Koolan Iron Ore Pty Ltd v Infrassure Ltd (No 2)
[2023] FCA 1654
•21 December 2023
FEDERAL COURT OF AUSTRALIA
Koolan Iron Ore Pty Ltd v Infrassure Ltd (No 2) [2023] FCA 1654
File number: WAD 399 of 2018 Judgment of: JACKSON J Date of judgment: 21 December 2023 Catchwords: INSURANCE - business interruption insurance policy - failure of seawall between ocean and mine - claim under policy for business interruption - would applicant have continued operations under existing mine plan, or adopted a revised mine plan? - extent to which mine plan would have been achieved - consideration of mining operations - hypothetical board paper - additional expenditure to diminish reduction in output not proved - no adjustment for stock on hand - adjustment for redundancies - foreign exchange hedging arrangements not to be taken into account
INSURANCE - interest on claim - s 57 of the Insurance Contracts Act 1984 (Cth) - time from which was unreasonable for insurer to withhold payment
CONTRACTS - construction of business interruption policies - adjustments clause - common sense approach to evidence - adjustments not to be made for entirely hypothetical trends, variations and other circumstances - taking account of revised mine plan not permitted under policy
CONTRACTS - meaning of words - 'adjustments' - 'trend of the business' - 'variations' and 'other circumstances'
EVIDENCE - establishing hypothetical past events - malleability of recollection of events - dangers of hindsight evidence - reliance on objective facts, contemporaneous materials and observable behaviour
Legislation: Evidence Act 1995 (Cth) s 135, 279B
Insurance Contracts Act 1984 (Cth) s 57
Judiciary Act 1903 (Cth) s 39B
Insurance Contracts Regulations 1984 (Cth) reg 38
Cases cited: AIG Australia Limited v Kaboko Mining Limited [2019] FCAFC 96
Allstate Life Insurance Co v Australia & New Zealand Banking Group Ltd (No 5) (1996) 64 FCR 73
Attard v James Legal Pty Ltd [2010] NSWCA 311
Australian Casualty Co Ltd v Federico (1986) 160 CLR 513
Australian Pipe & Tube Pty Ltd v QBE Insurance (Australia) Limited (No 2) [2018] FCA 1450
Brescia Furniture Pty Ltd v QBE Insurance (Australia) Ltd [2007] NSWSC 598
Browne v Dunn (1893) 6 R 67
Chappel v Hart (1998) 195 CLR 232
Coshott v Prentice [2014] FCAFC 88; (2014) 221 FCR 450
Dalby Bio-Refinery Ltd v Allianz Australia Insurance Limited [2019] FCAFC 85
Diosdado Sayseng v Kellogg Superannuation Pty Ltd [2007] NSWSC 857
Ellis v Wallsend District Hospital (1989) 17 NSWLR 553
Fabcot Pty Ltd v Port Macquarie-Hastings Council [2011] NSWCA 167
Fencott v Muller (1983) 152 CLR 570
Financial Conduct Authority v Arch Insurance (UK) Ltd (Hiscox Action Group intervening) [2021] UKSC 1
Glynn v Margetson & Co [1893] AC 351
HDI Global Specialty SE v Wonkana No. 3 Pty Ltd [2020] NSWCA 296; (2020) 104 NSWLR 634
Henry Booth & Sons v Commercial Union Assurance Co Ltd (1923) 14 Lloyds LR 114
Hosmer Holdings Pty Ltd v CAJ Investments Pty Ltd (1995) ATPR 41-442
Hughes Aircraft Systems International v Airservices Australia (No 3) (1997) 80 FCR 276
Johnson v American Home Assurance Company (1998) 192 CLR 266
Jones v Dunkel (1959) 101 CLR 298
Mobis Parts Australia Pty Ltd v XL Insurance Company SE (No 10) [2018] NSWSC 37
Mobis Parts Australia Pty Ltd v XL Insurance Company SE [2018] NSWCA 342
National Australia Bank Limited v Nautilus Insurance Pte Ltd (No 2) [2019] FCA 1543
National Union Fire Ins Co v Anderson-Prichard Oil Corp, 141 F.2d 443 (10th Cir. 1944)
Onley v Catlin Syndicate Ltd as the Underwriting Member of Lloyd's Syndicate 2003 [2018] FCAFC 119
Philip Morris Inc v Adam P Brown Male Fashions Pty Ltd (1981) 148 CLR 457
PMB Australia Ltd v MMI General Insurance Ltd [2000] QSC 329
Polikoff Ltd v North British & Mercantile Insurance Co Ltd (1936) 55 Ll L Rep 279
Prudential LMI Commercial Ins Co v Colleton Enterprises Inc, 976 F.2d 727 (4th Cir. 1992)
R v Commonwealth Court of Conciliation and Arbitration; Ex parte Barrett (1945) 70 CLR 141
Rana v Google Inc [2017] FCAFC 156; (2017) 254 FCR 1
ReWakim; Ex parte McNally [1999] HCA 27; (1999) 198 CLR 511
Rockment Pty Ltd t/a Vanilla Lounge v AAI Limited t/a Vero Insurance [2020] FCAFC 228; (2020) 282 FCR 561
Rosenberg v Percival [2001] HCA 18; (2001) 205 CLR 434
Rough v Rix (1982) 30 SASR 301
Sigma Pharmaceuticals (Australia) Pty Ltd v Wyeth [2018] FCA 1556
Swashplate Pty Ltd v Liberty Mutual Insurance Company trading as Liberty International Underwriters [2020] FCAFC 137
Tanna v Deutsche Bank (Asia) AG [1997] ANZ ConvR 598
Todd v Alterra at Lloyds Ltd (on behalf of the underwriting members of Syndicate 1400) [2016] FCAFC 15; (2016) 239 FCR 12
Tyco Australia Pty Ltd v Optus Networks Pty Ltd [2004] NSWCA 333
Wilkie v Gordian Runoff Limited [2005] HCA 17; (2005) 221 CLR 522
Wilson v Arwon Finance Pty Ltd [2020] WASCA 137
Division: General Division Registry: Western Australia National Practice Area: Commercial and Corporations Sub-area: Commercial Contracts, Banking, Finance and Insurance Number of paragraphs: 761 Date of hearing: 20-23, 26-27 and 29-30 July 2021 Counsel for the Applicant: Mr GJ Pynt (20-23 and 26-27 July 2021)
Mr GJ Pynt with Mr M Darwin (29-30 July 2021)Solicitor for the Applicant: Herbert Smith Freehills Counsel for the Respondent: Mr TM Mehigan SC with Mr B Mostafa Solicitor for the Respondent: Ashurst Australia ORDERS
WAD 399 of 2018 BETWEEN: KOOLAN IRON ORE PTY LTD (ABN 87 099 455 277)
Applicant
AND: INFRASSURE LTD
Respondent
ORDER MADE BY:
JACKSON J
DATE OF ORDER:
21 DECEMBER 2023
THE COURT ORDERS THAT:
1.The parties must file a minute of consent orders reflecting these reasons and dealing with costs or, if necessary, competing minutes by 4.00 pm AWST on 22 February 2024.
2.The matter is listed for mention at 9.00 am AWST on 29 February 2024.
3.Liberty to apply in respect of paragraphs 1 and 2.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
TABLE OF CONTENTS
I. INTRODUCTION [1] II. THE POLICY [10] III. THE ISSUES [24] EMP or RMP [26] Would Koolan have adopted the RMP? [29] To what extent would the EMP or the RMP have been achieved? [34] ICW-UWEs [39] Stock on Hand [43] Foreign exchange [48] Redundancies [53] Interest [54] List of issues [58] IV. THE WITNESSES [61] James Beyer [65] Lee Seng Hui [72] Peter Kerr [79] Andrew Thomson, Brett Morey and Scott de Kruijff [82] John McKenzie and Michael Potter [84] V. EMP OR RMP [87] Koolan's claim that it would have adopted and achieved the RMP [87] The proper construction of the Policy [100] General principles of construction [113] Business interruption policies [119] The terms of the Policy in this case [130] Some specific terms in the adjustments clause [138] Adjustments [139] 'The trend of the Business' [143] 'Variations' and 'other circumstances' [152] The proper construction of the adjustments clause as a whole [159] Koolan's RMP claim is not permitted under the Policy [180] Mining at Koolan Island [181] The approach to the evidence [182] Mount Gibson's mining operations [202] Mount Gibson's mine planning process [206] The chronology of events [212] First period of low iron ore prices - 2008-2009 [212] Second period of low iron ore prices - 2012 [213] 2013 - the iron ore price rebounds [229] March 2013 - the Board approves the new mining plan [235] The rest of 2013 [245] 2014 - the iron ore price declines [252] The Board meeting of 29 April 2014 [256] Mr Beyer asks about mining at the average strip ratio [265] Sterilisation of MW3 [273] A broker visit to Koolan Island and broker reports [288] June to September 2014 [296] September 2014 - Mr Lee is given information about cashflows and IRR [310] 24 and 25 September 2014 - Board meeting and Board strategy meeting [314] October 2014 market release and investor teleconference [323] October and November 2014 - the first two slumps in the seawall [333] Mr Beyer's evidence about the IRR [342] The annual general meeting on 12 November 2014 [345] The seawall fails [348] 2015 - iron ore prices continue to decline [356] The changes at Extension Hill [367] Insurance claims are settled, the mine reopens [380] The evidence about what Koolan would have done had the seawall not failed [389] The hypothetical board paper (HBP) [397] Findings on whether Koolan would have adopted the RMP [416] Koolan was committed to the EMP [423] Senior management consistently defended the EMP [427] Koolan showed no signs of departing from the EMP, even though prices were falling [436] Mr Lee's concerns do not indicate that Mount Gibson would have abandoned the strategy [449] What was said and done after the seawall failed [457] Uncertainty about when revision to the EMP would have been initiated or completed [462] The evidence about when consideration of a revision to the EMP would have been initiated [464] The IRR 'threshold' of 15% [473] The prices that Mount Gibson would have assumed if it were revising the EMP [478] The mine planning process [492] Extension Hill was different [493] Mining at ACE [500] No mining of MW3 after the Incident [504] Other mining companies' responses to low prices [505] How long would it have taken to devise and approve a revision to the EMP? [506] It has not been established that a revision would have been materially similar to the RMP [515] Whether any Board paper would have been materially similar to the HBP [515] Whether any revised mine plan would have been materially similar to the RMP [525] A slowdown in mining cannot be ruled out [531] Conclusion on content of the HBP and the RMP [536] What decision the Board would have made on a proposed revision is unknown [537] Mr Lee's hindsight evidence is not reliable [538] Koolan's case as to how the other directors would have viewed the HBP/RMP [541] The absence of evidence from the other directors is significant [546] To what extent would Koolan have achieved the mine plan [555] To what extent would Koolan have achieved the EMP? [558] To what extent would Koolan have achieved the RMP? [574] VI. THE SUBSIDIARY ISSUES [583] ICW-UWE [583] Item 1(b) [584] The way in which Koolan claims ICWs under Item 1(b) [586] The grounds on which Infrassure objects to the ICW claim under Item 1(b) [598] The construction of the Policy concerning ICW [605] Koolan has not established its claim for ICW under Item 1(b) [622] The purpose of mining at ACE [638] Item 4 [650] Stock on Hand [655] The construction of Item 1(a) and the definition of 'Output' [661] The adjustments clause [670] Salvage sale [676] When the Stock on Hand was sold [695] Foreign exchange [706] The parties' competing positions [707] Consideration [724] Redundancies [733] The issue [733] Consideration [739] Interest [748] The competing arguments [749] Consideration [753] VII. CONCLUSIONS [760] RMP and EMP [761] ICW-UWE [761] Stock on Hand [761] Foreign exchange [761] Redundancies [761] Interest [761] REASONS FOR JUDGMENT
JACKSON J:
I. INTRODUCTION
The applicant, Koolan Iron Ore Pty Ltd is a subsidiary of Mount Gibson Iron Limited, a mining company that is listed on the Australian Securities Exchange (ASX). Koolan operates an open cut iron ore mine on Koolan Island, off the Kimberley Coast of Western Australia. At the relevant times the mine comprised the Main Pit and the Acacia East Pit (ACE). Part of the mine was separated from the ocean by a seawall. On 24 October 2014 there was a slump in the seawall, which was followed by a further slump on 8 November 2014 and then, on 25 November 2014, the catastrophic failure of the seawall and the inundation of the Main Pit (the Incident). This prevented Koolan from operating the Main Pit for a period of time. The Main Pit was dewatered and mining in that pit recommenced in 2018.
