Insurance Australia Limited v Meridian Travel (Vic) Pty Ltd; Taphouse Townsville Pty Ltd v Insurance Australia Limited; LCA Marrickville Pty Limited v Swiss Re International Se

[2022] HCATrans 172

[2022] HCATrans 172

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S36 of 2022

B e t w e e n -

INSURANCE AUSTRALIA LIMITED (ABN 11 000 016 722)

Applicant

and

MERIDIAN TRAVEL (VIC) PTY LTD (ACN 111 480 883)

Respondent

Office of the Registry
  Sydney  No S37 of 2022

B e t w e e n -

THE TAPHOUSE TOWNSVILLE PTY LTD (ACN 603 252 482)

Applicant

and

INSURANCE AUSTRALIA LIMITED (ACN 000 016 722)

Respondent

Office of the Registry
  Sydney  No S38 of 2022

B e t w e e n -

LCA MARRICKVILLE PTY LIMITED (ACN 601 220 080)

Applicant

and

SWISS RE INTERNATIONAL SE

Respondent

Applications for special leave to appeal

GAGELER J
EDELMAN J
GLEESON J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA AND BY VIDEO CONNECTION

ON FRIDAY, 14 OCTOBER 2022, AT 11.36 AM

Copyright in the High Court of Australia

GAGELER J:   In accordance with the protocol for remote hearings, I will announce the appearances of the parties.

MR P.D. HERZFELD, SC appears with MR J. ENTWISLE for the applicant in S36/2022 and for the respondent in S37/2022.  (instructed by Allens)

MR J.C. SHEAHAN, KC appears with MR A.M. POMERENKE, KC and MS N.A. WOOTTON for the respondent in S36/2022 and for the applicants in S37/2022 and S38/2022.  (instructed by Clayton Utz)

MR D.L. WILLIAMS, SC appears with MR R.D. GLOVER and MR N.D. RIORDAN for the respondent in S38/2022.  (instructed by DLA Piper)

GAGELER J:   We propose to hear from all parties in all three matters and then retire to consider the course we will take  The parties have helpfully agreed on an order of address, which means we will hear from you first, Mr Sheahan, in the Taphouse matter and also, concurrently, in the Marrickville matter, as I understand it.

MR SHEAHAN:   Thank you, your Honours.  When we get to the Meridian matter, Mr Pomerenke will be doing the submissions on our side.  In relation to LCA, as we call it, and Taphouse, we make two points at the outset.

The first is that all the questions we are about to discuss are questions of the interpretation of policies of insurance.  But even where they do not involve questions of general importance, they are questions of wide significance.  These are, as your Honours appreciate, test cases, and they have been selected in conjunction with the Australian Financial Complaints Authority because their resolution has wide-ranging significance.

The second point is that there is at least one important question of general significance raised by the cases.  In our written submissions we identified two.  That is, a question concerning from whose perspective instruments of this kind . . . . . are to be interpreted, from the perspective of the parties, as the Full Court would have it, or the perspective of the insured, as the Court of Appeal of New South Wales would have it.

And secondly, in what circumstance considerations of coherence should trump the ordinary meaning of the terms of the policy.  On reflection, the better view may be that insofar as the Full Court erred in relation to matters engaging the second topic, that was a symptom of its error on the first.  And so, it is on that we will focus, and I will turn immediately to it.

That this is a significant question of principle can hardly be doubted in our respectful submission.  The Full Court was confronted by a considered judgment of two members of the New South Wales Court of Appeal in the first COVID test case.  As authority for the proposition, it appears in the decision of the Full Court at page 512 in paragraph 79, namely where a:

written contract evidences the terms in which a financial product or service is offered for acquisition, the meaning of its language is to be construed from the perspective of a reasonable person in the position of the offeree –

In this case, the prospective insured.  Now, the court referred to a decision of this Court in Australian Casualty Co v Federico as authority for that proposition.  Its applicability here was confirmed by the findings of the primary judge at paragraphs 35 and 36 on page 31, that the insurers were the profferers and that there was:

no basis upon which it could be concluded that any policy exhibits an “evident degree of negotiation” –

between the parties.  Now, nevertheless, the Full Court rejected the proposition that was enunciated by Justices Meagher and Ball in Wonkana.  Their discussion of that topic is at pages 509 to 513 of the record, paragraphs 71 to 82.

GAGELER J:   Mr Sheahan, are you suggesting that the contra proferentem principle would produce a different outcome on the construction of this contract, or these contracts?

MR SHEAHAN:   The contra proferentem proposition has its own subtleties and nuances associated with the extent of the ambiguity necessary to give rise to it, whether it is a last resort or not.  The proposition for which we contend is one that starts – one that guides the interpretive process from the outset, as opposed to it being a last resort mechanism at the end if there is still ambiguity arising.

The proposition that we have, is, in essence – I exaggerate slightly – a contract of adhesion in respect of a financial product issued to a section of the public, then the ordinary principle that it is to be interpreted by reference to what reasonable parties to it would understand operates so that it is to be interpreted by reference to the perspective of the recipient, the offeree; because both parties would understand that in circumstances where it is issued without negotiation to a member of a section of the public that it is that person’s perspective that is important in interpreting ‑ ‑ ‑

GLEESON J:   Mr Sheahan, does that perspective mean anything more than what is discerned from the circumstances known to that party?

MR SHEAHAN:   It does something more than that, we think, in our respectful submission, your Honour – but it at least does that.  It would at least do that.

GAGELER J:   But, Mr Sheahan, it is quite a subtle point.  But what I really need to know – no doubt you will get to it – is how it makes any difference to the construction of these provisions.

MR SHEAHAN:   I will get to that almost immediately.  I should say something very briefly about whether the Full Court was wrong in the position it took about this.  There are really four problems with the way the Full Court approached it in rejecting the Court of Appeal’s analysis.  The first was that they misunderstood what had been decided by this Court in Federico – I will not go into that in any detail.

The second was that they did not advert to the support for the proposition that the Court of Appeal relied on in the decision of this Court in Pacific Carriers v BNP Paribas, which is quoted in our submissions in the LCA matter at paragraph 22 on page 841, which is to the same effect, that the letters of indemnity were to be construed according to what a reasonable person in the position of the recipient would have understood them to mean.

The third thing is that the Full Court did not advert to the support for this proposition found in the judgment of the majority of the Supreme Court of the United Kingdom in FCA v Arch, which is quoted in our submissions and LCA at paragraph 26 on page 842 of the record.

And finally, they failed to appreciate the point which we were just making.  The real burden of this proposition is that it is not an exception to the general rule that one interprets the contract by reference to, from the perspective of what the language ought to be understood to mean by the parties.  It is just a specific case of it.  And the specific case of it directs attention to the perspective of one party; the offeree.  Now ‑ ‑ ‑

EDELMAN J:   Mr Sheahan, this may all be very interesting, but it is extremely abstract.  Because, at one level, you could say that if one looks at it from the perspective of a reasonable person in the position of the offeree, that reasonable person is going to consider what is likely that a reasonable person in the position of the offeror would have intended.

MR SHEAHAN:   That is possible, your Honour.  That is possible.  But, in our respectful submission, let me try and ‑ ‑ ‑

EDELMAN J:   It is not merely possible:  it is the only way.  It is the way we understand language, is – when one reasonable person is understanding meaning, that they do so by reference to what they think was reasonably intended.

MR SHEAHAN:   Let me try and make it concrete, your Honour.  If you take the perspective of the insured, in relation to the bits of these policies that we are concerned with:  extensions of cover.  There is the ordinary cover and then there is plus this, plus that, plus another thing.  The correct position from the perspective of the insured, in our respectful submission, is to say, well, I read those in accordance with their terms, and I extract from them their ordinary meaning.

