just finalised a claim in a De Havilland Beaver Floatplane that went turkey up and floated around for 4 days whilst being battered by wave action. The rebuild was performed in Canada by one of the most well known and respected Beaver repair shops in the Country. The Insurer was London based. The Owner is delighted with the finished product and reckons it flies and looks better than it ever did.
Doug, I hope this gives you a wider perspective on this issue, clearly it is a difficult case.
No doubt Phil will respond to you with his own views.”
This was an interim response to an email that Mr Williamson had sent to Mr Stacy (copied to Mr Ellis) on 20 May 2004 in which he referred to having sought advice from his London claims colleagues regarding the proposed repair of the Aircraft.

Mr Williamson raised, amongst other things, the following concerns:
“We note the quoted cost to repair and understand that you will have factored into the equation the associated costs of transportation, import/export taxes & duties, insured’s own labour/incidentals etc. Based on these & the possibility of added costs once the aircraft has been delivered to ASIC, will the threshold between repair & CTL be a factor.
We are also acutely aware of the insured’s concerns over the future airworthiness of the aircraft, particularly due to the corrosive nature of saltwater. This is highlighted by the fact that Cessna are not providing a warranty. Under the circumstances, we question what would happen if ASIC go bust and the aircraft suffers a subsequent failure, who does the client go to, certainly not Cessna.
The client has also been in contact with Cessna over the past weeks and they have verified in writing that Cessna do not have a repair scheme for salt water immersion. Cessna have also verified that such a repair scheme would likely cost in the vicinity of $1m to be approved.
Under the circumstances and based on the Estimated repair costs by ASIC plus the cost of a repair scheme by Cessna, this would simply mean the aircraft is not economical to repair. In our opinion, we believe the insured should not agree to the ASIC repair option unless Cessna approve such repairs.
We are sure you’ll understand that due to residual value implications for this aircraft, a repair without a Cessna approval would not constitute indemnity as the Insured will not be put back in the same position they enjoyed immediately prior to the loss. Indeed using a wide body aircraft anology, if Airbus review one of their aircraft and after technical inspections are not prepared to authorise a repair scheme then put simply that is it. Whilst this is a General Aviation aircraft, that should not make the manufacturers view any less relevant.”
Mr Nash also responded to Mr Williamson’s email on 21 May 2004, saying:
“Whilst we appreciate the insured’s concerns, we agree with what Michael has said in his response.
We remain confident that this aircraft can be repaired and returned to service as previously outlined. There is no chance that we will consider it to be a CTL.
I will discuss with Phil on Monday, and we will send you a more detailed response – which will be along the same lines as above.”
Mr Williamson sent a further email to Mr Nash (copied to Mr Stacy) on 24 May 2004 referring to his consultation with his UK colleagues. Mr Williamson said:
“My UK colleagues have again looked at the situation and have made the following comments:
From the correspondence it seems that Cessna feel that the aircraft is not repairable and we again note that Cessna has no repair scheme for such damage. If the manufacturer has no repair scheme how can an independent repair facility say it can do the job? Normally such independent repair facilities would look to the manufacturer for guidance on repair schemes generally albeit saltwater immersion.
The insurance policy is there to indemnify the insured in the event of a loss. Again, from the papers we have read, if Cessna refuse to provide a warranty for any repair clearly the insured has not been placed in the same position as he was before the loss.
We have spoken to 2 x independent loss surveyors who have heard of ASIC. Apparently ASIC is good at physical damage repairs but the immersion of the aircraft in salt water for an extended period is a completely different scenario. Both of the adjusters we spoke with expressed concern at repairing the aircraft in such circumstances.
I accept there have been delays & these have taken time, however we are attempting to argue the point for our client who as you know is adamant that the repair of the aircraft will not put him in the same position as prior to the loss. I also note your advices that the insured did not wish to take a cash settlement offer, however I am not aware of the details of your offer so cannot comment at this point. Would you therefore please provide an outline of this soonest..
Await your comments to the above.”
On 24 May 2004, Mr Nash sent Mr Williamson an email, saying that the insurer remained confident “that the aircraft can be repaired and returned to service within the amount quoted by ASIC”. Mr Nash expressed sympathy for the “difficult position” in which the insured found himself, but said “we are extremely concerned at the delays in settling this matter”. He referred to discussions he had had with Mr Williams about the possibility of a cash settlement in lieu of repair, and said:
“As this option was not taken up by the insured, we requested that they authorise repairs – this was over two months ago – refer Phil’s letter of 22nd March (dated 26th February 2004 in error).
Would you please advise ASAP your and the insured’s response to the points made in Mike Ellis’ email?
I sincerely hope we can reach an amicable solution to this claim in the very near future.”
Mr Nash responded with an email on 25 May 2004 in which he stated, amongst other things, that Cessna did not provide a warranty in relation to any repairs carried out – whether under a Cessna approved repair scheme or not, nor, to the insurer’s knowledge, did any other aircraft manufacturer. The email continued:
“Doug I understand you are trying to argue the point for your client – and that’s fair enough. However it seems the insured is trying everything to avoid having the aircraft repaired. It is clear to me that the insured is never going to be willing to have the aircraft repaired – by anyone. Even if he agreed to it being repaired, he would probably never be totally satisfied and comfortable that something would never go wrong in the future. Insurance is all about peace of mind. However this should not be at the expense of underwriters when a reasonable repair option is available.
Back on 19th February 2004 I spoke with the insured and offered the option of a cash in lieu of repair settlement. At that time I did not make a firm offer – was sounding out the option. I did also indicated that we would consider including the full Loss of Use amount in such a cash settlement. However at that time repairs were estimated at US$691,178, and the exchange rate was 0.7885. Now some three months later – the repairs are US$771,444 and the exchange rate has dropped to 0.6999. The increase in AU$ terms is around AU$120,000.
However, we would still be willing to consider offering a cash in lieu of repairs.”
Interestingly, the email from Mr Nash to Mr Williamson on 25 May 2004 started by questioning the opinion which had been provided by Mr Williamson’s UK colleagues. Mr Nash asserted:
“Indications to us from Cessna Product Support are that they accept the repair process to be carried out by ASIC in accordance with Cessna 208 SRM.”
The email also asserted that ASIC had a “solid reputation of completing similar repairs in the past – under the scrutiny of Cessna”.