The respondent, Infrassure Ltd is part of a group of insurers known as a Market who indemnified Koolan under a Material Damage and Business Interruption insurance policy (Policy). Infrassure's share of any liability under the Policy was 7.5%.
Koolan claimed under the Policy for the physical damage to the mine resulting from the failure of the seawall and for the resulting business interruption. The claim in respect of physical damage was settled in June 2016. The claim for business interruption was also settled in July 2017, in relation to all insurers in the Market other than Infrassure. These reasons determine the remaining disputes between Koolan and Infrassure.
Infrassure does not dispute that Koolan suffered some loss resulting from the interruption to the operation of the mine, and nor does it dispute that it is liable to indemnify Koolan for loss of that kind. The dispute is about the quantum of Koolan's claim. On 10 June 2021, Infrassure paid Koolan its calculation of its share of the indemnity due as a result of the business interruption loss, $801,832. Koolan, however, alleges that Infrassure is liable to indemnify it for $8,491,337, and also that it is liable for interest under s 57 of the Insurance Contracts Act 1984 (Cth).
The approximately $7.7 million difference between the parties is explicable by a number of issues about the construction of the Policy, how Koolan would have operated the mine if the seawall had not failed, and whether certain adjustments to the claim should be allowed. The most significant issue is whether Koolan has established that, if the seawall had not failed, it would have changed its mine plan, so that from March 2015 it would have mined specified volumes of iron ore at a lower cost, and so on a more profitable basis, between then and 23 October 2015. That is the end date of the Indemnity Period on which the parties are agreed, being the 12 months starting on the date of the first slump in the seawall.
By its originating application, Koolan seeks a declaration that it is entitled to be indemnified by Infrassure under the Policy for 7.5% of Koolan's calculation of the business interruption loss. It also seeks declarations as to the proper construction of the Policy. It claims judgment in the sum of $8,491,337 plus interest under the Insurance Contracts Act and costs (that sum does not, however, take into account the amount of $801,832 that Infrassure paid Koolan just before trial).
The trial took place during the COVID-19 pandemic, by video link from locations in Perth, Sydney and Brisbane, and included witnesses appearing from Hong Kong and Christmas Island.
The Policy and the parties' submissions are replete with capitalised defined terms and acronyms. These reasons will not swim against that tide. Terms defined in provisions of the Policy that are set out below will be used throughout these reasons without further defining them.
Given the complexity and disparate nature of the issues, it is not possible to state the outcome succinctly at this point. The parties agreed that when these reasons are delivered, they will confer in an attempt to agree the amount of Infrassure's remaining liability, if any.
II. THE POLICY
Before describing the issues in more detail it is convenient to set out the key terms of the Policy. Its identifying details are Material Damage and Business Interruption Insurance policy bearing Unique Market Reference/policy number Q10592513/01 on policy wording with endorsements bearing number B0621CMSMG0513.
The Policy wording is standard wording that was issued by the Insurance Council of Australia and National Insurance Brokers of Australia in 1987. In fact, cases and other materials reviewed below suggest that wording of this kind has been in use in the United Kingdom and other insurance markets for a century. It has been used in a wide range of commercial operations and was not specifically prepared for use in the mining industry.
The relevant terms are found in Section 2 of the Policy, headed 'Business Interruption'. The indemnity clause is as follows:
In the event of any building or any other property or any part thereof used by the Insured at the premises for the purpose of the Business being physically lost, destroyed or damaged by any cause or event not hereinafter excluded (loss, destruction or damage so caused being hereinafter termed Damage) and the Business carried on by the Insured being in consequence thereof interrupted or interfered with, the Insurer(s) will, subject to the provisions of this Policy including the limitation on the Insurer(s) liability, pay to the Insured the amount of loss resulting from such interruption or interference in accordance with the applicable Basis of Settlement.
The total amount claimed from the Market was below the limitation on liability referred to here.
The Basis of Settlement is then set out. It contains four items. Only Item 1 and Item 4 are relevant to the dispute. Item 1 provides as follows:
The Insurance under this item is limited to loss of Gross Profit due to: (a) Reduction in Turnover and (b) Increase in Cost of Working and the amount payable as indemnity thereunder shall be:
(a) In respect of Reduction in Turnover
the sum produced by applying the Rate of Gross Profit to the amount by which the Turnover during the Indemnity Period shall, in consequence of the Damage, fall short of the Standard Turnover,
less any sum saved during the Indemnity Period in respect of such of the charges and expenses of the Business payable out of Gross Profit as may cease or be reduced in consequence of the Damage.
(b) In respect of Increase in Cost of Working
the additional expenditure necessarily and reasonably incurred for the sole purpose of avoiding or diminishing the reduction in Turnover which, but for that expenditure, would have taken place during the Indemnity Period in consequence of the Damage, but not exceeding the sum produced by applying the Rate of Gross Profit to the amount of the reduction thereby avoided;
less any sum saved during the Indemnity Period in respect of such of the charges and expenses of the Business payable out of Gross Profit as may cease or be reduce[d] in consequence of the Damage.
Item 1(b) can be labelled 'Increased Costs of Working' (ICW). It is unclear why the final sentence just quoted is not indented to Item 1(b) like it is to Item 1(a). Koolan submits that the fact that this 'savings' clause appears twice in identical terms appears to be a typographical error, and that nothing turns on it. I agree. The item means the same if the savings clause appears at the end of Item 1 and if it appears at the end of both Item 1(a) and Item 1(b) individually.
Item 1 then makes provision for a reduction of the amount payable in certain circumstances which are not relevant.
The term 'Gross Profit' is defined as follows:
GROSS PROFIT:
the amount by which:-
(a)the sum of the Turnover and the amount of the Closing Stock and Work in Progress shall exceed
(b)the sum of the amount of the Opening Stock and Work in Progress and the amount of the Uninsured Working Expenses as set out in the Schedule.
NOTE
The amounts of the Opening and Closing Stocks and Work in Progress shall be arrived at in accordance with the Insured's normal accountancy methods, due provision being made for depreciation.
There are no 'Uninsured Working Expenses' (UWEs) set out in a schedule to the Policy. However, it ended up as common ground that when the UWEs are not specified in the schedule, they are simply the variable costs of producing Turnover (or Output, as to which see below).
Other terms used in Item 1 are defined as follows (italicisation in original):
TURNOVER: the money (less discounts, if any allowed) paid or payable to the Insured for goods sold and delivered and for services rendered in course of the Business at the Premises.
INDEMNITY PERIOD: the period beginning with the occurrence of the Damage and ending not later than the number of months specified in the Schedule thereafter during which the results or the Business shall be affected in consequence of the Damage.
…
REDUCTION IN TURNOVER: the amount by which the Turnover during a period shall, in consequence of the Damage, fall short of the part of the Standard Turnover which relates to that period.
As already indicated, the Indemnity Period here is 12 months. Following this is a provision (or set of provisions) that is central to Koolan's primary claim. It is framed as a group of definitions but, as will be seen, it also has substantive effect:
RATE OF GROSS PROFIT:
The Rate of Gross Profit earned on the Turnover during the financial year immediately before the date of the DamageANNUAL TURNOVER:
The Turnover during the 12 months Immediately before the date of the DamageSTANDARD TURNOVER:
The Turnover during the period in the 12 months immediately before the date of damage which corresponds with the Indemnity Period…
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)To which such adjustments shall be made as may be necessary to provide for the trend of the Business and for variations in or other circumstances affecting the Business either before or after the Damage or which would have affected the Business had the Damage not occurred, so that the figures thus adjusted shall represent as nearly as may be reasonably practicable the results which but for the Damage would have been obtained during the relative period after the Damage.
I will call the provision found in the right-hand column above the adjustments clause.
There is an option in the following terms for the Insured to replace the 'Turnover' with 'Output':
At the option of the Insured the term 'Output' may be substituted for the term 'Turnover' and, for the purpose of this Policy, 'Output' shall mean the sale and/or invoice value of goods manufactured and/or processed by the Insured in course of the Business at the Premises. Provided that only one such meaning shall be operative in connection with any one event involving Damage.
Koolan has taken that option in relation to the present claim. From now on, therefore (with one exception to be explained below), these reasons will substitute 'Output' in place of 'Turnover', without marking the substitution with square brackets or in any other way.
Item 4 of Section 2 is as follows:
The insurance under this item is limited to increase in cost of working (not otherwise recoverable hereunder) necessarily and reasonably incurred during the Indemnity Period in consequence of the Damage for the purpose of avoiding or diminishing reduction in Output and/or resuming and/or maintaining normal business operations and/or services.
This item is subject to a sublimit of $7,500,000.
III. THE ISSUES
The pleadings are in broad terms only. It is preferable to focus on the way that the issues emerged from the written outlines of opening submissions, supplemented by written closing submissions, filed on behalf of each of the parties. Also, to a large extent the details of Koolan's claim appeared in certain claim spreadsheets prepared on its behalf in order to quantify the claims under the several alternatives that are about to be explained.
The issues are described here in a relatively brief, introductory way. It will be necessary to go into the parties' cases in more detail when I come to resolve the issues in Sections V and VI below.
EMP or RMP
The main issues in this case revolve around the mine plan for the Main Pit. In broad terms, a mine plan for open cut mining sets out which parts of the pit will be excavated, and when. Mining companies are constantly making, implementing and revising plans of that kind. As at October and November 2014, when the seawall failed, Koolan was working to a mine plan that came to be called the 'existing mine plan' or EMP.
As has been seen, the amount of indemnity under Item 1 of the Policy is calculated by reference to the amount by which the Output during the Indemnity Period (24 October 2014 to 23 October 2015), fell short of a concept labelled 'Standard Output'.