The second thing I do is that I treat grants of distinct cover as distinct grants of cover – in accordance with their ordinary meaning – because it is likely that I have been asked to pay for them, the costs of these grants of cover will be part of my premium.  The third thing is, yes, I will read this instrument as a whole.  And where I see distinct grants of cover – in their plain terms, qualifying, are they grants of cover? – yes, I will understand that that language has to be given effect.

What I do not do, in our respectful submission, is what the Full Court said needed to be done in the passages at paragraphs 57 to 58 of their reasons, page 505.  The analysis that they call for is unashamedly a lawyerly one, starting at about point three on the page.  It has to be an:

“iterative process”, involving “checking each of the rival meanings against the other provisions of the document and investigating its commercial consequences”, “enables a court to assess whether either party’s preferred legal meaning gives rise to a result that is more or less internally consistent and avoids commercial absurdity” . . .

In the interpretative process ‑ ‑ ‑

GAGELER J:   Mr Sheahan, what is it that you are assuming about the characteristics of the insured?  When you make that submission, is the insured taken to be somehow less sophisticated than the insurer?

MR SHEAHAN:   The insured is, yes.

GAGELER J:   Less able to read documents?

MR SHEAHAN:   The insured is able to . . . . . But the insured approaches the product – and this is a product issued – approaches the product as something that is intended to be able to be readily understood by the insured without going through iterative processes and, as their Honours put it, “a substantive intellectual process” of evaluation.  The insured is entitled to approach these instruments on the footing that they are readily comprehensible and where they say we are giving you this, with one hand, they are not taking it away by implication with another – an implication that you can discern by thinking through the implications of a particular reading of one as opposed to a particular reading of another – plain words, differently.

But the insured ought not be put in a position of “substantiative intellectual” iterative exercise that the Full Court requires and that any lawyer in any court will adopt when dealing with a negotiated agreement. 

EDELMAN J:   Well, it may be, Mr Sheahan, that all the joint judgment is doing is spelling out an intellectual process that may consciously or subconsciously be going on in the process of simply reading the contract as a whole.  It certainly would assist me if you took us to how it is that you say the provision would be differently interpreted.

MR SHEAHAN:   Perhaps I will do that now, your Honour.  If we can go, and in doing so can I make this point, the Taphouse policy – the relevant clauses are at page 656 – perhaps I will come back to this.

In the case of the LCA policy, in our submission, the implications of the Federal Court’s perspective can be seen in its treatment of the catastrophe clause.  Now, that is at pages 574 to 575.  That is the extensions.  The catastrophe clause is 9.1.2.5 at about point five on the page of 575.  The hybrid clause which governed diseases is at the top of that page.

Now, on one construction of the catastrophe clause, it would apply where there was a catastrophic pandemic and all of the trial judge, the Full Court, and Chief Justice Allsop in the Star Case agreed that its ordinary meaning was apt to encompass a catastrophic pandemic.  But, in the next paragraph – and the Full Court does that at 324 on page 591 – in the next paragraph of their reasons, the Full Court held that adopting that construction – that is to say, to treat catastrophe as extending to a pandemic – would negate the effect of the various limitations that exist in the hybrid clause as to the types of disease that engage the cover, the need for closure or evacuation orders, the geographical limits, and sub‑limit on the insurer’s liability, leading to the conclusion that they express at 328, in the last sentence:

The short point is that is cll 9.1.2.5 and 9.1.2.6 applied to cover for losses consequent upon the actions of authorities due to the existence of notifiable human infectious or contagious diseases, the limits and restrictions on the cover intentionally imposed by cl 9.1.2.1 would effectively be rendered inefficacious –

Now, at least in relation to catastrophe clause – that is, we would submit with respect, plainly wrong.  The catastrophe clause requires a catastrophe – not an outbreak of a disease.  There is no basis at all for a conclusion that any outbreak – that is to say, all outbreaks of listed human diseases – will be catastrophes.  Listed human diseases include Severe Acute Respiratory Syndrome and the Middle East respiratory syndrome – the list appears in Wonkana judgment at paragraph 86.  Both ‑ ‑ ‑

GLEESON J:   Mr Sheahan, this point does not depend on some special approach to interpretation of an insurance contract which is a policy of adhesion.

MR SHEAHAN:   I take your Honour’s point.  It is, in a sense, a blunter instrument than that.  The point here is that catastrophe associated with disease is a very narrow category.  It seems to involve a mercifully unusual combination of high transmissibility, serious morbidity, the absence of treatments and the absence of a vaccine.  So, the Full Court simply made a mistake about that.  It made this mistake in the context of trying to read down these additional grounds of cover to achieve what it saw as being a more coherent operation for the policy as a whole.

Even the prevention of access clause in the same policy has the same difficulty.  It, admittedly – this is 9.1.2.6, on page 575 – it admittedly covers much more like the same ground as the hybrid clause.  But even it can be seen to have a different focus of operation.  So, the hybrid clause addresses orders resulting from an outbreak.  That causal link between the outbreak and the order.  The prevention of access clause applies where you have an action to secure a particular objective:  it is purposive.  The hybrid clause focuses on an outbreak in a radius with unlimited scope for its objective – that is to say, it could be to secure outcomes outside the radius, whereas the prevention of access clause focuses on avoidable risks within the radius.

So, it is conceivable that an outbreak at an international airport or an island resort might be affected by an order which would be caught by the hybrid clause, but not affected by an order covered by the prevention of access clause because the reason for the order in cases like that might be to prevent harm to humans inside the radius.  So, even here, the construction for which we contend does not make the limitations in the hybrid clause nugatory.

GAGELER J:   Mr Sheahan, I am sorry.  I am still trying to actually understand how the process of construction, or the factors bearing on construction, you say, are different.  Is it that one reads each clause as if it were a module separated from the other clauses, or is it that we read each clause more literally than we would if we were applying more standard interpretative techniques?

MR SHEAHAN:   What follows from Federico is that you read them by reference to their ordinary language.  So, that is the second of your Honour’s propositions.  What follows, in our submission, from the perspective of the insured is that these discrete grounds of cover are treated as discrete grounds of cover unless their ordinary language tells you otherwise.

To just give your Honours an example, in the Taphouse clauses which are on pages 656 to 657, the importance of treating these things, these discrete kinds of cover discretely, unless the ordinary meaning indicates otherwise, is exemplified by the fact that each of them – bottom of page 656 and the top of page 657 – commences with these emphatic words:

We will pay –

Now, that language discourages an ordinary reader from concluding that it means, we will pay depending on whether you can discern the contrary intention by implication in another grant of cover in this clause.

The two points that your Honour Justice Gageler mentioned to me were, in essence, the two points for which we contend as following from the approach defined by the position of the insured.  In the particular case of serial grants of cover, you read them with serial grants of cover, and you read them in accordance with their ordinary language.  If their ordinary language points you in the direction of one qualifying another because, for example, the first one has the words subject to the next clause in it, then you give that ordinary language effect; or, if the second clause says, there is no cover under this policy in respect of listed human diseases, as opposed to, there is no cover implicitly under this clause, then you give that language effect.

But none of that has happened here, and what the Full Court has done, in our respectful submission, consistently, is strive for the virtue of consistency by reference to close lawyerly attention to the intersectional operation of these provisions in a way that the ordinary reader would not, and the approach of the ordinary reader would lead to the conclusion that they were covered by these grants of cover.

GAGELER J:   Yes, thank you, Mr Sheahan.

MR SHEAHAN:   Your Honours, otherwise we rest on our written submissions.