Mr Nash’s assertions concerning Cessna led Mr Williamson to send him a further email (copied to Mr Stacy) on 3 June 2004, in which he said:
“Firstly the issue of Cessna’s position is the crux of our argument at this stage. On the one hand, we have written advice from them saying they do not have a repair scheme for this aircraft in respect of saltwater immersion. On the other, you are saying that you have “indications” from Cessna they will accept the repair process to be carried out by ASIC.
Our concern has always been that if Cessna do not provide a written confirmation they will accept the repairs to be carried out by ASIC either with or without a Cessna approved repair scheme, then the client is not being put in the position he was in before the incident.
You mention that Cessna have “indicated” they will accept the ASIC repairs, do you have this confirmed from them & if so, may we be provided with a copy?”
On 4 June 2004, Mr Stacy forwarded Mr Williamson’s email to Mr Ellis, with a covering email which said:
“Here is the latest from Doug Williams and CYA. Have you looked at the 208 SRM to comment on how specific it is when it comes to unusual repair such as this or say hail damage or lightning strikes or deterioration of the paint or is it as I imagine it is specific about bent metal rather than unusual happenings
Could you please consider this and ring us as we wish to reply asap.”
On 4 June 2004, Mr Nash responded to Mr Williamson’s email as follows:
“It is true that Cessna does not have a repair scheme specifically in respect of repairs following salt water immersion. Repair schemes are generic by nature, and generally relate to the repair of structural damage – hence “Structural Repair Manual”. In this case there is no structural damage to the aircraft.
The lack of a specific repair scheme for repair of aircraft immersed in salt water does not mean that these aircraft are not repairable. It simply indicates that the manufacturer is not as concerned about repairs of this nature as they are in relation to repairs effecting the structural soundness of the aircraft.
Take for example an aircraft maliciously damaged by pouring of acid over the paint work, or an aircraft caught in a hail storm. Cessna would not have a repair scheme specifically in relation to an aircraft requiring a total strip down and repaint or repair of hail damage. This does not mean the aircraft is not repairable, and it would not be necessary to obtain pre-approval from Cessna before commencing repairs.
As you and the insured would be aware, no manufacturer will pre-approve repairs. If it was necessary to seek pre-approval from the manufacturer prior to commencing repairs the repair industry would grind to a halt - and aircraft sales would sky rocket.
Cessna Product Support have verbally assured Phil Stacy that repairs carried out by ASIC in accordance with the Cessna 208 SRM would be acceptable. This is also evidenced by the fact that ASIC have repaired other salt water immersed Cessna aircraft, and these have been successfully returned to service.
We indicated to the insured in February 2004 that we would be willing to cash settle for the cost of repairs plus Loss of Use. I believe we are being very reasonable in offering this – considering our obligation under the policy is to “... repair, or pay for the repair of, accidental loss of or damage to the Aircraft ...”. However this claim has been ongoing for nearly four months now. We feel it may be necessary to reconsider our approach to this claim if it is not resolved in the near future.
I look forward to your urgent response.”
Mr Williamson responded to Mr Nash, advising that he had discussed the matter with Mr Williams and asked that the insurer obtain a written confirmation from Cessna Product Support “to the effect that the repairs can be done in accordance with the

208 SRM” and asked for a copy to be forwarded to the plaintiff for its records.

Mr Williamson said that this would provide the client with comfort and evidence of Cessna’s approval should they decide to sell the Aircraft at some point in the future after the repairs carried out by ASIC.

Mr Nash sent Mr Williamson an email in response on 7 June 2004, saying:
“We will see if we can obtain written confirmation from Cessna that it is in order for repairs to be undertaken in accordance with the Cessna 208 SRM.
However, as previously advised, for reasons of legal liability exposure we would not expect Cessna to pre-approve or in any way guarantee the repairs in advance, so I would not be expecting anything too comforting.
This in no way means that they would have any problems with the end result – as they have not on other occasions.
We will see what they can provide.”
This correspondence was forwarded to Mr Ellis who, on 7 June 2004, sent an email to Mr Stowers asking him to obtain written confirmation from Cessna Product Support to the effect that the repairs could be done in accordance with the 208 SRM.