The Rate of Gross Profit is then applied to that shortfall (the Reduction in Output) as an essential step in the calculation of the indemnity. But both Standard Output and Rate of Gross Profit are subject to the adjustments clause included in the provision which has been quoted at [20] above. The main issues concern the mine plan on which the adjusted Standard Output and adjusted Rate of Gross Profit should be based.
Would Koolan have adopted the RMP?
At the heart of the case are Koolan's contentions that:
(a)the above provisions require Output to be calculated by reference to the mine plan which would have been implemented had the relevant Damage not occurred; and
(b)here, if the seawall had not failed, from 1 March 2015 Koolan would have mined according to a different mine plan from the EMP, known as the 'revised mine plan' or RMP.
Importantly, the RMP was not proposed, let alone adopted or implemented, before the seawall failed. In circumstances explained below, it was proposed for the purposes of the insurance claim.
These contentions give rise to issues of construction and issues of fact. As far as construction goes, according to Koolan, the Policy provides for indemnity based on a hypothetical calculation because of the requirement in the adjustments clause to make adjustments to the Rate of Gross Profit and Standard Output so that the resulting figures are 'as nearly as may be reasonably practicable the results which but for the Damage would have been obtained' during the relevant period. So if the Court determines as a matter of fact that Koolan would have adopted the RMP during the Indemnity Period, the Policy requires the adjusted figures to reflect that.
Infrassure disputes that construction. It submits that the provisions of the Policy set out in Section II above start with a presumption that the Output in the Indemnity Period would have been the same as the Standard Output, that is, the Output for the 12 months immediately before the date of the Damage. Infrassure says that a similar presumption is the starting point for calculating the Rate of Gross Profit. Infrassure contends that these presumptions mean that the Insured must prove its Standard Output and Rate of Gross Profit on the basis of historical facts at the end of the Indemnity Period. Hypothetical possibilities such as the RMP may not be taken into account for the purposes of the adjustments clause.
As for issues of fact, the main one, which took up the bulk of the evidence, is whether Koolan would indeed have changed to the RMP as from 1 March 2015 if the seawall had not failed. Infrassure says that the course of events and Mount Gibson's internal and external communications leading up to the Incident (and beyond) show that Koolan would not have adopted the RMP, but would have continued to mine on the basis of the EMP.
To what extent would the EMP or the RMP have been achieved?
There are also issues in this case about the extent to which the mine plan or plans - whichever they would have been - would have been achieved. These issues revolve around what are called the 'physicals', namely, the forecast amounts for total ore and waste that would have been mined, the total material moved or TMM, and the quantities of ore that would have been extracted.
On the assumption that Koolan would have continued to mine according to the EMP, Infrassure submits that Koolan consistently fell short of its plans in the past, so the Court should conclude that it would have fallen short if it had continued with the EMP. Koolan, however, points to new equipment and other productivity improvements which, it says, mean that it would have had the capability to achieve the targets in the EMP had it mined according to that plan. But if the Court finds that it would have fallen short, the parties are agreed that the Court should find that Koolan would have achieved 91% of the EMP.
If the Court finds that Koolan would have mined according to the RMP, Infrassure submits that Koolan has failed to discharge its onus of proving the amount of ore that would have been mined under the RMP, so that its claim must fail entirely. Its submissions in support of that were directed, not to whether Koolan was capable of mining and processing the amounts shown in the RMP, but whether it had established that it would have developed the particular mine schedule on which it relies for the physicals under the RMP. Infrassure submits that Koolan has not done so, because the personnel involved and the software package used would have been different. Koolan submits that all it has to show is that it had the capability to mine the amounts contemplated under the RMP, and it has established that, even if it used different software and different personnel.
Alternatively, if the Court is prepared to make a finding that Koolan would have achieved the physicals in the RMP up to a certain level, Infrassure submits that Koolan would have fallen short by a similar margin to the shortfall against target for FYE 2014 (this judgment will use the convention 'FYE' to designate financial year ending on 30 June in the relevant year), that is, 17%.
There are four other issues which are not as significant as the EMP or RMP issue in their monetary impact, and so may be called subsidiary issues.
ICW-UWEs
In broad terms, Items 1(b) and 4 provide indemnity for additional expenditure during the Indemnity Period that was incurred for the purpose of avoiding or diminishing the Reduction in Output that would otherwise have occurred in consequence of the Damage. Koolan has included in its claim spreadsheets, for each of the alternatives (RMP, EMP and 91% EMP), a figure labelled 'Increased Cost of Working - UWE's'. At a conceptual level, the figures (which differ between the spreadsheets) were derived in the following way.
Koolan has calculated the Rate of Gross Profit which it says it would have achieved had the seawall not failed, in mining certain volumes from both the Main Pit and ACE. But because the seawall did fail, the company in fact mined a lower volume of ore, from ACE only. The actual costs it incurred in order to mine that ore were higher than the costs would have been if one were to assume that the same Rate of Gross Profit applied to the actual Output. Koolan says that the difference reflects increased costs which it incurred in working ACE as a consequence of the failure of the seawall.
Infrassure disputes these 'ICW-UWEs' amounts. It submits that Koolan has not established that the actual expenses meet any of the criteria in Item 1(b), alternatively Item 4. Infrassure says that Koolan was required to identify specific work that was required to avoid or diminish any Reduction in Output, and to cost that work. These things Koolan has not done. Infrassure also submits that on the evidence, Koolan has not established that any additional expenses were necessarily and reasonably incurred for the sole purpose of avoiding or diminishing the Reduction in Output consequent on the Incident.
In relation to additional expenditure under Item 4, Koolan says this allows it to claim additional costs as a last resort if its claim under Item 1(b) fails. But Infrassure submits that Item 4 only applies to additional costs 'not otherwise recoverable' under the Policy, and costs in the nature of those claimed by Koolan are recoverable under Item 1(b), even though Koolan has failed to prove its case under that item.
Stock on Hand
At the time of the Damage, Koolan had on hand 358,981 tonnes of iron ore which had been mined and was stockpiled (Stock on Hand). Koolan subsequently sold that ore, at prices that were lower than the prices it would have achieved had the Damage not occurred. That is because the failure of the seawall led to a delay in shipments, which in turn led to lower prices in a falling price environment. There was a pause in shipping from Koolan Island from November 2014 and shipments did not resume until January 2015. All this is common ground. But the parties are in dispute as to whether that shortfall in sale value is the subject of indemnity under the Policy.
As will be explained in more detail when I come to determine the issues that arise under this heading, in Section VI below, Koolan has claimed, in effect, the Rate of Gross Profit on the difference between the price that would have been realised on the stockpiled ore had it been sold in a world where the Incident had never occurred, and the price that was in fact realised for that ore.
Koolan also bases its claim, in the alternative, on the adjustments clause, or on a salvage sale clause in the Policy, which will be set out in Section VI.
Infrassure says none of that is permissible under the Policy, essentially because Koolan has elected to base its claim on Output, that is ore produced during the Indemnity Period, rather than Turnover, being revenue from ore sold during that period. Infrassure also takes issue with the applicability of the salvage sale clause.
There is also a factual issue about when the Stock in Hand was in fact sold. Koolan says it should be treated on a 'first in first out' basis, so that it will have been sold within two months of when shipping resumed. Infrassure submits that it should be taken to have been sold throughout the entire Indemnity Period. This potentially matters because of fluctuations in the iron ore price over the relevant period. But it only matters potentially, because if Koolan's primary approach is correct, the aggregate Output during the Indemnity Period is the basis of the calculation, and the times at which any particular ore was sold will not be relevant.
Foreign exchange
Mount Gibson sells most of its product at prices denominated in United States dollars, but it reports its financial results in Australian dollars. So any decline in the US dollar relative to the Australian dollar will adversely affect those results.
In order to hedge against that risk, in FYE 2015 and FYE 2016 Mount Gibson entered into forward foreign currency contracts, whereby it agreed to deliver an amount of US dollars in return for Australian dollars at a conversion rate fixed in advance. If the US dollar was low against the Australian dollar compared to the fixed conversion rate, then Mount Gibson would experience a gain (because under the contracts it would receive more Australian dollars than it would have, had it not hedged). Conversely, if the Australian dollar was low, Mount Gibson would experience a loss.
In either case, the gain or loss would need to be reflected in Mount Gibson's accounts. Mount Gibson's accounting practice in reporting these gains or losses was to allocate them to its operating subsidiaries pro rata against the percentage of revenue which the subsidiary earned.
During the Indemnity Period, Mount Gibson reported losses on the forward foreign currency contracts. Infrassure submits that these losses should reduce the amount of adjusted Standard Output that Koolan uses to calculate the indemnity, as well as the Rate of Gross Profit that is applied to the Reduction in Output that is derived (in part) from that adjusted Standard Output.
Koolan disputes this. It says that the foreign exchange losses have nothing to do with the Incident and that they are a mere accounting entry made at 'head office' level.
Redundancies
The interruption to mining operations at the Main Pit resulted in Koolan making a number of employees redundant. Koolan has thereby saved those employees' salaries or wages and other employment costs, and it accepts that this reduces its claim, under the 'savings' provision in Item 1(a). But in order to achieve those savings, redundancy payments were made. Koolan contends these should be netted off from the savings. Infrassure contends that the Policy does not permit or require this.
Interest
In addition to the above issues, Koolan claims interest under s 57 of the Insurance Contracts Act. That section provides that the insured is entitled to interest commencing on the day as from which it was unreasonable for the insurer to have withheld payment of an amount for which it is liable under the contract of insurance. Regulation 38 of the Insurance Contracts Regulations 2017 (Cth) prescribes an interest rate of 3% more than the mean of the 10 year Bond yields over the relevant period, rounded down to the nearest quarter of 1%.
Koolan claims that the date from which interest should run is 31 August 2017, which is one month after all the other insurers in the Market considered themselves to have been possessed of enough information to settle Koolan's business interruption claim. Infrassure takes issue with this, but only if Koolan fails in its RMP claim. In that event, Infrassure points out that Koolan only advanced the alternative EMP claim in early 2020. So if the Court does reject the RMP claim, it will have vindicated Infrassure's decision not to settle on the basis of that claim in 2017.
It is worth noting that the interest claim is what gives this Court jurisdiction over the matter. Because the applicant seeks interest pursuant to s 57 of the Insurance Contracts Act, jurisdiction arises under s 39B(1A)(c) of the Judiciary Act 1903 (Cth), which relevantly provides that the original jurisdiction of the Court includes jurisdiction in any matter arising under any laws made by the Commonwealth Parliament. A matter will arise under an Act if the Act or a provision within it establishes a right or duty asserted by the parties: see Rana v Google Inc [2017] FCAFC 156; (2017) 254 FCR 1 at [18]; R v Commonwealth Court of Conciliation and Arbitration; Ex parte Barrett (1945) 70 CLR 141 at 154. As set out by Allsop CJ in National Australia Bank Limited v Nautilus Insurance Pte Ltd (No 2) [2019] FCA 1543 at [96]:
… a substantial claim for interest is based on a right granted by s 57 of the Insurance Contracts Act. The provision is a code for the right to claim interest: NRMA Insurance Ltd v Tatt (1989) 94 FLR 339.