GAGELER J:   Thank you.  That takes us, I think, to Mr Williams.

MR WILLIAMS:   If the Court pleases.  Although presented as matters of principle, the special leave questions in reality involve matters of application of well‑established principles of contractual interpretation.  As to the first question, the essential problem emerges from the fact that the applicant is unable in real terms to identify how, consistent with established principles, the perspective of the reasonable insured differs from the perspective of the reasonable business person to which numerous authorities of this Court refer.

Here the primary judge and the Full Court applied established principles of construction in interpreting the policy, and the applicant does not seek to gainsay the existence or content of those principles.  Federico, properly understood, did not involve any departure from or gloss upon those principles, for the reasons given by the Full Court at paragraphs 72 to 81 of the joint judgment.

The proposition that this appeal concerns matters of application of well‑established principle rather than the existence of some new principle is made good in a number of paragraphs of the Full Court’s judgment.  The Full Court dealt with the perspective of the objective reader of the policy at paragraphs 71 to 82.  But before doing so, at paragraph 55, the court noted that:

there were limited real differences in the parties’ express submissions as to the general principles applicable to the construction of policies of insurance –

The court went on to say:

However, the parties did diverge on three particular matters, though their differences may have related to the application of principles rather than their content.

As the reasoning thereafter continued, that proposition was demonstrated to be correct.  At 75 to 79 the Full Court dealt with Federico and Wonkana and identified in how in each of those cases the Courts recognised the importance of context and reading the policy as a whole.  Indeed, at 79 of the Full Court’s judgment, there was a passage from Wonkana that was cited which:

described the starting point for the exercise of construction as being:

“what the words of the policy convey, as a matter of contemporary language read in the context of the whole policy, to a reasonable non-expert in this country.”

Similar statements were made in Wonkana at paragraph 33.  The primary judge and the Full Court approached the construction exercise in that way.  As the Full Court made clear at 77 of its judgment, in rejecting the applicant’s approach, it is an important paragraph – it is paragraph 77:

None of this is to suggest that the position of the parties is irrelevant.  On the contrary, an objective construction requires that account be taken of the surrounding context which includes the essential characteristics and nature of the parties.  The policies in issue in these proceedings were between insurers and business operators and ought to be construed from the point of view of a reasonable businessperson appreciating that and the purpose and object of the agreements.

After returning to Federico, the Full Court said:

There was nothing in the above approach which diverges from the orthodox approach of interpreting the policy from the perspective of a reasonable person in the position of the parties. It merely supports the uncontroversial proposition that those parties are not to be attributed with the special knowledge of a legal expert which is unknown or unavailable to both parties.

The Full Court then continued at 82 by adding:

To the foregoing it can be added that even if a policy’s interpretation is to be approached from the perspective of the reasonable insured, it cannot be assumed that they would do so in a manner inconsistent with the requirement to construe the policy “as a whole”.  Indeed, Meagher JA and Ball J in Wonkana confirm that the reasonable insured would not do so:  at 642 [33] –

of that judgment.  Of relevance to this application is the statement in Wonkana, at 35, where Justices Meagher and Ball considered that:

the meaning of the language –

in the policy then under consideration would be:

the same if considered by reference to the understanding of a reasonable person in the position of the parties.

Or from the perspective of the reasonable prospective insured.  It is that lack of difference that your Honours were grappling with in the questions that were asked of my learned friend that makes this an inconvenient vehicle for this so-called principle to be determined.  To these references, it may be added that in identifying general principles of construction at paragraph 58, the Full Court repeated what was said by Justice Higgins in this Court in Hume Steel Ltd v Attorney-General (Vic).  Namely, that the process of reading a clause in light of those surrounding it:

is a process which is “based on sound common sense and appeals to everyone, lawman and lawyer” –

Earlier, in the same paragraph, the Full Court said that:

if giving a more broadly worded clause its fullest scope would negate the operative efficacy of a specific clause directed to the issue at the centre of a claim for indemnity, some alternative and narrower meaning may have to be given to the broadly worded one.

This appeal, or proposed appeal, in truth involves a challenge to the application of established principles.  So much can be seen from paragraph 320 of the judgment – this is of the Full Court – where the Full Court said that:

Although by its submissions LCAM may be taken as having accepted that a contextual approach to the policy’s interpretation was required, in the application of that approach it sought to substantially limit the impact of the operation of other clauses on the construction of cll 9.1.2.5 and 9.1.2.6.

The Full Court said that:

As discussed in the preliminary part of these reasons –

when dealing with general matters of principle:

an important part of construing a policy as a whole is reconciling the respective operative effects of its provisions.

As may be seen, the applicants’ real complaint lies in the Full Court’s application of those principles to the particular policy of insurance in question.  That proposition emerges most clearly from paragraph 25 of the applicant’s written submissions.  The absence of a matter of principle involved is evident in paragraph 23 of those submissions where – after discussing Wonkana, Federico, and Pacific Carriers, and the:

reasonable person “in the position of the offeree, in this case the prospective insured”. That was no more than the working out of a what a “reasonable non-expert” is, in this context –

We all can accept that policy should be interpreted on the basis of what a “reasonable non-expert” may think them to mean – or interpret them to mean, but that does not identify a difference of substance about the way in which the primary judge in the Full Court went about the exercise of construction; i.e., how would a reasonable non-expert, or reasonable business person, construe the policies?  According to the applicant – this is in 24 of its submissions – the interpretive function was to be done in the context of a clause, in which the insurer promised to indemnify the insured:

against loss resulting from the interruption of or interference with the Business –

In consequence of a list of some 16 different circumstances contained within clause 9.1.  That is somewhat of an overstatement.  The relevant policy provisions can be found at page 574 to 575 of the application book.  What your Honours will immediately discern, as did the courts below, was that section 2 of the policy can be put to one side immediately – that is 9.1.1 – because it only relates to damage occasioned to a building or a property.  Clause 9.1.2 is the list of six items which need primary consideration.  The reasonable business person would immediately identify, looking at those, that there are two and only two of them that refer to disease.  Clause 9.1.2.1 refers to an:

outbreak of a notifiable human infectious or contagious disease –

and 9.1.2.3, a “disease arising from”, essentially, “food or drink”.  The other paragraphs just do not talk about disease at all, and that would be the starting point from which a reasonable business person would approach the matter.  The interpretative or iterative process that my learned friend seeks to suggest is so difficult, is in fact not.  It is a matter of looking at those paragraphs that all appear on a page or two of the document and giving them appropriate work to do and coherent work to do.

EDELMAN J:   Although, Mr Williams, there is a difference in that 9.1.2.1 and 9.1.2.3 are focussed upon disease broadly that relates to the situation.

MR WILLIAMS:   Yes, indeed.

EDELMAN J:   Whereas 9.1.2.5 is not confined in that way.

MR WILLIAMS:   It is not expressly, at least, dealing with disease at all.  A point that her Honour the primary judge made.  Nor is ‑ ‑ ‑

EDELMAN J:   It is not concerned expressly with disease, but nor is it concerned expressly with what is happening at the situation.

MR WILLIAMS:   Quite.  And that is a very good reason why the courts below looked very carefully at the limited grant of cover that is provided in 9.1.2.1 through to 9.1.2.6.  This, of course, is a property policy.  Your Honours will see this discussion at paragraphs 270 through to 274 – the introductory words and how the Full Court appropriately identified that 9.1.2 was a limited extension – this is in paragraph 270, which:

provides cover for “loss” resulting from “interruption of or interference with the Business” in consequence of certain events occurring during the Period of Insurance which are “deemed to be loss caused by Damage”.