Mr Stowers responded to Mr Ellis on 8 June 2004 in an email which said:
“Have spoken with Steve Charles, head of Cessna Propeller Product Support, and he has stated that nothing in the SRM specifically addresses water immersion repairs but at the same time he said nothing precludes them either. He did state that although the manual did not cover water immersion it did cover the repair of any corrosion that might develop.
Steve is going to check with his engineering department, which is out of pocket for the next few days, before he will put anything in writing.
At least now there is the possibility he will put something in writing.”
Mr Ellis forwarded that response from Mr Stowers to Mr Stacy who, in turn, passed it on to Mr Nash.

On 11 June 2004, Mr Ellis sent a follow-up email to Mr Stowers in which he said:
“I was wondering if you have heard from Steve Charles?
I have today been told by the aircraft Owner that they had a visit recently from Chad Brown of Cessna Support, Wichita. Apparently, Mr Brown inspected the aircraft and made the comment that is was not repairable and supposedly issued a letter to this effect. We are attempting to get a copy of this letter but in the meantime have you heard of Chad Brown.
I understand the wreck is deteriorating due to the passage of time. I have a report that the doors are all difficult to open because the hinge pins and the like are seizing up. Given the amount of time that has lapsed since you did your repair estimate do you think the repair cost would increase by much assuming you were to commence collection in say the next few weeks or by the end of June 2004.
Mickey, things are getting a little urgent here and I would be most grateful if you could do the follow up with Steve Charles or Chad Brown ASAP.”

Mr Ellis copied that email to Mr Stacy.

Mr Stowers responded to Mr Ellis on 12 June 2004 by email, saying:
“Attempted to call Steve Charles today but as yet he has not returned my call, will try again Monday.
Yes I’ve heard of Chad Brown, he is a lower echelon service rep. for Cessna. His area covers Australia and the ‘Far East’. All he really is is a liaison between the customer and the Cessna factory. He makes no decisions.
As I said in the beginning, time is of the essence. The longer it sits the more labour and more parts will have to be either repaired or replaced and the Cessna factory raises their prices every three months. The used engine price won’t have changed much but the total of the parts and labour was approximately $500,000.00 and the delay may have cost as much as 10%. Not being able to actually see the aircraft this is only a guess.”
In May 2004, Mr Chad Brown had provided Mr Williams with an email which said, amongst other things, that he could not provide Mr Williams with an opinion or recommendation on whether the Aircraft should be scrapped or saved. He suggested that an option to consider was having an independent inspector give an estimate on what could be repaired and what would need to be replaced, and such an inspection might provide Mr Williams and the insurer with an additional opinion as to how to proceed.

Mr Williams on-forwarded that correspondence from Mr Brown to Mr Ellis on

15 June 2004. Mr Ellis, in turn, forwarded it to Mr Stacy with an email of

16 June 2004, in which he said to Mr Stacy:
“I received the following message from Arthur Williams.
The comments made by Chad Brown are nothing like what I was told by Mr Williams or indeed by Arthur, as expected! In fact the comments are quite open and objective and in no way rule out a repair as being a feasible option.
As we already know, the Cessna SRM does not specifically cover water immersion repairs as Chad has pointed out.
Since I have not heard back from Mickey Stowers, I guess he is waiting for Steve Charles to submit his views in an email.”
On 22 June 2004, Mr Stacy sent Mr Williamson an email to keep him “up to date” with the claim. The email said:
“We spoke with Mike Ellis this morning and he said that he has spoken to Mickey Stowers of ASIC in the USA this morning and Mickey has been contracted by Steve Charles from Cessna 208 Product Support Wichita who is only just back from leave.
Steve Charles assured Mickey he would be sending a letter to Mickey “within the week” regarding Cessna’s attitude to the recovery of aircraft that have been wet with salt water.
We will continue to monitor this so a speedy resolution can be reached ASAP.”

As I have noted, the plaintiff has expressly submitted that there is no need for me to resolve these matters in view of the findings I have made with respect to the election issue. Counsel for the defendant submitted:
“50.It is the defendant’s submission that it is not necessary to determine whether the proposed repair process as set out in the ASIC repair estimate (part of Exhibit 16), the ASIC document of 19 February 2004 (Exhibit 74) and the evidence of Mr Stowers ... would have been successful in repairing the aircraft so that it could be returned to service. This is so for two reasons. If repair, per se, was not impossible, as discussed above, then the defendant insurer took the risk. It was obliged to repair. If it needed to have the repairer perform a different and more expensive operation then that is what it was obliged to do.
51.Secondly, as Mr Whitney said in evidence, the repair estimate was just that. It did not purport to be a fully detailed specification of the repair work. It could not be expected to be that because additional works might be required upon disassembly and inspection of the aircraft.”
To that submission I would only add that Mr Whitney’s oral evidence before me went further to say that until the Aircraft had been taken to America, stripped down and looked at, then it would have been impossible to say whether the Aircraft could have been repaired or not.[11]
[11]T 9-13.30-40.