Given federal jurisdiction is attracted in relation to a matter in relation to the interest claim, that jurisdiction is not limited to the questions incidental to the aspect of that matter which attracted the federal jurisdiction. Rather, the jurisdiction extends to the resolution of the whole matter: Nautilus at [81]; see also, ReWakim; Ex parte McNally [1999] HCA 27; (1999) 198 CLR 511 at [135]; Philip Morris Inc v Adam P Brown Male Fashions Pty Ltd (1981) 148 CLR 457 at 475; Fencott v Muller (1983) 152 CLR 570 at 603. Here, the matter encompasses the entirety of the dispute between the parties.
List of issues
After the end of the trial my Chambers settled with the parties a list of the issues to be determined, as explained more fulsomely in the discussion above. The list is as follows (slightly modified to ensure consistency in the use of defined terms):
RMP and EMP
1.If the seawall had not slumped on 24 October 2014 and 8 November 2014 and failed on 24 November 2014 (together, the Incident), would the applicant have worked the mine:
a) according to
i)the EMP particularised in para 20A(b) of the Further Amended Statement of Claim, from 24 October 2014 to 28 February 2015; and
ii)the RMP constituted by the Reforecast Mine Plan found at tab 11 of the Court Book, the Hypothetical Board Paper found at tab 467 of the Court Book and the Reforecast Life of Mine Plan found at tab 476 of the Court Book, from 1 March 2015 to 23 October 2015; or
b)according to the EMP from 24 October 2014 to 23 October 2015?
2.If the outcome of the previous issue is (a), on the proper construction of the Policy referred to at para 8 of the Further Amended Statement of Claim, are the Rate of Gross Profit and Standard Output as adjusted according to the adjustments clause permitted or required to be calculated on the basis of that outcome?
3.To what extent would the applicant have achieved the forecasts/targets contained in the mine plan(s) to which the applicant would have worked in the Indemnity Period had the Incident not occurred?
ICW-UWE
4.Is the applicant entitled to the items claimed as 'Increase Cost of Working at ACE' (UWE's) in Appendix G of the Reissued Third Supplementary expert report of John McKenzie, referenced in paragraph 13 of the report (CB 42a)
a)under Item 1(b) of Section 2 of the Policy; or
b)to the extent that the answer to a) is 'no', under Item 4 of Section 2 of the Policy (up to the $7.5 million sub-limit)?
Stock on Hand
5.Regarding the Stock on Hand on Koolan Island as at 24 October 2014, is the applicant entitled under the Policy to indemnity:
a)under Item 1(a) of Section 2 of the Policy for diminution in the value of the Stock on Hand as a result of the Incident; or
b)under the salvage sale clause; or
c)not at all?
6.If the applicant is not entitled to indemnity for the diminution in value under Item 1(a) of Section 2 of the Policy, or is entitled only to indemnity in accordance with the salvage sale clause, when and over what period of time should the Stock on Hand be taken to have been sold?
Foreign exchange
7.Should the calculation of the indemnity factor in, either when determining the value of the Standard Output and the value of the actual Output during the Indemnity Period or as a saving, foreign exchange losses which were allocated to the applicant in its financial statements in respect of the Indemnity Period and foreign exchange losses that would have been allocated to the applicant if the Incident had not occurred?
Redundancies
8.Is the applicant entitled to deduct the cost to it of redundancies that were necessary as a result of the Incident from savings in employment costs attributable to the Incident?
Interest
9.From what point in time, if at all, should the respondent pay the applicant interest under s 57 of the Insurance Contracts Act 1984 (Cth)?
After one more preliminary section dealing with the witnesses, I will structure these reasons by reference to this list of issues.
As already foreshadowed, the parties agreed, and I accept, that the most convenient course to take will be for me to express my opinion as to how each of the issues is to be determined, and then leave it to the parties to seek to reach agreement as to the quantitative impact of those determinations on Koolan's claims. There is a degree of interaction between the way the issues will be resolved, so it was not possible to present an agreed set of figures at trial (or even competing sets of figures). If the parties are unable to reach agreement as to the quantum of the claim after considering these reasons, it may be necessary to conduct a further hearing or to resolve the areas of disagreement on the papers.
IV. THE WITNESSES
There were 11 lay witnesses, all of whom were called by Koolan. One of the lay witnesses was Mark Davidson, a loss adjustment consultant who prepared Koolan's indemnity claim as presented to the Market. The rest of the lay witnesses were present or former employees or officers of Koolan or Mount Gibson. Five of those lay witnesses, including Mr Davidson, were not required for cross examination, so their statements were admitted into evidence without any oral testimony. In what follows, all excerpts from witness statements exclude evidence ruled or agreed to be inadmissible which, in some circumstances, has required editing of those excerpts.
There were also two expert witnesses: Koolan called John McKenzie, an accountant with expertise in quantifying business interruption claims, and Infrassure called Michael Potter, a forensic accountant. Mr Potter was Infrassure's only witness. Expert reports from a third person, Craig Tucker, were ultimately not adduced into evidence.
Due to the COVID-19 pandemic, each witness who was cross examined gave evidence by video link.
I will now give a description of the witnesses who were cross examined, and my overall assessments of the ways in which they gave evidence. I recorded these assessments at the time of the trial.
James Beyer
Mr Beyer was the Chief Executive Officer (CEO) of Mount Gibson throughout the period that is material to the present claim.
Mr Beyer has a Bachelor of Engineering, Mining from the University of Queensland and a Master of Geoscience, Mineral Economics from Macquarie University. Before coming to Mount Gibson he worked as a mining manager and then general manager at Western Mining Corporation, and subsequently as a general manager and then senior director at Newmont Mining Corporation. He commenced employment with Mount Gibson in November 2011 as its Chief Operating Officer (COO). He was appointed acting CEO shortly after that (due to the resignation of the then CEO) and his appointment became permanent in May 2012. Since October 2018, Mr Beyer has been the Managing Director and CEO of Regis Resources Ltd, a publicly listed gold mining company.
Mr Beyer's evidence was central to Koolan's claim and he was cross examined at length. He presented as a highly experienced senior mining executive with a sound grasp of the technical aspects of mining activities, albeit at a level of detail that one would expect of a chief executive who is able to delegate to others.
Mr Beyer's manner was relaxed until the cross examination became more directly challenging of his evidence, whereupon he sometimes expressed annoyance or exasperation with the cross examiner. Generally he listened carefully to questions and for the most part did his best to answer them, although on particular points where he was challenged his answers became less helpful. Mr Beyer displayed a modest level of distrust of the cross examiner throughout and was generally astute to discern where a line of questioning was going.
That is all unremarkable for a person who was cross examined for two long days, and those observations are not intended by way of criticism. What they reflect, however, is that Mr Beyer did not present as a witness with no stake in the outcome. That is so even though the matters traversed in cross examination involved no criticism of any of the actions he actually took, and no risk of damage to his reputation. After all, most of his evidence went to what would have occurred in a world that never eventuated. Although Mr Beyer has not been employed by Mount Gibson since 2018, it is difficult to imagine how he would have behaved differently in the witness box if he had still been its CEO. Indeed, as will be seen he appeared more partisan than its present CEO, Peter Kerr.
That is significant because of the caution which the Court must adopt when assessing testimony about a past counterfactual. The main issue to which Mr Beyer's evidence went was whether Koolan would have mined on the basis of the RMP from March 2015, if the seawall had not failed. His evidence was largely about what he and the board of Mount Gibson (Board) would have done in that hypothetical situation. As discussed below, the courts have long acknowledged the risks that evidence of that kind will be self-serving and that it will be affected by hindsight. In light of the first of those risks, any lack of independence in a witness is particularly significant. It was clear that Mr Beyer was concerned to support Koolan's claim here.
I have no reason to think that Mr Beyer gave his evidence other than honestly. But, as is also discussed below, a genuine belief by a witness as to how he would have acted in a hypothetical situation will generally not be enough to persuade the Court that he would have acted in that way. In my view, Mr Beyer's apparent conviction that he would have recommended adoption of a revised mining plan from March 2015 was affected by hindsight and a desire to support Koolan's claim, and in general that reduces the weight I give to his evidence.
Lee Seng Hui
Mr Lee is the Chairman of the Board of Mount Gibson, and has been since 19 February 2014. So he was Chairman throughout the period relevant to this claim.
Mr Lee has a Bachelor of Laws from the University of Sydney. He is the Chief Executive and an Executive Director of Allied Group Limited, which is listed on the Hong Kong Stock Exchange. He is Chairman of Tian An China Investments Company Limited. He is also, relevantly, a non-executive director of APAC Resources Limited, which is a substantial shareholder of Mount Gibson. Mr Lee has been on the Board since 29 January 2010.
Like Mr Beyer, Mr Lee was cross examined at length. For the most part he presented as calm, impartial and objective. He was extremely careful in the manner in which he listened to and answered questions. He professed to avoid speculation, even in relation to uncontroversial matters such as whether one of the reasons a director of Mount Gibson was appointed was because he had 40 years of technical, operational, managerial and corporate expertise.
Occasionally, Mr Lee's level of caution about the questions that were being put to him led to unnecessary confusion; for example in the following passage, where the cross examiner asked him about the two slippages in the seawall which preceded the catastrophic failure (ts 288):
So what those two slippages must have revealed to the company and to the board is that there was a pre-existing issue of instability in that southern wall, wasn't - that must be the case, mustn't it?---No. I don't see how you - you - you come up with that conclusion.
Well, isn't it inescapable? Unless there is some internal event that caused it, it must mean an inherent condition in the wall?---I don't see how you - you're - you're saying - let me clarify what you're saying. You're saying that the board knew that there was some - already before these two slippages, that the board knew that there was some instability in - - -
No. No, not before. What it - I'm not suggesting before. That what the incidents revealed to the board is that there must have been a pre-existing instability problem?---I'm - I'm confused. Because you - you are - you are - you are - the way you're - you're asking the question is that you are assuming the board to have realised that there is an instability prior to the instability.
Well, the - - -?---That's not what happened.
Okay. Well, you tell me what happened?--- ..... we tried to - we have - we have suffered a minor ..... we're trying to repair. This is the - you're talking about the - the two slippages.
Yes?---Yes. So we have to repair the two slippages.
Okay. Well, maybe the point you're trying to make is that you had no understanding at the time as to what the causes of those slippages were?---No, I did not.
When Mr Lee was taken to records of Board meetings he attended in 2014 and 2015, he disclaimed having any independent recollection of the meeting or Board paper in question, and consistently said 'I rely on the minutes'. He gave evidence of this nature on at least eight occasions. Only on very few occasions did Mr Lee say he had 'a little bit of a recollection of it' (ts 256) or a 'vague recollection' (ts 248). And when the cross examination became more directly challenging, Mr Lee's answers became unhelpful. For example, he professed to have no independent recollection of a Board meeting on 29 April 2015, when he gave evidence in his witness statement about a matter that was recorded in the minutes of the meeting. When confronted with the apparent contradiction between the giving of that evidence and the lack of independent recollection, Mr Lee had no good answer. More generally during cross examination, he tended to repeat or paraphrase what was said in the Board minute or paper that was being presented to him, rather than engage with the question of what he himself could now remember.