So, it is an add‑on to a property policy which provides some limited additional cover. What is notable, and which the applicant never really comes to grips with, is how carefully calibrated the cover in 9.1.2.1 is – that is, the hybrid clause – in particular, that it either has to be the geographical limitation, at the situation or, as extended by 9.1.2.4, the five‑kilometre radius, that it has a specific exclusion for a number of diseases – those diseases declared to be a listed human disease pursuant to subsection 42(1) of the Biosecurity Act.

The other feature, of course, in 9.1.2.1, which is identified at paragraph 280, is that it is the only one of these sub‑provisions that contains its own submission‑limit of indemnity; the sub-limit for 9.1.2.1 is $500,000 in the context of a policy that would otherwise have a limit of $10 million.

EDELMAN J:   I would have thought, Mr Williams, that actually probably one of the strongest points in favour of your construction is the words “by order of a competent public authority” that confines the operation of 9.1.2.1, rather than either of those particular matters.

MR WILLIAMS:   Well, there are four or five features of that paragraph that operate to identify that in the case of the type of disease under consideration, the cover that is to be provided is limited.  But it is limited in the ways in which I suggested, and it is limited in the way in which your Honour Justice Edelman suggested and in other ways too.  But the reasonable reader would recognise those limitations by reading it.

The discussion we are having here, of course, is not one that gives rise to any special principle or general principle; it is ordinary contractual construction principles at work.  That is why this is not an appropriate vehicle for special leave.  Now, the hypothetical reasonable person,  irrespective of whether that was a reasonable person in the position of the parties or a reasonable business person in the position of the policy holder, would immediately go through the exercise of construction according to usual principles that the Full Court and primary judge did and interpret the matter with those principles firmly in mind.

What really is happening in this case is that the statement that is made from Wonkana is being elevated to seek to provide a rationale for a grant of special leave when, really, all that is involved is a rehash of conventional principles of construction.

EDELMAN J:   Mr Williams, just applying very conventional principles of construction, what would be wrong with a construction that read 9.1.2.1 and 9.1.2.3 harmoniously with 9.1.2.5 simply by saying that the first and the third are concerned with events – and limitations on those events – that occur at the situation and then the fifth one is concerned with things that do not occur at the situation but occur as a result of a general conflagration or other catastrophe?

MR WILLIAMS:   That, of course, gives rise to the question of what is meant by that expression.  What we would submit is that when one looks at the way in which the parties have carefully calibrated the cover under 9.1.2.1, to think that the same peril could be covered by clause 9.1.2.5 would render all those criteria, which must be met, including that it does not fall within the exclusion, nugatory.  But, in any event, this is a matter of ordinary contractual construction rather than any matter that is driven by the perspective of the party who is asking the question.

Can I just deal with the second special leave question?  That again raises no question of general principles.  It proceeds from the false premise identified by your Honour Justice Edelman in Rinehart that the ordinary meaning of an insuring clause exists in some acontextual vacuum unaffected by the clauses which surround it or by the words of the policy as a whole.  Now, at written submissions at paragraph 6 we give a further reference to the New South Wales Court of Appeal decision in Mainteck where the court observed that the contention that the:

language has a “plain meaning” is (a) a conclusion and (b) a conclusion which cannot be reached without regard to the context.

In which the language is used.  The applicant’s submissions in reply seek to suggest that this is “the erection and destruction of a straw‑man”.  It said that the “POA and Catastrophe Clauses needed to be read together with the Hybrid Clause” and that they “needed to be read down”.  But first, that is not an accurate description of what is happening with the Court’s task of construction here, and it said that it:

was permissible to depart from the ordinary words of the clause in the absence of necessity to avoid inconsistency.

Again, that is not really what is happening here.  It is a matter of contextual reading of the clause as part of the contract as a whole.  Can I deal briefly with the subsidiary matter, which is the catastrophe clause.  As your Honours will have seen from the written submissions and from the Full Court’s judgment, that matter only arises if my friend succeeds on the first point.  It does not have any independent operation that would provide a pathway to success.  We have dealt with this in our written submissions, and I can deal with this very briefly.  It is to be noted at the outset that the applicant has never explained satisfactorily or otherwise how to reconcile the incongruence which would exist between the carefully‑calibrated limited cover provided for government action for certain consequences of notifiable diseases, but excluded entirely diseases including those listed under the Biosecurity Act and, further, how the $500,000 sub‑limit would be avoided by a different approach.

Your Honours, we have dealt with the other matters in terms of catastrophe in our written submissions and, given the time, I shall sit down.

GAGELER J:   Thank you, Mr Williams.  Mr Herzfeld.

MR HERZFELD:   Thank you, your Honours.  Would your Honours turn to page 656 of the application book, please?  Your Honours will see clause 7 down the bottom of the page.  It concerns business interruption caused by a “legal authority” and then relevantly:

Preventing or restricting access to your premises . . . as a result of damage to or threat of damage to property or persons within a 50‑kilometre radius of your premises.

“Damage” was defined for this purpose in the clause quoted at paragraph 500:

accidental physical damage, destruction or loss.

If your Honours turn over the page, your Honours will see the immediately adjacent clause, namely, clause 8.  It concerns business interruption caused by:

any legal authority closing or evacuating all or part of the premises –

Notice immediately that this is more limited than preventing or restricting access.  The clause then goes on as a result of, relevantly:

i.outbreak of an infectious or contagious human disease –

Notice this is only certain kinds of disease, namely, infectious or contagious ones.  The clause then goes on:

occurring within a 20 km radius of your premises –

Notice this is a smaller radius than clause 7.  The clause then excepts certain diseases, and notice this exception applies only to clause 8(a)(i), not clause 7.

The constructional choice presented by clause 7 was whether the reference there to “damage to or threat of damage to . . . persons” included disease, and both the primary judge and the Full Court held it did not by applying these orthodox principles of construction.  First, simply reading clause 7 on its terms with the definition of damage – remember, accidental physical damage to persons, reading that definition in – that is not readily apt to describe disease.

Secondly, that is confirmed by reading clauses 7 and 8 together, remembering that they are immediately adjacent clauses.  First, clause 8 deals specifically with disease, and that immediately tells against disease also being covered by clause 7.  Further, clause 8 imposes substantial limitations to the cover which would be obliterated if clause 7 also applied to disease, and those obliterated limitations are conveniently set out on page 663 of the application book in paragraph 521.  Each of the limitations set out in (a) to (d) there, which are each of the matters to which I drew attention when taking your Honours through the clauses, would be obliterated if clause 7 also applied to disease.

So, in that context, special leave should be refused for these reasons.  First, the construction adopted by Justice Jagot at first instance and the Full Court is plainly correct.  Any other construction would produce “profound incongruence and incoherence” in these two adjacent clauses, to use Justice Jagot’s language.

This is not simply a question of mere overlap of clauses, nor is it a question of reading down the ordinary meaning of clause 7.  It is a question of giving to the defined term “accidental physical damage, destruction or loss” to persons as it applies in clause 7, a perfectly natural meaning in circumstances where giving it a strained meaning to cover disease obliterates the limitations on the express disease‑based cover in clause 8.  That is the first point.

The second point is there is no point of principle suitable for consideration by this Court in this question of construction.  It involves no more than the proposition that a contract is to be read as a whole, and to say that proposition is well‑settled is an understatement.  It was relied upon by Justice Stanford to construe a deed in Throckmerton v Tracy in 1555.  At application book page 504, paragraph 57, the Full Court quoted a number of slightly more recent authorities of this Court standing for the same proposition that it is necessary to construe a contract as a whole.  Over the page at 505, specifically Wilkie v Gordian Runoff was quoted for the proposition that:

preference is given to a construction supplying a congruent operation to the various components of the whole –

So, that is the second point.  The third point is that the insured seeks to manufacture a point of principle in this way.  The insured refers to the statement in the joint reasons in Federico, which is quoted conveniently on page 510 of the application book.  Your Honours will see in the block quote about two‑thirds down the way of the page is what was said in Federico.