It is, however, unnecessary for me in these circumstances to say anything further about the expert evidence.

Damages

Clearly enough, the plaintiff will be entitled to be awarded the sum of $1,800,000.

The plaintiff also has a claim for $7,367.88 for recovery expenses incurred by it in connection with the cleaning of the Aircraft done by the plaintiff at the defendant’s request. The plaintiff’s entitlement to recover this under the Policy was not seriously disputed.

The principal points of issue were claims by the plaintiff for loss of income and loss of use as a consequence of the Aircraft being taken out of service. These items were claimed by the plaintiff to be some $324,270 per annum.

Needless to say, the plaintiff bore the onus of proof in respect of these aspects of its claim. As the case unfolded, however, it became apparent that evidence originally given by Mr Williams on critical aspects of these claims was at least suspect, if not plain wrong, that the plaintiff had failed to make disclosure of documents (including parts of its own accounts) which were directly relevant to these claims, and that much of this documentation, when it was disclosed in the course of the trial, further undermined the credibility of the claims being made by Mr Williams on behalf of the plaintiff. Such were the inroads made into these components of the plaintiff’s claim that counsel for the plaintiff, doing their best to salvage the plaintiff’s position on these points, were driven effectively to abandon their arguments that the plaintiff had proved its case for recovery of damages for lost income and lost use and to submit that:

-it was “difficult for CYA to establish with mathematical precision what actual loss of profits were attributable to not having the Aircraft available”; and
-this was “really a ‘loss of opportunity’ to earn income case, and precise mathematical calculations are not possible or appropriate”.

The plaintiff’s pleaded case on these claims was as follows:
“50A. Further:
a)since about 1980 CYA (by its current name and by its previous names of Janlin Pty Ltd and Hevi Lift Pty Ltd) has traded as Cape York Air;
b)CYA, trading as Cape York Air, operated its aircraft (including the Aircraft) for reward throughout Cape York Peninsula providing, inter alia, the following services (“the air services”):-
i)the delivery of passengers, goods and mail pursuant to agreements with the Commonwealth of Australia (via the Department of Transport and Regional Services and its predecessors) and the Australian Postal Corporation (and its predecessors) during the period from about 1980 to 1 November 2004;
ii)the delivery of passengers, goods and mail by way of private charter during the period since about 1980;
iii)the delivery of passengers on behalf of the Queensland Government in respect of the Cairns Magistrates Court during the period since about 1992;
iv)search and rescue operations pursuant to agreements with the Commonwealth of Australia (via the Department of Transport – Australian Maritime Safety Authority and its predecessors) during the period since about 1994;
c)following the Ditching of the Aircraft, CYA did not have the financial resources to lease, hire or otherwise acquire a suitable alternative aircraft for use in CYA’s business to, inter alia, provide the air services;
d)by reason of the failure of QBE to accept the claim as an actual loss or a constructive total loss and to pay to CYA the insured sum in a timely way, and/or the failure of QBE to pay to CYA an amount in respect of the loss of use of the Aircraft in a timely way:-
i)CYA was unable to lease, hire or otherwise acquire a suitable alternative aircraft for use in CYA’s business to, inter alia, provide the air services;
ii)CYA was unable to continue to provide the air services;
iii)CYA was forced to sell its hangar, assets and remaining aircraft and discontinue its operation by about November 2006.
51.It was within the contemplation of the parties when the Policy was entered into, that:-
a)the funds received by way of indemnification for the loss of an aircraft (including the Aircraft) would be used by CYA to purchase, lease, hire or otherwise acquire a suitable alternative aircraft for use in CYA’s business to, inter alia, provide the air services to derive income;
b)the funds received by way of loss of use in respect of the loss of an aircraft (including the Aircraft) would be used by CYA to lease, hire or otherwise acquire a suitable alternative aircraft for use in CYA’s business to, inter alia, provide the air services to derive income;
c)the failure to pay to CYA the funds referred to in (a) or (b) was likely to cause CYA such financial hardship that (as was the case) it would have to sell its hangar, assets and remaining aircraft and discontinue its operation.
51A.At all material times prior to the Ditching, QBE was aware or ought to have been aware of the matters referred to in paragraphs 50A(a), 50A(b), and 51(a) to 51(c) herein.
PARTICULARS
(1)From about 1980 to about 2001 the aircraft operated by CYA were insured with Australian Aviation Underwriting Pool (“AAUP”).
(2)In about 2001 QBE took over (or otherwise acquired) the business and business records of AAUP including the business and business records relating to the insurance of the aircraft operated by CYA.
(3)From about 2001 the aircraft operated by CYA (including the Aircraft) have been insured by QBE.
(4)From about 2001 QBE frequently visited and inspected CYA’s facilities and the aircraft operated by it.
(5)From about 2001 QBE has been familiar with CYA’s business (including its provision of the air services) for the period since about 1980.
(6)In or about September 2003 CYA (through its then broker, Toby Palham of Heath Lambert) negotiated with QBE so that the Policy would include cover for loss of use of certain aircraft (including the Aircraft) operated by CYA.
52.By reason of the failure of QBE to accept the claim as an actual loss or a constructive total loss and to pay to CYA the insured sum in a timely way:-
a)CYA has been deprived of the opportunity to purchase, lease, hire or otherwise acquire a suitable alternative aircraft for use in CYA’s business to, inter alia, provide the air services to derive income;
b)CYA was unable to continue to provide the air services;
c)CYA was forced to sell its hangar, assets and remaining aircraft and discontinue its operation by about November 2006;
d)CYA has lost income and continues to lose income, of at least $324,270.00 per annum.
PARTICULARS
(i)in respect of the air services referred to in paragraph 50A(b)(i) herein:-
Gross receipts  $1,000 per hour
Costs$750 per hour
Nett income  $250 per hour
x annual hours of use                700 hours x $250 per hour - $175,000.00
(ii)in respect of the air services referred to in paragraphs 50A(b)(ii) to (iv) herein:-
Gross receipts  $1,340 per hour
Costs$750 per hour
Nett income  $590 per hour
x annual hours of use                253 hours x $250 per hour - $149,270.00
iii)total of (i) and (ii) =     $324,270.00 per annum.
52A.Further and in the alternative to paragraph 52 herein, by reason of the failure of QBE to pay to CYA an amount in respect of the loss of use of the Aircraft in a timely way:-
a)CYA has been deprived of the opportunity to lease, hire or otherwise acquire a suitable alternative aircraft for use in CYA’s business to, inter alia, provide the air services to derive income;
b)CYA was unable to continue to provide the air services;
c)CYA was forced to sell its hangar, assets and remaining aircraft and discontinue its operation by about November 2006;
d)CYA has lost income and continues to lose income, of at least $324,270.00 per annum.
PARTICULARS
CYA relies upon the particulars to paragraph 52 herein.
52B.Further and in the alternative to paragraph 52A herein, if (which is denied) CYA is not entitled to indemnity under Section 1 of the Policy arising from a total or a constructive total loss of the Aircraft, then it is entitled to payment from QBE of an amount of $135,000.00 in respect of the loss of use of the Aircraft.
PARTICULARS
90 days x $1,500.00 per day - $135,000.00”
The starting point for the plaintiff in respect of these claims was the assertion by