Given the various executive and board positions Mr Lee occupies, I expect that he has attended many board meetings and seen many board papers. So I accept that his apparent lack of recollection of specific matters was truthful. It did, however, limit the usefulness of his evidence. It amounted to an inability or unwillingness to place himself in the states of mind he held in the relevant parts of 2014 and 2015 and, instead, a tendency to make inferences in hindsight based on the documents that were put to him at the time of preparing his witness statements.
Like Mr Beyer, I have no reason to think Mr Lee's evidence was other than honest. But in general I consider it to be reconstruction based on inferences from the written record and on hindsight. That limits the weight I put on Mr Lee's evidence. That is especially so given the risks, already mentioned in connection with Mr Beyer, that evidence about what Koolan would have done had the seawall not failed may be self‑serving and affected by reconstruction and hindsight.
Peter Kerr
Mr Kerr has been the CEO of Mount Gibson since October 2018. He is a chartered accountant with a work history in a large accounting firm, and then as a mining executive in various roles, including Chief Financial Officer (CFO) and managing director. He joined Mount Gibson as its CFO in 2012 and held that role throughout the period relevant to this claim.
Mr Kerr was cross examined for half a day. Although he is Mount Gibson's present CEO, he appeared to be an impartial and disinterested witness, more so than Mr Lee and certainly more than Mr Beyer. He agreed with the cross examiner frequently, occasionally offering explanation or qualification. His answers were generally helpful and at no point did he appear to be approaching the questions with concern about the possible consequences of his answer, or with any intention to be obstructive.
I accept Mr Kerr as an honest witness, and his apparent impartiality increases the weight I put on his evidence. In what has no doubt already emerged as a theme, however, it does not follow from those conclusions that the Court should accept uncritically his evidence about what Koolan would have done in the counterfactual scenario where the seawall did not fail.
Andrew Thomson, Brett Morey and Scott de Kruijff
These three lay witnesses were not cross examined at length, and it is not necessary to comment on them separately. Mr Thomson was the COO of Mount Gibson during the time relevant to the claim. He now works as a consultant elsewhere, although at the time of the trial he had been engaged to be interim general manager of operations at Koolan Island. Mr Morey was Technical Services Manager at Koolan Island for most of the relevant period, although in 2015 he became Operations Manager at Koolan Island. He still works for Mount Gibson. Mr de Kruijff was General Manager at Koolan Island for most of the relevant period. He does not work for Mount Gibson anymore.
Each of these witnesses answered the questions put to them in straightforward ways, and were prepared to concede points where necessary. Where they did not concede, the reasons they gave were plausible. I consider that each of them gave their evidence honestly and impartially.
John McKenzie and Michael Potter
Neither of these expert witnesses was cross examined at length, and they too can be described together. Each was willing to concede points where appropriate. They neither professed expertise they did not have, nor sought to avoid having to engage with points by professing lack of relevant knowledge. Neither crossed the line separating an expert witness from an advocate. In the case of each of them, I accept that their evidence was given with the measure of independence appropriate to expert witnesses.
The only attack on the general expertise of either of these witnesses was a submission by Koolan that Mr Potter, a forensic accountant, has no experience in business interruption insurance claims and said in cross examination that he has no expertise in studying mine processing and loading operations. In the end, the basis on which I will resolve the issues below means that I do not need to comment on Mr Potter's business interruption experience. I accept, however, that he did not profess any particular expertise in connection with mining.
I will now turn to consider the evidence and submissions relevant to each of the issues and to determine those issues.
V. EMP OR RMP
Koolan's claim that it would have adopted and achieved the RMP
Koolan's primary claim is that, had the seawall not failed, it would have mined according to the RMP from 1 March 2015. As already indicated, the RMP did not exist prior to the seawall failure. It was created for the purposes of the insurance claim. For the purposes of this proceeding, Mr Beyer and Mr Kerr have also prepared a hypothetical board paper (HBP) which, Koolan says, replicates as nearly as practicable the approval process that would have occurred had the seawall not failed. Mr Lee's evidence was that he would have supported the recommendation in the HBP and that he expects that the Board would have approved it. Koolan thus seeks to effectively reconstruct the decision making process and the manner in which a number of variables would have contributed to a decision to implement the RMP.
There are two key differences between the EMP and the RMP. Both depend on strip ratios. The strip ratio is the ratio of waste removed to ore recovered, usually measured by volume. The first key difference between the EMP and the RMP is that under the latter, an area at the western end of the Main Pit known as Main West 3 or MW3 would not be mined. That is a high strip ratio area, so if it were not mined, the average strip ratio of the material mined would be considerably less. The second key difference is that only the low strip ratio areas in ACE would be mined.
The result, Koolan says, would have been a significant reduction in TMM, and so a significant reduction in the unit cost per tonne of ore produced, due to a reduction in waste tonnes mined. In simple terms, if the unit cost of production of a tonne of ore is higher than the sale price of that tonne, the mine is unprofitable. Reducing the relative amount of waste mined reduces the total cost of mining and thus increases the profitability of the mine per tonne of ore sold. That is why, Koolan says, when the iron ore price is low, there is a focus on mining ore with a lower strip ratio. However, as will emerge below, there can also be good reasons to mine at a high strip ratio.
Infrassure's case in response emphasises the hypothetical nature of the RMP as a plan that was produced after the failure of the seawall solely for the purpose of the business interruption claim. It submits that the authorities caution against accepting such evidence, regardless of the credibility of those giving it.
Infrassure submits that the hypothetical that Koolan has sought to recreate does not faithfully reflect the true position that would have been reached. It omits to consider alternative options that Mount Gibson had in fact been considering prior to the seawall failure, such as a short term suspension in mining. It also omits other important information, such as the need to announce a significant reduction in reserves if the RMP were adopted.
Infrassure also points to Koolan's actual behaviour in an environment of falling prices in the year or so leading up to the failure of the seawall. As at 1 January 2014, the price was over AU$150/dry metric tonne (dmt). By 24 October 2014, when the first slump occurred, it had fallen by over a third, to AU$91/dmt. By the time of the final failure, it was AU$80/dmt, a fall of some 46% from January. But despite that, there is no evidence of Koolan actually changing its mine plan before the failure. Infrassure submits that the price environment was no worse in early 2015, and that the Court should not accept evidence Mr Beyer gave that by early 2015 he would have seen coming an important threshold for Koolan Island, namely that its internal rate of return (IRR) would drop below 15%.
Further, Infrassure says that when, in the real world, Mr Beyer was presenting financial forecasts to the Board regarding potential returns from rebuilding the seawall, he was doing so on the basis of the EMP, without proposing or seeking out an alternative mine plan.
Infrassure also points to evidence about the time it would have taken to prepare and present the RMP ready for consideration by the Board and submits that Koolan could not have had it ready for approval by late February 2015, the time of the HBP.
Infrassure further relies on Koolan's omission to call evidence from any Board member other than Mr Lee. It makes, in effect, a submission about that based on Jones v Dunkel (1959) 101 CLR 298. Infrassure also submits that Mr Lee's hypothetical evidence should not be given any weight.
Koolan's preferred alternative case to the RMP is that it would have continued mining according to the EMP, had the seawall not failed. Koolan also has a third alternative, which is that it would have mined according to the EMP but only achieved 91% of budgeted mining performance. Infrassure accepts that the claim should be calculated on that basis.
Nevertheless, Koolan's primary case is that, not only would it have mined to the RMP, it would have achieved the figures forecast in it. It points to the fact that the TMM forecast for the RMP, approximately 29 million tonnes (Mt), is 22% lower than the TMM forecast for the EMP for the 12 months following the slump in the seawall, approximately 37.2 Mt. Even if Koolan had only mined 91% of the EMP forecast (about 33.9 Mt), which is the percentage that Infrassure accepts should be applied to the EMP claim, that would still be more than the TMM forecast under the RMP. That TMM is also less than the TMM which Koolan achieved over the 12 months prior to the first slump in the seawall.
Koolan also points to six new and three second hand dump trucks that had been delivered to the island just before the slump, to replace the existing fleet of nine, which it says would have brought further efficiencies. It had greater excavator capacity on the island than was necessary to achieve the TMM under the RMP. Also, it was considering an upgrade to the primary crushing unit. All this, it says, means that it would have achieved the RMP, had it adopted it.
Assessing these competing cases will require consideration of a range of evidence, both about what did actually occur in connection with mining at Koolan Island during the relevant period, and about what would have happened, on Koolan's case, if the seawall had not failed, as well as an issue about what was permitted under the Policy.
The proper construction of the Policy
It is convenient to consider that construction issue first. For the reasons about to be given, I will determine it adversely to Koolan. In theory, I could stop there. In practice, as a trial judge whose conclusion about the proper construction of the Policy may be mistaken, I will not stop there, and will go on to make findings of fact as to whether Koolan would have adopted the RMP, as it says it would have, and the extent to which the company would have achieved whatever plan it mined under.
It is true that the agreed statement of issues set out above puts the contractual construction question after the factual question of whether Koolan would have adopted the RMP. Nevertheless, it appears to me that arriving at a proper understanding of the Policy is the logical place to start.
The parties' cases as to the proper construction of the Policy have been briefly outlined above at [29]-[32]. According to Koolan, the Policy provides for indemnity which can be based on a hypothetical calculation of the kind that it advances in its primary case, because of the requirement in the adjustments clause to make adjustments to the Rate of Gross Profit and Standard Output.
Infrassure submits that on the proper construction of the Policy, it does not permit Koolan's loss to be calculated by reference to the RMP. That is said to be so regardless of whether, as a factual matter, Koolan would have implemented the RMP during the Indemnity Period. That is because, Infrassure submits, the provisions of the Policy start with a presumption that the Output in the Indemnity Period would have been the same as the Standard Output. A similar presumption exists for Rate of Gross Profit, namely that the Rate of Gross Profit for the financial year prior to the Damage would have been the Rate of Gross Profit in the Indemnity Period. In Infrassure's submission, these presumptions are important, because they mean that the parties have agreed on a formula that removes the need for the Insured to prove what its Output and Rate of Gross Profit would have been on a hypothetical basis. Rather, the calculation is made on the basis of historical facts.
Infrassure relies on specific words in the adjustments clause, including the word 'adjustments' itself, which it says connotes small changes. These must be 'necessary', meaning, Infrassure submits, that there must be a compelling reason to make them. The 'trend of the Business' and the 'variations in or other circumstances affecting the Business either before or after the Damage' will be, by the time of assessment of indemnity, matters of historical fact. The requirement that the figures thus adjusted represent the results that would have been obtained 'as nearly as may be reasonably practicable' is also, in the words of Infrassure's written opening submissions (para 20), 'an objective recalibration of results by reference to trends, variations or other circumstances affecting the Business'.
In Infrassure's submission, there is no overarching principle of insurance law that displaces or modifies the basis of settlement of a claim agreed on by the parties: Brescia Furniture Pty Ltd v QBE Insurance (Australia) Ltd [2007] NSWSC 598 at [405]. That means, it says, that any requirements arising from what Koolan calls in its submissions 'the indemnity principle' must yield to the terms of the Policy. So, for example, if an interruption to the business of a mine leads to a deferral of production, not loss of production, because the resource remains in the ground and can be extracted later, the insurer nevertheless has to pay based on the proposition that the production has been lost during the Indemnity Period, and so is liable to give more than a complete indemnity, if that were judged over the life of the mine.