The insured focuses on the statement there that the word “injury” was to be given the meaning it would convey to a reasonable non-expert.  And the insured seeks to generalise this into a proposition that insurance policies of the kind at issue here are to be construed from the perspective of a reasonable non-expert insured.  And then the insured seeks to say that whether or not this is so is a question of principle, on which differing views have been expressed at the intermediate appellate level.

But even if this were a correct general principle, a reasonable non‑expert insured would have no difficulty in seeing the incoherence produced by the insured’s construction of clause 7.  A reasonable non‑expert insured still reads adjacent clauses together.  And so much is evidenced by the fact that in Federico, in the very passage relied upon by the insured quoted at application book 510, the joint reasons referred to the need to give meaning to the word “injury” in the context of the whole policy.  And that is all that has been done here.

And so, more particularly, a reasonable non-expert insured still recognises that a specifically drafted clause with particular limitations could not be intended to be swamped by a generally drafted clause so as to allow circumvention of those limitations.  And so much is evidenced by what was said by Justice Higgins in the passage to which Mr Williams referred.  And so, for all these reasons, a construction from the perspective of a reasonable non-expert insured simply would not assist the insured here.

And likewise, to say, as the insured does in its reply submissions, that commercial contracts should be read fairly and broadly still requires that they should be read.  And it still requires that they should be read as a whole.  And so, as a result, the supposed question of principle just does not arise in this matter.

The fourth point is this.  The proposition that insurance policies such as this are to be construed from the perspective of a reasonable non-expert insured, is likewise contrary to well-settled principle.  If your Honours turn to page 820 of the application book, your Honours will see that we have collected in footnote 1 of our submissions authorities of this Court stating unambiguously that insurance policies, as with all commercial contracts, are to be construed as a whole in a business-like manner, from the perspective of a reasonable person in the position of the parties, not simply one of the parties.  And the position sought to be adopted by the insured in this Court flies in the face of each of those statements.

What was said in Federico did not indicate some different general principle, and the reasons for that were explained by the Full Court at application book 512 in paragraphs 80 to 81.  The point being made in Federico was that a non-technical meaning of the word “injury” was to be adopted, not that the policy was to be construed from the perspective of someone who does not read clauses which are adjacent to each other together.

Now your Honours that deals with grounds 1 and 2 sought to be advanced by the insured as set out at application book page 806.  Ground 3 is a purely factual ground which would not warrant a grant of special leave.  Indeed, there is an independent reason why this ground should not attract a grant of special leave.

It concerns and challenges the concurrent findings of fact made by the primary judge in the Full Court that the restrictions on access to the insured’s premises were not imposed as a result of an outbreak within 20 kilometres of the insured’s premises.

GAGELER J:   Mr Herzfeld, this was not developed by Mr Sheahan against you.  We have your written submissions on this point ‑ ‑ ‑

MR HERZFELD:   Thank you, your Honour.

GAGELER J:    ‑ ‑ ‑but you have . . . . . point as discrete.

MR HERZFELD:   Yes, thank you, your Honour.  In that case, there is nothing further to address in oral argument beyond what we have put in our written submissions.

GAGELER J:   Thank you.  Back to you, Mr Sheahan.

MR SHEAHAN:   Your Honour, in response to Mr Williams, it is no part of our argument – and never has been – that the policy is not to be construed as a whole.  Rather, it is that, in construing it as a whole, priority is to be given to the ordinary meaning of its language.  It is a proposition that really falls directly from what was decided in Federico where the Court said of the policy:

It contains nothing which would be likely to suggest to those to whom it is proffered –

the potential insurers:

that its terms are to be construed in any special technical sense or as conveying other than what they convey as a matter of ordinary language read in the context of the whole policy.

So, our focus is precisely on the need to read things in terms of what they convey in terms of their ordinary language.  In that case, the question, as your Honours know, was whether bodily injury caused by an accident postulated the occurrence of an identifiable causative accident separate from the bodily injury.  But the High Court said, construing this by reference to its ordinary language, as the insured, or worker, who was filling bags with soil and sand – he could say when he got home with his ruptured disc, I had an accident at work, with complete facility – with complete harmony – with ordinary usage.  We do not contend for anything other than that.

As for what is meant by a “catastrophe” – and whether it encompasses something physical – the Full Court’s conclusion at page 603 of paragraph 357 – it does not encompass a disease because it has to be something physical arising suddenly.  There are two short answers to this.  The first is that a plague is undeniably physical – undeniably.  The second is, as to suddenness, it is a common but not a necessary aspect of catastrophe.  World War II was a catastrophe for German cities and for the German people, but it was not in any sense sudden.

Listening to Mr Herzfeld’s submissions, they focused in part on clauses 7 and 8 in the Taphouse policy.  There is a good reason, by appearing on the face of that language, at page 656, not to see it as a calling for a fastidious attention to consistency.  A conscientious – even lay reader – would quickly discern that the insurer had not made a serious effort to ensure coherence and consistency.  You can see that from the first problem – namely, that the chapeau does not connect with the language of the extensions of cover.  The chapeau was about damage and the extensions of cover relate to other things that are not damage.

As to the meaning of damages extending to disease in clause 7, the trial judge made the point that the definition is not really “apt to describe any form of harm to humans”, but it has to be applied to humans.  It has to be in this clause.  If it is being applied to humans, it is perfectly apt to encompass the damage of being killed or left on a respirator by a disease.  Those are our submissions, your Honour.

GAGELER J:   Thank you.  That takes us, I think, to the Meridian Case, and there it is Mr Herzfeld.

MR HERZFELD:   Thank you, your Honours.  Would your Honours turn to page 627 of the application book, please?  In paragraph 413, your Honours will see the insuring clause in the Meridian policy.  Your Honours will notice that in the last four lines, what the promise was, was to:

indemnify You in respect of the loss arising from such interruption or interference in accordance with the settlement of claims clause –

This was a policy of indemnity with an agreed measure of indemnity.  That is a perfectly common structure for indemnity insurance policies.  The settlement of claims clause is on page 639 at paragraph 448.  Relevant for present purposes is Item 9 – Gross Revenue.  It covers loss of revenue and increased cost of working.  In paragraph (b), your Honours will see that the concluding words specifically provide for a deduction.  Your Honours can see it is:

any sum saved during the Indemnity Period in respect of such charges and expenses of Your Business payable out of Revenue as may cease or be reduced in consequence of the Damage.

The issue which gives rise to the special leave application is this:  the insured here received government payments under the JobKeeper scheme.  Our position is that those payments reduced the insured’s loss.  We accept, in this Court, that those payments do not fall within the sum saved wording at the end of paragraph (b), but our submission is that in an indemnity policy such as this, the doctrine of subrogation requires that payments which are made by third parties in reduction of the insured’s loss must be brought into account for the benefit of the insurer.

EDELMAN J:   Mr Herzfeld, there may be an issue here which is not really ventilated in your written submissions, but I wonder whether you have considered it or may wish to comment on it.  That is, how one construes an indemnity provision such as this.  Does one construe it in the way that Lord Goff described in The Fanti as a provision that “gives rise to an action for unliquidated damages”.  Or, does one construe it in the way that Lord Hoffman described it in the Piper Alpha as a provision that is not concerned, not analogous, to a claim arising from a breach of contract, but is a claim for an indemnity for a liability to which considerations such as remoteness and mitigation might not attach?