Mr Williams in evidence of the very great importance of this Aircraft to the plaintiff’s business. In evidence in chief he said:
“... It is fair to say that Cape York Airlines was fairly and squarely built around the Cessna Caravan because of its capabilities for servicing the region. The Aircraft generated approximately 50% of the company’s revenue so it was a major revenue stream. It was pivotal and central towards us holding and continuing, I guess, to hold the mail service contract through the region. The mail service being one that typically involved a mixture of mail obviously, passengers and cargo, and so we needed to cope with quite significant demands on that. Very often not weight based but cubic based so you needed a large aircraft in that respect.”
It will be seen from the extract from the statement of claim I have set out above that the following elements were central to the claims for lost income and loss of use of the Aircraft:

(a)After the ditching, the plaintiff could not, and did not have the financial capacity to, lease, hire or otherwise acquire an alternative aircraft to provide the “air services” to derive income;
(b)The “air services” which the plaintiff was restricted or prevented from engaging in, and thereby earning income from, were:
(i)delivery of passengers, goods and mail pursuant to agreements with the Commonwealth of Australia and Australia Post.

(ii)the delivery of passengers, goods and mail by way of private charter;

(iii)the delivery of passengers on behalf of the Queensland Government in respect of the Cairns Magistrates Court;

(iv)search and rescue operations pursuant to agreements with the Commonwealth of Australia.

(c)By reason of the defendant’s failure to accept the claim, the plaintiff was “forced to sell its hangar, assets and remaining aircraft and discontinue its operation by about November 2006”.

As Mr Williams’ evidence unfolded, however, and as further documents were produced, the basis for these underlying assumptions fell away or were completely removed.

In respect of the contention that the plaintiff was deprived of an opportunity to “lease, hire or otherwise acquire a suitable alternative aircraft” for use in its business, it is sufficient to find that the plaintiff did not lead any evidence whatsoever to establish that such an alternative aircraft was, in fact, available to it at the time.

Before turning to examine the “air services”, it is necessary to record some further evidence which emerged during the course of Mr Williams’ cross-examination.

It will be recalled that one of the particular characteristics of this Aircraft was that it held ASEPTA approval from CASA. On 20 June 2003, the plaintiff requested an extension of the ASEPTA approval from CASA, but CASA only granted an extension of the existing approval until 26 December 2003. The Aircraft did not hold ASEPTA approval at the time of the ditching. This meant that it could not be used for regular public transport. In his evidence, Mr Williams sought to explain that the lack of a further renewal of the ASEPTA approval after 26 December 2003 was to do with a lack of resources issue within the CASA office, and sought to give me the impression that this issue was really an administrative delay caused within CASA’s office and by reason of the intervention of the Christmas holiday period.