In contrast to the adjustments permitted under Infrassure's construction of the Policy, Koolan's RMP claim, Infrassure submits, constitutes a 'major rewriting of their business plan which, in fact, did not occur in the indemnity period' (ts 64).
Koolan makes several points in response to this. First, it does not accept that the RMP was a wholesale rewriting of the EMP. All the RMP would have done, Koolan says, is to remove MW3 from the EMP and remove a high strip ratio (11:1) area of ACE so that the remaining orebody mined had a low strip ratio of 3:1.
Koolan appeared to submit that Infrassure's construction of the Policy was of uncertain application because, for example, it was not clear whether Infrassure would have accepted that only one of those changes would have been within the parameters of the indemnity provided under the adjustments clause or if, for example, a change from a strip ratio of 11:1 to 8:1 rather than 3:1 would have been acceptable.
Second, Koolan says that there is no warrant to read any requirement into the adjustments clause that the adjustments that are to be taken into account must be small. In fact, Koolan submitted that the word 'adjust' here should be understood to have the same meaning as it does in the widely used insurance term of 'loss adjuster', simply meaning assessing how much should be paid for a claim.
Third, Koolan submits that the words in the adjustment clause referring to the 'trend of the Business' cover the trend of businesses that constantly review and revise their mining plans to take account of both matters that are within their control, such as costs, and matters that are not within their control, such as the iron ore price and currency exchange rates.
Fourth, Koolan submits that, taken in context, the adjustments clause, in providing for 'trends in the Business' and for 'variations in or other circumstances affecting the Business either before or after the Damage or which would have affected the Business had the Damage not occurred', is referring to the top two risks affecting Koolan's business, namely the market price of iron ore, and exchange rates. Koolan says that those two matters directly and fundamentally affect how any iron ore producer goes about its business on a daily, monthly and yearly basis. These would have driven change from the EMP to the RMP.
Above all, Koolan emphasises the concluding words of the adjustments clause, which require the figures adjusted in accordance with it to 'represent as nearly as may be reasonably practicable the results which but for the Damage would have been obtained during the relative period after the Damage'. This, counsel for Koolan submitted in opening, expresses an 'overriding intention' albeit 'within the confines of the clause' to ensure that Koolan 'is indemnified as nearly as can be for what it has been deprived of … in terms of business interruption by the failure of the seawall'. In these circumstances, he submitted, the Policy requires Koolan to prove a hypothetical which, he accepted, 'we can never know for certain would have eventuated but for the seawall failure' (ts 26).
General principles of construction
Contracts of insurance are to be construed according to the same principles of construction that are applied to commercial instruments in general: Swashplate Pty Ltd v Liberty Mutual Insurance Company trading as Liberty International Underwriters [2020] FCAFC 137 at [58]. In construing an insurance policy, as with other instruments, preference is given to a construction supplying a congruent operation to the various components of the whole: Wilkie v Gordian Runoff Limited [2005] HCA 17; (2005) 221 CLR 522 at [16].
In Onley v Catlin Syndicate Ltd as the Underwriting Member of Lloyd's Syndicate 2003 [2018] FCAFC 119 at [33] (Allsop CJ, Lee and Derrington JJ), the Full Court summarised 'the well‑established principles concerning the construction of policies of insurance as commercial contracts' as follows (citations removed):
Necessarily, a policy of insurance is assumed to be an agreement which the parties intend to produce a commercial result as such, it ought to be given a businesslike interpretation being the construction which a reasonable business person would give to it. The contract is naturally enough interpreted, in a temporal sense, as at the date on which it was entered into. The Courts frequently have regard to the contextual framework in which a contract is formed, to the extent to which it is known by both parties, to assist in identifying its purpose and commercial objective. It goes without saying that a construction that avoids capricious, unreasonable, inconvenient or unjust consequences, is to be preferred where the words of the agreement permit.
However, the imperative to arrive at a 'businesslike' or commercial interpretation of a contract must not be taken too far. An interpretation is commercial if it is not commercially absurd: Rockment Pty Ltd t/a Vanilla Lounge v AAI Limited t/a Vero Insurance [2020] FCAFC 228; (2020) 282 FCR 561 at [54] (Besanko, Derrington and Colvin JJ), citing HDI Global Specialty SE v Wonkana No. 3 Pty Ltd [2020] NSWCA 296; (2020) 104 NSWLR 634 at [54], [124]‑[125].
In Rockment at [56] their Honours said:
Therefore, references to a commercial result are not intended to invite a consideration of the actual financial consequences for each of the parties of a particular construction in the events which have occurred by the time that a dispute arises. Such inquiries would quickly descend into an assessment with hindsight as to what a fair and reasonable contract might provide given the circumstances that have unfolded. It would be contrary to the very certainties that the law of contract seeks to provide as to the allocation of risks, rights and obligations, if the meaning of agreements were to be adjudicated by reference to such an imprecise foundation.
To the above may be added certain points specific to the construction of insurance contracts which were made by Kirby J in Johnson v American Home Assurance Company (1998) 192 CLR 266 at 272‑276. While his Honour was in dissent, his statements of principle have been applied in numerous subsequent authorities, for example: Todd v Alterra at Lloyds Ltd (on behalf of the underwriting members of Syndicate 1400) [2016] FCAFC 15; (2016) 239 FCR 12 at [42]; Dalby Bio-Refinery Ltd v Allianz Australia Insurance Limited [2019] FCAFC 85 at [18]. Insofar as they are relevant here, they include:
(1)While the Court should give the words of the policy their ordinary operation, 'it should be an operation which takes into account the commercial and social purposes of an insurance policy': American Home Assurance at [19(1)].
(2)Account must be taken of the fact that insurance policies are often written in an international market, where particular words and phrases are elucidated by courts in different jurisdictions. Settled interpretations of commonly used language will not be disturbed without good reason: American Home Assurance at [19(2)].
(3)'… [A] fair and reasonable construction should be adopted which would take into account the variety of persons entering an insurance contract and the entitlement of such persons to know the bargain which they have secured': American Home Assurance at [19(4)] (footnote removed).
In AIG Australia Limited v Kaboko Mining Limited [2019] FCAFC 96 at [43] (Allsop CJ, Derrington and Colvin JJ) summarised how definitions are to be deployed in the construction of contracts (citations removed):
… [I]t must be recognised that usually definitions do not have substantive effect. They are not to be construed outside of the operative provisions to which they apply. Where there is an issue as to the proper construction of an operative provision in a commercial instrument then the provision should be read by inserting the definition into the provision. The same principles as to construing definitional provisions as stated in the context of the proper construction of statutes apply to the construction of commercial instruments.
Business interruption policies
Turning to the kind of business interruption policy which is in issue here, in Financial Conduct Authority v Arch Insurance (UK) Ltd (Hiscox Action Group intervening) [2021] UKSC 1, Lords Hamblen and Leggatt (with whom Lord Reed agreed) described how such policies work (referring to clauses such as the adjustments clause as 'trends clauses'):
253The standard method used in business interruption insurance to quantify the sum payable under the policy takes an earlier period of trading for comparison purposes. In most wordings this is the calendar year preceding the operation of the insured peril. A 'standard turnover' or 'standard revenue' is derived from the turnover of the business in this period. This figure is then compared with the actual turnover or revenue during the indemnity period. The results of the business in the comparator period are also used to derive a percentage of turnover that represents gross profit. The rate of gross profit is then applied to the reduction in turnover to calculate the recoverable loss. Increase in the cost of working during the indemnity period is also typically covered.
254Whilst the basic comparison between the turnover of the business in the prior period and in the indemnity period will produce a rough quantification of the lost revenue, there may be specific reasons why a higher or lower figure would be expected for the indemnity period apart from the operation of the insured peril. For example, the general trend in the business may be such as to make it likely that there would have been increased or decreased turnover during the indemnity period in any case compared with the previous year. Equally, there may be specific reasons why the turnover during the prior year was depressed, such as a strike that affected the business, or why it would be expected to have been depressed anyway during the indemnity period, such as a scheduled strike. The purpose of the trends clause is to provide for adjustments to be made to reflect 'trends' or 'circumstances' such as these. The aim is to achieve a more accurate figure for the insured loss than would be achieved merely by a comparison with the prior period and to seek to arrive at a figure which, consistently with the indemnity principle, is as representative of the true loss as is possible. The adjustment may work in favour of either the policyholder or the insurer, but it is meant to be in the interests of both.
Observations of Meagher JA (Beazley P and Leeming JA agreeing) in Mobis Parts Australia Pty Ltd v XL Insurance Company SE [2018] NSWCA 342 (Mobis NSWCA) also provide guidance as to how business interruption policies such as the Policy should be read. The wording of the policy under consideration in Mobis NSWCA was substantially the same as the Policy in this case, although the issues in Mobis NSWCA did not directly concern the adjustments (or trends) clause. At [146]-[147] and [149] Meagher JA said:
Turning to the provisions extracted above, which form part of a commercial contract of insurance, the Court must give a businesslike interpretation to 'the language used by the parties' in light of 'the commercial circumstances which the document addresses and the objects which it is intended to secure': McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579 at [22] (Gleeson CJ). As the general object of section 2 of the policy is to indemnify Mobis Australia against loss of its gross profit, the prospect of under- or over-indemnification may colour the meaning of the language used: see Castellain v Preston (1883) 11 QBD 380 at 386 (Brett LJ).
But the indemnity under section 2 is not simply against 'actual loss', unlike that in business interruption wordings generally adopted in the United States, discussed in Riley [as to which see immediately below] at paras 1.10 and 12.14, and in the 'hybrid' policy considered by this Court in Coalex Pty Ltd v Commercial Union Assurance Co of Australia Ltd (1988) 5 ANZ Ins Cas 60-858 at 75,381 (col 2). Rather, the Local Policy contained a formula for the assessment of the insured loss of gross profit, which (as noted at [122] above) qualifies the application of the principle of indemnity insofar as it might be said to depart from perfect indemnification in some contingency: see also Coalex v Commercial Union at 75,380 (col 2). In Henry Booth & Sons v The Commercial Union Assurance Co Ltd (1923) 14 Lloyds LR 114 at 114 (col 2), Greer J explained the object of such a formula thus:
It is the common practice in policies of this sort, in order to prevent lengthy disputes, that there should be an agreed method of ascertaining the loss. Sometimes the assessment of the loss is in favour of the assurance company and sometimes the assured, but it is nevertheless good sense to have a method which can be readily applied without difficulty and without raising a great number of points for dispute.
…
… A reasonable businessperson seeking to understand these lengthy clauses would not begin by assuming that they mean nothing more than the expression 'full indemnity for actual loss to gross profit', and then proceed to enquire whether anything in the language required otherwise. His or her attention would remain fixed on the sense of the language describing the method for ascertaining the loss as coloured by its immediate and commercial context: see Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46]-[52] (French CJ, Nettle and Gordon JJ).