MR HERZFELD:   That issue may not matter for the purposes of what we need to say in this Court, but certainly the orthodox position in insurance law, I think, for about 400 years has been that an insurance policy which provides for an indemnity provides for an unliquidated claim, and that a measure of indemnity provision like this is effectively a means of settling that claim.  But as I say, for ‑ ‑ ‑

EDELMAN J:   I think there is no dispute about that, Mr Herzfeld.  I think that the point that I am raising is how do you quantify the unliquidated amount?  Do you quantify it in the same way as you might quantify a claim for breach of contract, which would bring in notions of payments by third parties or steps that had been taken in mitigation, or do you quantify it as though it is a primary right, where issues of mitigation, payments by third parties, remoteness concerns would not necessarily arise?

MR HERZFELD:   I suppose I have two points about that.  The first is if this case gives rise to that question, then it is even more suitable for a grant of special leave than perhaps we had attempted to demonstrate.  The second point is that I confess I had not thought about that, but the orthodox view, I think, would be that it is to be quantified subject to the parties’ agreement in the same way as any other breach of contract claim.

But, for our purposes, as I say – and I should be clear, to the extent that your Honour considers that question is at play, that just enhances the prospects of this matter for a grant of special leave.  But for our purposes, it is sufficient to focus on the doctrine of subrogation.  That was accepted by Justice Jagot at first instance as having the consequence that the JobKeeper payments had to be brought into account.

The Full Court overturned her Honour’s view on the basis that the settlement of claims clause here displaced the general principle on which we rely.  Your Honours can see that in paragraph ‑ ‑ ‑

GAGELER J:  Mr Herzfeld, may I just ask this?  How does the doctrine of subrogation, in the way that you seek to employ it, intersect with the terms of the contract?  Does it arise as a matter of inference or construction or consequence of the language of the insuring clause?  And is it then capable of being confined by a contextual construction of that clause?

MR HERZFELD:   Yes.  It arises, we say, as an equitable doctrine in cases of promises to indemnify.  That is not a point which has yet been decided by this Court, and that is one of the points of principle that we seek to raise.  But we submit, consistently with the position in the UK, that it is an equitable doctrine, and it is not simply an implied term of the contract.  That is the first part of the answer to your Honour’s question.

The second part is that while the doctrine of subrogation can be modified or excluded by the parties, that requires a clear intent to be demonstrated, and it is not demonstrated by the settlement of claims laws here.  That is because the clause does not deal at all with third-party payments – the subject of the doctrine of subrogation. 

The “sum saved” language deals only with charges and expenses from which the insured may be freed by reason of the business interruption.  And the fact that express provision is made about that subject matter cannot give rise to an implication that the whole of the equitable doctrine of subrogation is to be swept away, given that that doctrine deals with an entirely different subject matter.  And that is a special ‑ ‑ ‑

GAGELER J:   Mr Herzfeld, could I go back a level and go back to the insuring clause, which is the source of the equitable doctrine that you seek to rely on.  It arises, you say, from the reference to indemnifying you in respect of loss.  But it then qualifies or explains immediately how that indemnification is to occur; it is to be in accordance with the settlement of claims clause.  It is at that level, I think, that you need to address the difficulty of the construction.

MR HERZFELD:   If that were right, it would have this consequence.  The settlement of claims clause here makes no reference to the insured bringing into account third‑party recoveries where, for instance, the business interruption is caused by the negligence of a third party.  And so, on the Full Court’s approach, the insured can recover fully from the negligent third party; it can also recover fully under the insurance policy.  And the explanation for that is that this kind of clause with an indemnity takes its primary character as an indemnity.  And the reference to the settlement of claims clause provides what Chief Justice Barwick once described as an extrapolation of the promise to indemnify.

And similarly, this Court in Monson, which we have quoted in our written submissions, explained that the fundamental character of a policy of this kind is a promise to indemnify.  So, the basis of settlement clause cannot be taken to prescribe exhaustively how the working out of the indemnity is to occur because, if it did, it would utterly subvert the nature of this policy as an indemnity in the case that I have given.  The insured can recover fully from a third party for negligence and can then recover fully under the insurance policy.

And that demonstrates that the settlement of claims clause does not purport to regulate the question of third-party payments – nothing in it whatsoever.  And, in particular, the concluding words of paragraph (b) deal with third‑party payments.  The unlikelihood of the doctrine of subrogation being ousted by that wording is underscored by the fact that other provisions of the policy that we have identified in our written submissions proceed on the premise that the doctrine of subrogation continues to apply.

EDELMAN J:   It may be, Mr Herzfeld, that the issue that I raised with you at the outset needs to be resolved as an anterior question and that the resolution of that issue would leave no room for questions of the equitable doctrine of subrogation because if it is resolved against you – and the clause were to be construed as a promise to stop loss, irrespective of any consequential loss that is suffered – then it would not matter one way or the other whether or not payments had been received – they would not need to be brought into account.  Alternatively, if it is construed the other way, then of course they would need to be brought into account.

MR HERZFELD:   But that then raises an even deeper point of importance for this Court, because it would be a radical reformulation of the way indemnity policies like this are understood.  It would come as a great surprise to many insurers that a policy structure like this with a settlement of claims clause has the consequence that an insured can recover from a negligent third party and not have to account to that to the insurer.

In that context, may we identify these reasons for a grant of special leave – in addition to the one that I have just covered.  The first is that the matter raises at least two important points of principle – and for the reasons, the exchange that I have just had with your Honour Justice Edelman, perhaps, a third – which is, perhaps, an anterior one.  But the two that we would point to are these.  First, the nature of the doctrine of subrogation; whether it is equitable in nature or arises as an implied term, is a fundamental question of doctrine.  The second point of principle, which really follows from the first, is the ease with which the doctrine can be excluded.  As I say, the Full Court’s approach has far‑reaching consequences for the exclusion of the doctrine.

The second point is that the Full Court’s approach is directly inconsistent with that of the Victorian Court of Appeal in Insurance Australia v HIH on which Justice Jagot relied at first instance.  In that case the Court of Appeal held that payments received by an insured under a government scheme in compensation for losses suffered by reason of the collapse of the HIH Group were to be accounted for in calculating the amounts payable by an insurer under a policy of indemnity.

The Full Court here distinguished HIH on the basis that the policy in that case did not have a settlement of claims clause.  But that is, in our submission, simply a reflection of the Full Court’s basic error of principle.  But it would also throw up your Honour Justice Edelman’s question – which is whether the presence of wording such as in accordance with the settlement of claims clause, transforms this from a standard indemnity to, really, something equivalent to a promise to pay a liquidated sum.  Further, the Full Court relied on the New South Wales Court of Appeal decision in Mobis.  That points to another potential inconsistency at the intermediate appellate level.

In our submission, the Full Court’s reliance on Mobis was misplaced because Mobis did not concern third‑party payments, but rather depreciation expenses.  Subrogation could not have anything to do with that matter in Mobis.  But, if it is the case that Mobis stands for a broader principle supportive of the Full Court’s decision here, then it too is inconsistent, we say, with both principle and the HIH Case.

The third reason in favour of a grant of special leave is this:  given the generosity of the JobKeeper program, the quantum of insurance money is liable to be affected by the difference in view between Justice Jagot at first instance and the Full Court on appeal will likely be significant.  That is why this issue has been included as part of these test cases.  On that topic your Honours will have seen from the written submissions that the Insurance Council of Australia has agreed to pay the insured’s costs and the disbursements below – and in this Court, in any event.