There was, however, clearly far more to this issue than Mr Williams was prepared to volunteer. In fact what had happened was that in March 2003, CASA gave the plaintiff notice that the plaintiff’s Air Operator’s Certificate (“AOC”) was varied so as to expire in December 2003, and this notice identified conditions which had to be fulfilled in order for the plaintiff to maintain its AOC after December 2003. The plaintiff’s AOC was endorsed to enable it to engage in Regular Public Transport (RPT”), i.e. carry fare-paying passengers. Subsequent correspondence was engaged in between the plaintiff and CASA and in October 2003 CASA conducted an audit of the plaintiff’s operations. CASA issued an audit report indicating, in brief, that it was not satisfied that the plaintiff was complying with the conditions imposed.

On 19 December 2003, CASA wrote to Mr Williams giving him “notice of proposed action to vary, suspend or cancel” the plaintiff’s AOC. The notice was said to flow from, inter alia, audits undertaken by CASA staff on 19 November 2001, 28 March 2002 and 18 October 2002 in relation to the company’s records which raised “serious concerns about the safety of the company’s operation due to non-compliance found on a regular basis” in relation to a number of specified matters. The notice referred to a “show cause” notice which had been issued to the plaintiff in November 2002, which was responded to by the plaintiff on 19 December 2002. It referred to a “show cause conference” which had been held between CASA and Mr Williams on

30 January 2003, in the course of which Mr Williams provided CASA with certain further information. After that conference, CASA issued a notice dated 26 March 2003 by which it varied the plaintiff’s AOC such that it would lapse on 26 December 2003 and specified that “subsequent issue of the AOC at the end of this period depends upon [the plaintiff] being able to satisfy CASA that ... it has met undertakings made by Arthur Williams to CASA” at the show cause conference. CASA’s notice of

19 December 2003 referred to an audit conducted by CASA on 14 May 2003, and a further spot check audit in September 2003, which resulted in CASA issuing a “request for corrective action”. It referred to Mr Williams’ challenge to the request for corrective action and to subsequent correspondence and attendance by CASA for the October audit. The notice of 19 December 2003 referred to the conditions contained in the notice of 26 March 2003, and stated:
“52.Whilst some progress has been made to meet those conditions, on the basis of the facts and circumstances set out above the company has not satisfied CASA that:
(i)it’s Training and Checking organisation under CAR 1988 217 is operating efficiently in a compliant manner;
(ii)that it has implemented the safety management system;
(iii)it’s control of maintenance is at an acceptable level.”

This notice gave the plaintiff 28 days to provide CASA with reasons why the AOC should not be varied, suspended or cancelled, and invited Mr Williams to participate in an optional “show cause conference” in relation to the notice.

On 6 January 2004, Mr Williams wrote to the chief executive of CASA, requesting that CASA withdraw the notice dated 19 December 2003 and that CASA “immediately

re-issue the Air Operator’s Certificate for a normal three year period of validity, and re-issue the chief pilot approval issued to Arthur Williams to remain valid whilst he remains employed by Cape York Airlines”. The letter then referred to difficulties which the plaintiff alleged it had experienced with CASA’s North Queensland area office and set out some lengthy responses to the various issues that had been raised in the CASA notice of 19 December 2003.

In any event, as Mr Williams conceded under cross-examination, from

26 December 2003 until the time of the ditching, the Aircraft did not have ASEPTA approval, and could not during that period be used for regular public transport. At best, according to Mr Williams, it could be used for some charter purposes.

Mr Williams accepted in evidence that, as the ASEPTA approval of the Aircraft had expired in December 2003, it could not be used for regular public transport services thereafter.

In relation to the plaintiff’s AOC, further temporary extensions of the AOC were granted during 2004 while negotiations were initially conducted between the plaintiff and CASA and then, after negotiations were unsuccessful, when the plaintiff instituted review proceedings in the Administrative Appeals Tribunal. That proceeding was resolved in late 2004 on the basis of a settlement between the plaintiff and CASA which saw the plaintiff continuing to hold an AOC which did not permit regular public transport.

Returning to deal with the “air services”, the first of these were services provided by the plaintiff pursuant to a contract with the Commonwealth of Australia (Department of Transport and Regional Services) under the auspices of the Remote Air Service Subsidy (RASS). This subsidy scheme enabled air operators to provide air services to remote areas of Australia. One of the specific terms of the RASS scheme was that a relevant air operator was required to meet the relevant CASA regulations for air passenger transport services.

As I have already noted, the Aircraft lost its ASEPTA rating in December 2003.