These cases are consistent with the useful commentary in Riley on Business Interruption Insurance (11th ed 2021, Sweet & Maxwell) on the business interruption policy generally in use in the United Kingdom, of which the Policy here is an example. Using the example of a fire which causes both physical damage and interruption to a business, the authors, Damian Glynn and Toby Rogers, ask (Riley 1.10):
What method of general application is there to ascertain, for the purposes of protection by insurance, the intangible, often hypothetical, loss of future earnings which is only commencing when the fire engines have driven away on the day of the damage (or shortly thereafter)?
Experience has shown that the proportionate effects of a fire (for example) upon the earning capacity of a business can be readily and accurately measured, in most cases, by comparing the turnover in the months following the damage with that in the corresponding period, in the 12 months preceding it, subject to appropriate adjustments for special circumstances or trends of business …
The authors refer to turnover as a 'yardstick' which in general can be used to measure the interruption of trading, subject to making provision for necessary adjustments. Elsewhere they say that 'turnover can be used as the foundation stone to assess the net effect of a fire or other insurance peril upon the earnings of a business' (Riley 1.10). Reduction in turnover is thus 'a reliable guide to and a suitable index for measuring the proportionate effect of the fire upon the earnings of a business' (Riley 1.11). Turnover is also 'the index by which to measure the loss of gross profit' (Riley 1.13). This, the authors say, 'is the basis from which the business interruption insurance transacted in the UK developed' (Riley 1.1).
This provision of a formula for loss, Mr Glynn and Mr Rogers write (Riley 2.52):
is a peculiarity which distinguishes a UK business interruption policy from the policies issued for practically all other classes of insurance. It could, like a contract of fire insurance to which it is complementary, omit any reference to the method to be adopted for ascertaining an insured's loss. This would on the face of it be the ultimate in simplicity, a goal towards which insurers are constantly urged to direct their efforts. Business interruption insurance, however, is vastly different from that for material damage which deals with tangible, identifiable forms of property and the material loss sustained in respect of them at a fixed point of time. By way of contrast, a business interruption policy is concerned with something intangible - the effect of damage on trading results which might materialise in the future had the damage not occurred.
The formula set out in the policy is a very flexible one which lends itself to a wide range of post incident circumstances. The key element of the formula is that it specifies a starting point for the calculation of what is a hypothetical situation. That starting point is represented by the pre-incident trading results of the business.
It thus seemed, by this point, that Infrassure was accepting that the foreign exchange losses were the result of hedging instruments entered into at head office level, the amounts of which were not directly related to the sales to any particular customers as achieved by any particular subsidiary. The losses were then allocated to particular mines (subsidiaries) by accounting entries. A little later senior counsel returned to paragraph 2 from the letter of instruction quoted above, as describing the link between sales revenue and foreign exchange losses.
Koolan does not dispute the AU$5,009,869 figure (although, again, this seems to be the figure on a 100% EMP basis, not 91% EMP). It also accepts that the actual foreign exchange losses that were allocated to Koolan in Mount Gibson's group accounts for the relevant period was much lower than that, at approximately AU$1.3 million. This reflects the fact that Koolan's actual revenue was significantly depressed due to the Incident, so a relatively lower proportion of the foreign exchange losses was allocated to it. It appears to be accepted that in the group accounts, the losses were allocated proportionate to revenue.
Koolan submits, however, that:
(1)Mount Gibson's foreign exchange hedging arrangements do not relate to either of the Offtake Contracts.
(2)Mount Gibson would have made the exact same losses on the arrangements whether or not the seawall had failed.
(3)The amount referable to the hedging arrangements depended on a prediction of group wide US dollar revenue, not the amounts that Koolan would sell its iron ore for over any particular period. The foreign exchange losses that appear in Koolan's accounts are a pro rata allocation based on the total revenue of the parent company, after the parent company incurred the losses.
(4)The amount of loss allocated to Koolan depended on the revenue of the other businesses in the group, which in turn had nothing to do with the Damage.
Koolan also relied on Mr McKenzie's view, expressed in his Third Supplementary Report at paragraph 2.5. There, he says that his instructions are that 'Forex arrangements are made at a Mt Gibson Group level and were not affected as a result of the damage'. He calls it a 'mere accounting allocation of the overall group loss which was the same in both the standard (no loss) and actual worlds' (para 3.3, noting that this went into evidence on the basis that it was evidence only of the assumptions that Mr McKenzie made). Mr McKenzie goes on to explain that the foreign exchange losses are presented in, but ultimately eliminated from, the Standard Output and Rate of Gross Profit calculations in both Koolan's RMP and EMP claims. While he describes this as confusing, he appears to consider the ultimate result - that the foreign exchange losses are not factored into the claim - to be correct.
Consideration
Resolving this issue must, in the end, come back to the application of the Policy to the facts. Despite some suggestion to the contrary in Infrassure's written submissions, by the end of oral closing submissions, there did not appear to be any dispute about those facts. As salient to the present issue, they were:
(1)Koolan is a subsidiary of Mount Gibson. Mount Gibson prepares accounts at a group level.
(2)Koolan operates the business of mining at Koolan Island. Koolan sells iron ore to its two main customers under the Offtake Contracts. The customers pay for the iron ore in US dollars. Mount Gibson is a party to the Offtake Contracts but not in any capacity as seller.
(3)Mount Gibson entered into foreign exchange hedging arrangements under which it could, in effect, sell a fixed number of US dollars at a fixed Australian dollar exchange rate. These arrangements did not form part of the Offtake Contracts and, save in one respect, were not otherwise linked to sales by Koolan under those agreements. The only discernible link is that predicted revenue by Koolan formed part of Mount Gibson's deliberations and calculations as to the amount of US dollars to be covered by the foreign exchange hedging arrangements. So too did the predicted revenue of the other operations within the group.
(4)During the Indemnity Period, Mount Gibson experienced losses on the foreign exchange hedging arrangements. Those losses were unaffected by the Incident. They would have been experienced, in the same amount, had the Incident not occurred.
(5)Mount Gibson allocated a portion of those losses to the accounts of Koolan. The portion was proportionate to Koolan's revenue, as a fraction of the overall revenue of Mount Gibson's operating subsidiaries.
Infrassure did not make a submission as to how the Policy would apply to these facts, other than to contend that the foreign exchange losses would have reduced the 'sale and/or invoice value' of the ore that Koolan would have sold had the Incident not occurred.
In the absence of any more direct link between the hedging arrangements and the Offtake Contracts, I do not see how that can be so. The relevant phrase forms part of the definition of Output in the Policy which, more fully, is that '"Output" shall mean the sale and/or invoice value of goods manufactured and/or processed by the Insured in course of the Business at the Premises'. This has been considered above in other contexts, but for present purposes it is simple enough. It means the amount of money that is received, or invoiced, as consideration for iron ore processed by 'the Insured' at the Premises.
While Mount Gibson is an Insured under the Policy, which is a group policy, there has never been any suggestion other than that the relevant Insured here is Koolan, that the relevant Business is the mine at Koolan Island operated by Koolan, and the relevant Premises are at that Island (I do not suggest that Infrassure sought to resile from any of that). It must follow that the Output, then, is the amount of money that Koolan has sold its iron ore for. That is the amounts agreed between it and the customers who buy the iron ore.
It is true that those amounts are denominated in US dollars and the claim (and Mount Gibson's accounts) are denominated in Australian dollars. Conceivably a dispute could arise about conversion between the two for the purposes of this claim, but that is not this dispute. The Court can only assume, then, that the sale or invoice value of the iron ore that Koolan mined and processed at Koolan Island is an amount which has been converted into Australian dollars in an uncontentious way. Mount Gibson's foreign exchange hedging arrangements have no bearing on that.
Since the hedging arrangements are not part of the Offtake Contracts, or even pegged in any way to the revenue earned under those Contracts, there is no basis to treat losses (or gains) on them as reducing (or increasing) the value of Koolan's Output under the Policy (whether for the purposes of calculating the unadjusted Standard Output or for the purposes of any adjustment). The same is true in relation to Rate of Gross Profit. I am fortified in that conclusion by the fact that the same losses would have been suffered regardless of the Incident, and regardless of the actual amount of revenue that Koolan earned during the Indemnity Period.
The fact that the foreign exchange losses are allocated by Mount Gibson by way of entries made in the group accounts does not change that. The Policy is quite prescriptive as to the concepts that are to be employed in calculating the indemnity under it. For example, while it uses the term 'Rate of Gross Profit', it defines 'Gross Profit' to mean:
the amount by which:
(a)the sum of the Output and the amount of the Closing Stock and Work in Progress shall exceed
(b)the sum of the amount of the Opening Stock and Work in Progress and the amount of the Uninsured Working Expenses as set out in the Schedule.
'Output' and 'Uninsured Working Expenses' are concepts specific to the Policy. As to the other terms used, it is revealing that a note follows this definition which says: 'The amounts of the Opening and Closing Stocks and Work in Progress shall be arrived at in accordance with the Insured's normal accountancy methods, due provision being made for depreciation'. That specific provision needs to be made to apply normal accounting methods in limited instances confirms that elsewhere, the Policy operates according to the ordinary meaning of the words used. Accounting entries made at a group level are not relevant.
Koolan's claim need not be adjusted to take account of the losses experienced on foreign exchange hedging arrangements during the Indemnity Period. Those losses do not need to be incorporated into either the Standard Output or the Rate of Gross Profit.
Redundancies
The issue
The redundancy issue is based on a simple and uncontentious set of facts that were recounted at the beginning of this judgment. To recap: the interruption to Koolan's mining activities resulting from the Incident required it to lay off a number of employees. Koolan accepts that the reduction in salaries, wages and other employment expenses reduces the indemnity under the Policy, pursuant to the savings provision in Item 1(a). The issue arises because Koolan had to make redundancy payouts to certain employees when they were laid off. Koolan contends that these should be netted off from the savings, because they are a cost of achieving those savings. Infrassure says that this is not what the Policy permits or requires.
On the EMP basis, Mr McKenzie and Mr Potter agree that redundancy costs incurred by Koolan total $6,596,019. Mr McKenzie calculates that Koolan's payroll savings (including on costs) as a result of the Incident were $16,689,873. Koolan submits that first of these figures should be deducted from the other, so that the savings applied in reduction of the indemnity for employment costs should be $10,093,854.
It will be recalled that under Item 1(a) of the Policy, the indemnity in respect of Reduction in Output is limited to:
the sum produced by applying the Rate of Gross Profit to the amount by which the Output during the Indemnity Period shall, in consequence of the Damage, fall short of the Standard Output,
less any sum saved during the Indemnity Period in respect of such of the charges and expenses of the Business payable out of Gross Profit as may cease or be reduced in consequence of the Damage.
Koolan submits that it would be (KCS para 310):
contrary to the meaning of 'Savings' to deduct the 'real world' gross saving (of wages, in this instance) but not to net off the 'real world' cost of achieving that saving (redundancies, in this instance). It would not be a reasonable and commercial interpretation of the “Savings” clause to give the insurers credit for the wages saved but for them not to have to net off the cost paid to achieve the saving.