The fourth and final reason for a grant of special leave is this:  the insured resists a grant on the basis that JobKeeper payments do not fall within the doctrine of subrogation because they did not have a relevant relationship with the loss the subject of the policy.  That is contrary to Justice Jagot’s conclusion, which the Full Court did not disturb, and so it is a matter that the insured would need to raise by way of notice of contention.

But, in any event, the insured’s submission really misunderstands the fact that the doctrine applies to any payment which goes to reduce the insured’s loss, not simply payments directed to the precise risk insured.  But that dispute between the parties itself raises a question of principle about the scope of the operation of the doctrine of subrogation.  It is a dispute which simply concerns characterisation of the uncontested features of the JobKeeper scheme.  So, it is a legal argument which will not be productive of any material increase in hearing length.

So, even if were to be raised by the insured, that is not a matter which tends against the grant of special leave, it is in fact a matter which tends in favour of the grant of special leave.  Would your Honours just excuse me for one moment?

Those are the oral submissions that we would seek to make in addition to our written submissions.

GAGELER J:   Thank you.  Mr Pomerenke.

MR POMERENKE:   Thank you, your Honours.  Our first submission is that there is a factual finding that actually stands in the way of the proposed special leave question such that they do not actually arise.  This involves me engaging with Mr Herzfeld’s fourth point.  Your Honour sees the formulation of the special leave questions in paragraphs 4 and 5 of the application for special leave – paragraph 4 on page 781 of the book – and it requires in terms:

a payment from a third party in respect of an insured loss –

We are focusing on those words, “in respect of” and “insured loss”. 
Paragraph 5 has the second question, which only arises if the first is answered affirmatively.  Both questions depend on:

a payment from a third party in respect of an insured loss –

as framed.  That requires us to identify just what is the insured loss, and the applicant has done that for us, accurately, in our respectful submission, in paragraph 5 of its reply submissions, which your Honours will find at page 800 of the book.  If your Honour has that paragraph, what your Honours will see is that the insured loss has three essential characteristics.  First:

loss arising from the interruption or interference of Meridian’s business –

Second:

as a result of damage occurring during the period of insurance.

And third, where the damage was, relevantly:

the outbreak of an infectious disease . . . within 20 km of the business premises.

So, we respectfully agree with our learned friends about that characterisation of the insured loss; that description of the insured loss.  Where we part company with our learned friends is in respect of what follows.  Your Honours see over on page 801, their Honours refer to Justice Jagot’s finding, which is the finding that Mr Herzfeld says is against us and requires us to put on a notice of contention in order to challenge it.  In our respectful submission, that is incorrect because, in short, the Full Court made a directly contrary finding.

So, what I want to do now is to demonstrate to your Honours the Full Court’s directly contrary finding.  You will see that in paragraph 461 of the Full Court’s reasons which is at page 644.  It is a long paragraph commencing on page 644, and when your Honours get to page 645 your Honours will find the critical sentences upon which we rely.  The critical sentence, in our respectful submission, is the sentence commencing:

The criteria for eligibility for JobKeeper payments were financial ones; they did not depend on –

and so on, and then the following two sentences.  The key thing ‑ ‑ ‑

EDELMAN J:   Sorry, Mr Pomerenke.  Which paragraph is this?

MR POMERENKE:   This is 461 of the joint reasons in the Full Court.  It starts at page 644 of the book, over to page 645.

GLEESON J:   But, Mr Pomerenke, do we not need to read those with that preceding sentence:

As a matter of the application of the policy’s provisions, they were not.

Because this is directed to this sum saved point that is not pressed.

MR POMERENKE:   That is true, your Honour, but can I say this.  Paragraph 397 of the primary judge’s reasons, upon which our learned friends rely, was also directed to the sum saved provision, so in both cases we had the primary judge and the Full Court dealing with the insurer’s first argument, which was the sum saved provision, and in the course of that discussion of their primary argument, findings were made both by the primary judge in 397 and in the joint judgment at 461, which were of general application.  So, the findings as to the character of the JobKeeper scheme, both the finding upon which Mr Herzfeld relies and the finding of the Full Court upon which I rely, were, one, in the context of the sum saved provision but, two, of general application.  We both want to give those findings general application, and they cannot stand together, in my respectful submission.

GLEESON J:   Why do you say that about the finding of Justice Jagot?  Is that because the subrogation point was not put at first instance?

MR POMERENKE:   Yes, the subrogation point was put, but not quite in the way in which it is now put.  But there is a more direct answer to your Honour’s question.  If your Honour goes back to Justice Jagot’s reasons at page 136, the relevant discussion starts at paragraph 394.  At the beginning of 394 your Honours will see the words:

I do not accept the submissions for LCA Marrickville that amounts received by it under the JobKeeper program are not within the scope of cl 10.1.3 (any sum saved –

and so on. So, her Honour’s reasons there are directing themselves to the sum saved provision.  And in 394 – down to 399 – her Honour is elaborating on the reasons why she rejects our submission in respect of the sum saved provision.  And it is in the course of that discussion that her Honour makes the finding at 397 upon which our learned friends seek to rely.  And we can see ‑ ‑ ‑

EDELMAN J:   Mr Pomerenke, this is really just a – it is basically a causation submission that is anterior to any of the issues that arise; that unless there is some causal link that is established with clause 10.1.3, none of the legal issues arise.

MR POMERENKE:   That is correct.  That is correct.  So, on the Full Court’s factual finding in 461 – of the Full Court’s reasons – sorry, I should just finish, Justice Gleeson.  Your Honour will see that it is not until paragraph 400 that Justice Jagot commences to discuss not the sum saved provision, but rather the general principle of indemnity.  So, it is perfectly clear that 397 is a finding made in the context of a discussion of the sum saved provision, just as 461 in the Full Court is.

Coming back to your Honour Justice Edelman, the causation question, in our respectful submission, 461 in the Full Court cannot be reconciled with 397 of the primary judge’s reasoning.  The key propositions are that Meridian was not entitled to JobKeeper according to its criteria irrespective of whether there was an outbreak. Sorry, I put that the wrong way around.  Meridian was entitled to JobKeeper irrespective of whether there was any outbreak.

Conversely, if Meridian did not meet the turnover test, it would not be entitled to JobKeeper even if there was an outbreak.  So, the short point is, the criteria for JobKeeper are unrelated to the outbreak.  They are unrelated to the defined damage.  They are unrelated to the interruption or interference which is the subject of the policy, and they are therefore unrelated to the insured loss.

EDELMAN J:   Is that right?  Is it right to say that, even in a pure causal sense, that but for the events which gave rise to the liability under the indemnity, but for those events, the JobKeeper payments would have been received in any event?  Is that your submission?

MR POMERENKE:   My submission is that the events that give rise to the insured loss, which commence with the outbreak of the disease – and are then interrelated and interconnected to the point of loss – are irrelevant to the question of whether or not you get JobKeeper.  They are unrelated and disconnected from the basic turnover question which JobKeeper proposes.  The criteria for JobKeeper are entirely disconnected from any view of the definition of “insured loss” – as our learned friends themselves define it in paragraph 5 of their submissions.  So, that is my submission, Justice Edelman.

The upshot of all that is that these questions are simply not going to arise on the appeal.  Contrary to our learned friends’ submissions, it is not for us to put on a notice of contention challenging 397 of the primary judge’s reasoning.  They need to challenge 461 of the Full Court’s reasoning.