That had nothing to do with the ditching incident. The Aircraft was not, at the time of the ditching, lawfully able to be used for the purposes of the RASS scheme. The plaintiff’s books, however, clearly demonstrate that the plaintiff continued to provide services, and derive income, under the RASS scheme, utilising its other aircraft. There is no evidence that the plaintiff lost any income under the RASS scheme during 2004 by reason of the non-availability of the Aircraft. Mr Williams had originally estimated in his evidence that the Aircraft was responsible for 50 per cent of the income earned under the RASS scheme. A detailed review of the plaintiff’s own documentation relating to the Aircraft and the plaintiff’s other aircraft used to service the RASS scheme demonstrated, however, that, historically, this Aircraft had contributed nothing like that level of service to or derived that proportion of income under the RASS scheme. Indeed, when challenged on this in cross-examination, Mr Williams conceded that it was correct that it was “abundantly clear” from the plaintiff’s own RASS returns (documents which the plaintiff was required to complete and submit to the relevant department under the RASS scheme) that in the 2003 year the Aircraft had contributed “nothing like 50% of the flying time”. He sought to explain that, however, by referring to charter work which the Aircraft was undertaking for the judiciary and other scientific survey work. That, however, was a shallow explanation, when one considers the repeated assertion by Mr Williams that this Aircraft had, in effect, made up half of the RASS income stream.

In 2004, the plaintiff tendered to the relevant department for a renewal of its contract under the RASS scheme. On about 18 November 2004, the department gave formal notification to the plaintiff that its tender had been unsuccessful. It is plain enough from the evidence that the reason why the tender was unsuccessful had nothing to do with whether or not the plaintiff had the Aircraft available to be used in servicing the RASS contract, but rather because, at the time it made the tender, the plaintiff’s AOC allowing it to engage in regular public transport was due to expire on

31 December 2004. As I have already said, the settlement negotiated with CASA which enabled the plaintiff to have an ongoing AOC was conditioned such that the plaintiff did not thereafter have an AOC which permitted regular public transport.

Mr Williams had said in his evidence in chief that, because of the absence of the Aircraft from his fleet, the tender which the plaintiff put in for the new RASS contract was a non-conforming tender, and this was the reason for its rejection. This tender document was one of the documents which the plaintiff had not disclosed. When it was disclosed in the course of the trial, and when Mr Williams was challenged on it in cross-examination, it became apparent that the document was, on its face, a conforming tender, and Mr Williams conceded that his suggestion that the contract had been lost because of a “non-conforming tender” was speculation.

As to the “delivery of passengers on behalf of the Queensland Government” it emerged that the Department of Justice had, in fact, discontinued using the plaintiff’s services prior to 11 November 2004, and that this cessation came about because the department became aware that CASA had issued the plaintiff with a notice cancelling its AOC permitting regular public transport. Mr Williams also confirmed that the plaintiff’s services to the department resumed some time after November 2004, because he had satisfied the department that the CASA action was over. Moreover, the plaintiff continued providing services to the Department of Justice until 2006 when, as

Mr Williams said, there was a “change in the requirement by the department”.

In short, to the extent that there was an interruption in the plaintiff’s revenue stream from the Queensland Government after the ditching of the Aircraft, that was completely unrelated to the Aircraft and was caused by the regulatory difficulties the plaintiff was having with CASA.

In respect of the search and rescue operations, it is sufficient to note that, when cross-examined on this contractual stream of income, Mr Williams conceded that the Aircraft was listed as only the fourth possible supplementary aircraft to be used for search and rescue, and that it was very rarely used for that purpose. He also conceded that on

1 December 2004, the plaintiff submitted a tender for a proposed new search and rescue contract, that the plaintiff was unsuccessful in that tender, and that the lack of success in that tender had nothing to do with the absence of the Aircraft.

The matters to which I have referred are, of themselves, sufficient to justify me finding that the plaintiff has failed to prove that any loss of income which it may have suffered was caused by it being deprived of the use of the Aircraft for the provision of the specified air services. For completeness, however, I should also say that the evidence adduced from Mr Williams, and particularly the evidence which came from him under cross-examination, casts serious doubt on the veracity of the estimates he had made concerning the financial returns received from the Aircraft and the costs attributable to the Aircraft. There was, for example, considerable divergence between the figures initially presented to me in respect of income and expenditure in the course of his evidence in chief and those disclosed in the company’s own general ledgers, which were put to him in cross-examination. By way of further example on this aspect,

Mr Williams asserted in the course of his evidence in chief, in effect, that the plaintiff’s records (which he had not disclosed at that stage) did not permit a precise allocation of expenses to this particular aircraft, and this justified him adopting a broad brush apportionment of the expenses incurred by the plaintiff across its fleet of aircraft according to what Mr Williams contended was the rate of usage of this particular aircraft. An examination of the plaintiff’s ledgers and books, particularly the RASS returns, identified that it was indeed quite possible for the repair and maintenance costs attributable to different aircraft within the fleet to be identified, but this exercise had not been undertaken by Mr Williams.

In short, the state of the plaintiff’s evidence is such that I am not satisfied that, even if it had established an entitlement to be remunerated for lost income or loss of use of the Aircraft in respect of the identified air services, it has proved any proper basis to quantify, or make any proper estimate of that lost income or the damages flowing from the loss of use.