Infrassure, however, submits that the savings clause simply requires expenses which were of a type needed to earn Gross Profit prior to the Damage to be deducted from the amount payable under Item 1. It says (ICS para 391):
There are no additional words that provide for a deduction in the savings depending on how those savings are achieved. KIO's case appears to be based on an approach that, because Infrassure is receiving the “benefit” of KIO's reduction in wages and salaries in the indemnity period, Infrassure must allow to KIO the cost of achieving that reduction.
Infrassure points out further that the benefit to Koolan from the savings in wages and salaries extended beyond the Indemnity Period; as it happened, for over two years until mining recommenced at the Main Pit. Infrassure submits that this is a reason why 'any appeal by KIO to a principle that Infrassure must pay KIO for the cost of the savings enjoyed by Infrassure by virtue of the Savings Clause is misplaced' (ICS para 392).
Consideration
The purpose of the savings provision is clear enough from the wording of the Policy. Item 1(a) is an indemnity for loss of Gross Profit which, broadly, is Output less variable expenses. The savings provision proceeds on the basis that expenses that are not uninsured variable expenses are 'payable out of the Gross Profit'. Thus, overheads and other fixed expenses which will be payable regardless of the interruption to or reduction in business activities caused by the Damage are 'insured', because the Insured is made whole in respect of the Gross Profit from which those expenses would otherwise have been met.
The savings provision is based on the recognition that some of those insured expenses, although nominally fixed and not varying with Output, may nevertheless be reduced or eliminated as a result of the Damage. To the extent that the insurers are paying the Gross Profit lost as a result of the reduced Output, the result would be a windfall to the Insured. That is because it can pocket the amount of the 'insured' fixed expenses which it would otherwise have defrayed from the Gross Profit, but which have been reduced or eliminated as a result of the Damage. The savings provision prevents that windfall from arising.
Turning then to the text of the savings provision, it is worded broadly. It refers to 'any sum saved'. That is capable of encompassing a calculation where payments required in order to achieve savings are taken into account to produce a net saving.
This is confined to any sum saved 'during the Indemnity Period'. The natural meaning of this is that the money actually spent during the Indemnity Period in a particular category of expense is to be compared with the money that would have been spent in that category during that period had the Damage not occurred. It is the time at which the expenditure occurred that must be identified, not the time over which the Insured might experience a benefit as a result of the expenditure.
Finally, the sum saved during the Indemnity Period must be 'in respect of' the charges and expenses of the Business payable out of Gross Profit that have ceased or reduced in consequence of the Damage. Those connecting words 'in respect of' are elastic and potentially wide. Once again, they are wide enough to admit of the possibility that a sum which takes account of an amount of money that must be paid in order to achieve a saving or reduction is a sum saved in respect of the charges or expenses that have ceased or reduced.
The breadth of these words, read in the context of the evident commercial purpose of the savings provision means that on the proper construction of the provision as applied to these facts, where redundancy payments are necessary in order to achieve savings in wages and salaries, those payments are to be taken into account when deriving what is, in fact, the 'sum saved during the Indemnity Period in respect of' the employment expenses that have been reduced in consequence of the Damage.
It is true that, on the facts here, Koolan experienced a 'benefit' (reduced wages/salaries) of which payment of the redundancies was a necessary condition (it must be assumed). That benefit, the reduced salaries, extended beyond the Indemnity Period. But that is simply a consequence of the way the time constraint in the savings provision is expressed. It will not be unusual for an expense that is 'insured', because it is payable out of the insured Gross Profit in respect of the Indemnity Period, to produce benefits that the Insured would continue to enjoy after the end of the Indemnity Period. For example, if the flooding were to make it necessary to build a new road in order to transfer ore from ACE to the ROM pad, the cost of that road would likely be covered as an ICW under Item 1(b). But the road would be Koolan's to use, not just for the Indemnity Period, but for the life of the mine. Such a benefit is simply a consequence of the ultimate purpose of Item 1, which is to make the Insured whole in respect of its Gross Profit. It is not, in my view, any obstacle to the construction of the savings provision set out above.
At a conceptual level, this means that the amount of Gross Profit for which Koolan will receive indemnity will be increased by the amount of the redundancy expenses, so that those expenses (it must be assumed) will be defrayed from that indemnity/Gross Profit. It is consistent with the commercial objective of the Policy as explained above for the redundancies to be paid out of Gross Profit. They cannot be said to be a variable expense. They are an expense made necessary by the Incident which will, if excluded from the indemnity, leave Koolan out of pocket compared to the Gross Profit which it would have earned had the Incident not occurred.
Koolan's position on the redundancies issue should be accepted. For the reasons given it is consistent with both the text of the Policy and the commercial objective of the Policy as evident from that text.
Interest
Finally, an issue arises under s 57 of the Insurance Contracts Act which provides that an insurer who is liable to pay 'an amount' under a contract of insurance is liable to pay interest on the amount for the period commencing on the day as from which it was unreasonable for the insurer to have withheld payment of the amount.
The competing arguments
Koolan contends that 31 August 2017 is that day. Koolan asserts that since that time, Infrassure has accepted that it was liable to pay Koolan on at least the EMP basis. It submits that at any point, Infrassure could have made a progress payment on the basis of its position as to how much it was liable for. It only made a progress payment, Koolan says, on the eve of the trial.
Infrassure submits, relying on Diosdado Sayseng v Kellogg Superannuation Pty Ltd [2007] NSWSC 857, that, if it succeeds on the EMP versus RMP issue (which, of course, it has), interest should be payable from the day on which it had had reasonable time to investigate Koolan's EMP claim. It points out that Koolan did not present calculations quantifying its EMP claim until Mr Davidson's second witness statement, served on 3 February 2020. The EMP calculations, it says, were then 'scrutinised' by way of the exchange of expert evidence, which took until service of Mr McKenzie's fourth supplementary report to complete. That occurred on 21 June 2021. Infrassure says that, allowing it a week to digest that last report, interest should run from 28 June 2021.
This 'loss adjustment' conducted by way of exchange of expert reports was, Infrassure says, conducted with reasonable expedition. In Mobis Parts Australia Pty Ltd v XL Insurance Company SE (No 10) [2018] NSWSC 37 at [39]-[50], Stevenson J accepted (in very different circumstances) that the course of events in litigation was the most reliable guide to determining a reasonable time for the investigation of a claim (upheld in Mobis NSWCA at [162]-[167]). Infrassure submits that the time it took for the EMP claim to be quantified, about 16 months, compares favourably to the period it took the other insurers in the Market to settle Koolan's RMP claim, which was about 2½ years.
Infrassure also submits that interest should only be payable at all if the payment of $801,832 it made on 10 June 2021 did not amount to full indemnity under the Policy.
Consideration
The question is not whether Infrassure had a bona fide basis to withhold payment. There are two different questions: first, when it can be said that Infrassure had had sufficient time to investigate the claim and form a view, and second, whether Infrassure's decision to withhold payment was correct, in view of the ultimate determination of the Court as to its liability: see Sayseng at [4]-[7] and the authorities described there.
As to the first of these questions, Infrassure cannot reasonably have been expected to deal with the EMP claim before it was put to it in quantifiable terms. Counsel for Koolan submitted that Infrassure could have done its own investigation, but he candidly admitted that there was no evidence about whether any of Infrassure's investigations involved looking at the EMP. So the contention that Infrassure could have or ought to have investigated the EMP claim prior to 3 February 2020 is not persuasive. Although it is conceivable that that there would be material within the mass of documents on which the EMP claim could have been investigated, the onus was on Koolan to define its claim. On the evidence before me, it was not until Mr Davidson's second witness statement on 3 February 2020 that it made any claim based on the EMP.
From that date, Infrassure required sufficient time to investigate the EMP claim in order to form a view. Even after that date, the EMP claim was not formally incorporated in the proceedings until the further amended statement of claim on 12 March 2021. From there, it appears there was more work to be done in finalising the figures of the EMP claim, evidenced by the further expert reports that were filed in 2020 and 2021.
Counsel for Infrassure made fallback submissions in respect of when it was appropriate for Infrassure to have finished investigating the claim. As above, Infrassure's position was that the interest should run from 28 June 2021, a week after Mr McKenzie's final report was served. The very earliest Infrassure says it could be found that it should have investigated the EMP claim is 12 March 2021, when the further amended statement of claim was filed, which would mean 'that Infrassure should have worked out what it should pay and considered its position even though it hadn't been served with the material supporting the claim' (ts 509).
However in my view, the appropriate date is 7 December 2020. That is the first weekday, one month after the date of Mr McKenzie's third supplementary report of 6 November 2020. That is the point at which the numbers of the EMP claim had crystallised and the reformulation of the EMP claim in that report was ultimately relied upon in trial. It is appropriate to allow Infrassure one month after that to have considered the claim and arranged payment.
As to the second question, the outcome of this litigation means that Infrassure was correct to have withheld any payment until 7 December 2020.
Koolan's success on some of the subsidiary issues may mean that the payment of $801,832 made on 10 June 2021 was insufficient to discharge Infrassure's liability, so that some interest will continue to run after that date. The extent to which that is so will depend on the calculations the parties make after considering these reasons for decision.
VII. CONCLUSIONS
It is now possible to summarise my conclusions by reference to the agreed list of issues set out in Section III above.
RMP and EMP
1.If the Incident had not occurred, Koolan would have worked the mine according to the EMP from 24 October 2014 to 23 October 2015.
2.On the proper construction and application of the Policy, the Rate of Gross Profit and Standard Output as adjusted according to the adjustments clause are not permitted or required to be calculated on the basis of the RMP.
3.In the Indemnity Period, Koolan would have achieved the forecasts/targets contained in the EMP to a level of 91%.
ICW-UWE
4.Koolan is not entitled to the items claimed as 'Increase Cost of Working at ACE' (UWE's) in Appendix G of the Reissued Third Supplementary expert report of John McKenzie:
(a)under Item 1(b) of Section 2 of the Policy; or
(b)under Item 4 of Section 2 of the Policy.
Stock on Hand
5.Koolan is not entitled to indemnity under the Policy at all in relation to the alleged diminution in value of the Stock on Hand on Koolan Island as at 24 October 2014.
6.The Stock on Hand should be taken to have been sold:
(a)in the case of 105,298 tonnes of lump, in the March 2015 shipment shown in MFI 1; and
(b)in the case of the 253,683 tonnes of fines, in the January, February and April 2015 shipments shown in MFI 1.
Foreign exchange
7.The calculation of the indemnity should not factor in the losses experienced on the foreign exchange arrangements referred to in Herbert Smith Freehills' letter of instruction to Mr McKenzie dated 26 October 2020.
Redundancies
8.Koolan is entitled to deduct the cost to it of redundancies that were necessary as a result of the Incident from savings in employment costs attributable to the Incident.
Interest
9.Infrassure must pay Koolan interest under s 57 of the Insurance Contracts Act 1984 from 7 December 2020.
As foreshadowed at the outset of this judgment, the parties should confer on the basis of these determinations to attempt to bring in a minute of consent orders to finalise the proceeding. Given the time of year, they should be permitted until the end of January next year to do so, with liberty to apply.
I certify that the preceding seven hundred and sixty-one (761) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Jackson. Associate:
Dated: 21 December 2023
3
29
4