This brings me to our second submission as to why special leave should not be granted.  Even if your Honours are against us on that first point, the appeal would not actually involve any dispute of principle because, when one looks at the special leave questions as framed, there is no dispute between us that there is a general principle of indemnity and a right of subrogation.  We emphasise, of course, that is a general principle.  It is also accepted on our side and, it seems, Mr Herzfeld’s side, that the general principle and the right of subrogation can be affected by, modified by and, indeed, excluded by the terms of the policy, and that must be so.

The question then is:  what is the effect of the relevant terms of this policy?  To what extent do those terms affect, modify, or exclude the general principle or the right of subrogation?  It boils down, in the end, to just a question of construction of this particular policy.  The third main reason why we say special leave should not be granted concerns prospects itself.  In our respectful submission, there are insufficient prospects of overturning the Full Court on this question.  First, they have to overturn the factual finding in 461 of the Full Court’s reasons, and there are insufficient prospects on that ground alone.  Then, they have to overturn ‑ ‑ ‑

GAGELER J:   At the moment, I think, that is not a proposed ground of appeal.

MR POMERENKE:   That is so.  You are quite right, Justice Gageler.

GAGELER J:   That would be, perhaps, an unattractive ground of appeal, were it sought to be raised.

MR POMERENKE:   Quite right. Quite right.

GAGELER J:   Yes, thank you.

MR POMERENKE:   Then they have to overturn the Full Court’s construction of the way in which the insuring clause works together with the settlement of claims clause.  The Full Court was unanimous on this question, and, in our respectful submission, their reasoning was orthodox and compelling.

An important point here is to remember that the policy did not provide cover for all loss or for any loss of any kind.  Mr Herzfeld has taken your Honours to the provisions.  It provided indemnity only for a limited kind of loss and only to a limited extent.  The Full Court, at 454 on page 641, emphasised this point.  What the parties were doing was recording their agreement, both as to the kind and the extent of the loss the subject of the indemnity.  In the analysis at 455 to 457 – including by reference to Mobis – was, in our respectful submission, correct.  The particular kind of loss was a reduction in revenue for services provided in the course of business.  It left out of account many species of loss that an insured might suffer.

Take a form of consequential loss – loss of a valuable opportunity to sell your business.  In effect, the NPV of your future cash flows.  For people at a particular stage of their life who have been running their business for decades, that might be a very real and significant loss impinging on, amongst other things, the value of their retirement fund.  But it is not covered by this clause.  It is not the kind of loss which the parties agreed would be covered.  That, potentially, works very significantly in the insurer’s favour.  But that is the parties’ bargain.  So, arguments that proceed – as the insurers’ do – from an assumption of complete or full

indemnity – which is what you require to get to the doctrine of subrogation – are proceeding from a false premise, in my respectful submission.

Next, can I make a point about the prime example that Mr Herzfeld gives about problems with the Full Court’s reasoning.  In my respectful submission, that problem simply does not arise – and I will explain why.  His point was by reference to claims that the insured might have against third parties.  His submission was that, by our construction – and by the Full Court’s construction – those claims were being done away with, and that would come as a great surprise.  That is not correct at all.  Two things – one, it is not our case but, two, more importantly, there are other terms of this policy that deal with that situation.  They are mentioned briefly.  Your Honours do not have the full policy, but they are mentioned briefly in our learned friends’ special leave application.

If your Honours could go, please, to page 787, and your Honours will read paragraph 19, and if your Honours will notice footnote 22.  In footnote 22, there is a reference to:

General Condition 3 –

which:

expressly confirmed the insurer’s “right to recover or obtain contribution from any person against whom You may be able to claim, and We have the right to take action in Your name”.

So, my submission about this is, this is a different kind of problem – different from the one with which the Full Court was concerned and different from the one that would be thrown up by an appeal to this Court – and it had a different solution under a different expressed term of the policy.  It does not detract from that argument at all.  In our respectful submission, it tends to reinforce it.  The terms of this policy govern the situation as between these parties.

They are actually the submissions I wish to make.  Thank you, your Honours.

GAGELER J:   Thank you.  Mr Herzfeld.

MR HERZFELD:   Thank you, your Honours.  Three points in reply.  Firstly, would your Honours turn to the primary judge’s reasons at application book volume 1, page 137, please?  Your Honours will see that from paragraphs 400 to 404, the primary judge dealt in terms with the argument that we seek to make and accepted it.  As part of accepting it, the primary judge accepted the submissions we made at 404, which included finding, as a matter of legal characterisation, that the JobKeeper payments did have to be brought into account because they reduced the loss suffered.

The Full Court did not deal with the question of whether JobKeeper was to be brought into an account in accordance with general principle; it dealt with the general principle at an anterior level by saying it was excluded and then dealt only with whether JobKeeper fell within the sum saved clause.  In any event, this is simply a dispute of legal characterisation on uncontested facts.  It is a dispute on which the insured is incorrect.  The submission confuses loss with the causes of loss. 

The relevant question since Castellain v Preston has been whether a payment reduces the insured’s loss, not whether it provides compensation for an insured risk.  That is the point we make in our reply submissions in application book page 801, paragraph 8.  It is therefore sufficient that JobKeeper was intended to provide – to reduce the loss resulting from COVID, as the primary judge found.

Putting the matter differently, in terms of remoteness and benefits of the kind considered in National Insurance Co v Espange and Zheng v Cai, there does not have to be identicality between the scope of the risk covered and the scope of the third‑party payments which go to reduce that loss, which therefore have to be brought into account.  That is the first point.

Secondly, it is said there is no dispute of principle. With respect, the dispute of principle is at least as to how easily the principle of subrogation may be excluded.  That, in and of itself, is a question of very great importance.  But nothing that Mr Pomerenke said demonstrates that the broader points of principle to which I have referred in‑chief would not arise.

The third reply point concerns prospects.  As your Honours have seen, as to the characterisation of JobKeeper, Justice Jagot and the Full Court disagreed.  As to the question of whether the general principle was excluded by the terms of the basis of settlement clause, Justice Jagot and the Full Court disagreed.  So, to say that there are insufficient prospects in this Court is a very bold proposition, and that is especially so given that the Full Court’s view has the consequence that in this perfectly common form of policy the insured can recover damages against a negligent third party who causes them business interruption and can then recover fully under their insurance.

That is not dealt with by the other terms to which Mr Pomerenke referred.  Those other terms are rather intended to expand the insurer’s rights of subrogation, but none of them would controvert the fact that on the Full Court’s approach the insured can recover damages against a negligent

third party and then subsequently recover fully under their insurance, and that is an extraordinary proposition with which the Full Court did not grapple.  Those are the submissions in reply.

GAGELER J:   Thank you, Mr Herzfeld.  At this point we will retire to consider the course we will take.

AT 1.12 PM SHORT ADJOURNMENT

UPON RESUMING AT 1.22 PM:

GAGELER J:   In the matters of Taphouse and LCA Marrickville, we consider that the prospects of persuading this Court on appeal that the conclusions reached by the Full Court of the Federal Court were affected by any error of interpretative principle are insufficient to warrant the grant of special leave to appeal.  In each of those two matters, special leave is refused with costs.

In the Meridian Travel matter, we are not satisfied that the matter presents as a suitable vehicle for the consideration of the question of principle sought to be raised by the grounds as formulated in the notice of appeal.  In that matter, too, special leave to appeal is refused with costs.

MR SHEAHAN:   Your Honour ‑ ‑ ‑ forgive me for interrupting.

GAGELER J:   I am sorry.

MR SHEAHAN:   In each of those orders, would your Honour be minded to remove the words “with costs”?  The parties have agreed that there is no occasion for an order as to costs.

GAGELER J:   Yes, of course.  That is done.  Thank you.

AT 1.24 PM THE MATTERS WERE CONCLUDED