Similarly, it emerged in the course of Mr Williams’ evidence that the sale by the plaintiff of its assets in November 2006 had nothing to do with the loss of the Aircraft. Rather, the situation was that the plaintiff owed a significant debt under the contract of sale by which the plaintiff itself had acquired the Cape York Airlines business. The shares in the plaintiff are owned by Paragon Pacific Pty Ltd, a company of which

Mr Williams is the sole shareholder. Under the contract to sell those shares, the plaintiff agreed to pay certain monies to the vendor. An issue arose between the plaintiff and the vendor as to the quantum required to be paid by the plaintiff to the vendor under that contract. That dispute resulted in litigation which was settled on terms which included that the assets of the plaintiff be sold and a certain sum then be paid to the vendor. The circumstances of the sale were summarised in the following passage of cross-examination of Mr Williams:
“Well, were you operating at loss prior to the sale in 2006? – Yes. We would have been operating at a – at a loss.
And you also faced this situation, did you not, that under the contract by which the shares in Cape York Airlines were acquired, a payment was due to the vendor? – Yes, we disputed that payment.
Yes. But you ended up settling on the basis that the payment of $350,000 would be made to the vendor out of the proceeds of sale; is that right? – Yes.
Right. Your view was always, was it not, that you had a substantial liability to the vendor of the shares, although perhaps not the full liability the contract called for? – Yes.
And you had no means of paying that substantial liability except by the sale of the assets of the company, correct? – Yes.
So that the sale was driven by the need to pay that debt, correct? – Yes, that debt and the – the debt from the Commonwealth Bank was important.”
Accordingly, I find that the plaintiff has failed to prove the claims for damages articulated in paragraphs 52 and 52A of its pleading.

The plaintiff does, however, have a contractual entitlement under the Policy to the payment of $1,500 per day for 90 days. There is, so far as I can see, no proper defence to the plaintiff receiving that to which it is contractually entitled, being a total of $135,000.

In summary, then, the plaintiff is entitled to recover the following:

-       Agreed value of Aircraft  $1,800,000.00
-       Recovery expenses  $7,367.88
-       Loss of income (as per Policy)  $135,000.00
  $1,942,367.88

I will allow interest on that sum from 30 April 2004. It seems to me that that represents an appropriately reasonable allowance of time within which the defendant insurer ought to have paid on the claim after having been notified of the incident and the claim being made. Allowing interest at the rate of 10 per cent for six years and four months on the damages yields $1,229,519.

Conclusion

There will be judgment for the plaintiff in the sum of $1,942,367.88 plus interest to the date of judgment of $1,229,519, being a total judgment of $3,171,886.88.

I will hear the parties as to costs.

[2010] QSC 313

27 August 2010

Key Legal Topics

Areas of Law

Insurance Law

Legal Concepts

Insurance Contract

Breach of Contract

Compensatory Damages

CITATION:	Cape York Airlines Pty Ltd v QBE Insurance (Australia) Ltd [2010] QSC 313
PARTIES:	CAPE YORK AIRLINES PTY LTD ACN 000 627 010 (plaintiff) v QBE INSURANCE (AUSTRALIA) LIMITED ACN 003 191 035 (defendant)
FILE NO/S:	BS 1762 of 2005
DIVISION:	Trial Division
PROCEEDING:	Trial
ORIGINATING COURT:	Supreme Court of Queensland
DELIVERED ON:	27 August 2010
DELIVERED AT:	Brisbane
HEARING DATE:	16 November 2009 – 20 November 2009; 20 January 2010 – 22 January 2010
JUDGE:	Daubney J
ORDER:	There will be judgment for the plaintiff in the sum of $1,942,367.88 plus interest to the date of judgment of $1,229,519, being a total judgment of $3,171,886.88. I will hear the parties as to costs.
CATCHWORDS:	INSURANCE – THE POLICY – PRINCIPLES OF CONSTRUCTION – ELECTION – where the plaintiff had a policy of insurance in respect of an aircraft with the defendant insurer – where the policy allows for the insurer to elect to pay for, repair, or pay for the repair of, accidental loss of or damage to the aircraft – where the plaintiff made a claim following the ditching of the aircraft –where the plaintiff was not convinced that a repair would return the aircraft to the condition it was prior to the ditching and sought that the defendant pay the amount insured under the policy – where the defendant obtained a quote described as a ‘repair guestimate’ for repairing the aircraft – where the defendant wrote to the plaintiff requesting that they sign an ‘authority to repair’ the aircraft in accordance with this quote and attempting to limit their liability to the amount specified in the quote – whether this was an option available to the insurer under the policy – whether this amounted to an election of an option available to the insurer under the policy Civil Aviation Act 1988 (Cth) Civil Aviation Regulations 1988 (Cth) Champtaloup v Thomas [1976] 2 NSWLR 264, cited Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) (1993) 182 CLR 26; (1993) 67 ALJR 537, cited Freshmark v Mercantile Mutual Insurance (Australia) [1994] 2 Qd R 309, cited Lake v Hartford Fire Insurance Co Ltd [1966] WAR 161, cited Sargent v ASL Developments Ltd (1974) 131 CLR 634, applied Surfers Paradise Investments Pty Ltd (in liq) v Davoren Nominees Pty Ltd [2004] 1 Qd R 567, cited
COUNSEL:	DR Cooper SC, with C Francis for the plaintiff SSW Couper QC for the defendant
SOLICITORS:	Kilmurray Solicitors for the plaintiff Cooper Grace Ward for the defendant