McMahons Tavern Pty Ltd v Suncorp Metway Insurance Ltd
[2004] SASC 237
•13 August 2004
SUPREME COURT OF SOUTH AUSTRALIA
(Full Court)
MCMAHONS TAVERN PTY LTD v SUNCORP METWAY INSURANCE LTD
Judgment of The Full Court
(The Honourable Justice Duggan, The Honourable Justice Besanko and The Honourable Justice Anderson)
13 August 2004
INSURANCE - GENERAL - POLICIES OF INSURANCE - CONSTRUCTION
Insurance - construction - proximate cause - riot causing damage to hotel - business interruption clause included - whether loss of trade caused by riot - whether interruption of business caused by insured event - contra proferentem rule discusssed - whether quantum of loss assessed correctly - no grounds for interference with trial Judge's findings - appeal and cross-appeal dismissed.
In Re An Arbitration Between Executor Trustee & Agency Company of South Australia Ltd & Anor and the Liverpool & London & Globe Insurance Company Ltd [1936] SASR 365; Maye v Colonial Mutual Life Assurance Society Ltd (1924) 35 CLR 14; Johnson v American Home Assurance Co (1998) 192 CLR 266, applied.
PMB Australia Ltd v MMI General Insurance Ltd & Ors [2000] QSC 329; PMB Australia Ltd v MMI General Insurance Ltd & Ors [2002] QCA 361, distinguished.
MCMAHONS TAVERN PTY LTD v SUNCORP METWAY INSURANCE LTD
[2004] SASC 237Full Court: Duggan, Besanko and Anderson JJ
DUGGAN J: In my view the appeal and cross-appeal should be dismissed. I agree with the reasons of Anderson J and the further comments made by Besanko J.
BESANKO J: In my opinion, the appeal should be dismissed. Subject to some observations I wish to make, I agree with the reasons for judgment of Anderson J.
The appellant submitted that the Judge erred in failing to apply the rule of construction embodied in the maxim, verba chartarum fortius accipiuntur contra proferentem. It has been said that the rule is a rule of the last resort (In re An Arbitration Between Executor Trustee and Agency Company of South Australia Ltd and Another, and the Liverpool and London and Globe Insurance Company Limited [1936] SASR 365 per Richards J at 374) but it cannot be said to be of no value. There are a number of conditions which must exist before this rule of construction may be applied. First, the relevant words must be words (or words in an instrument) proffered by one of the parties. In this case, it may be assumed that the Industrial Special Risks Insurance Policy and the words therein were proffered by the respondent insurer. This condition is met.
Secondly, it must be shown that the provision, when fairly read, is to use the words of Isaacs ACJ in Maye v Colonial Mutual Life Assurance Society Ltd (1924) 35 CLR 14 at 22, “doubtful or ambiguous and reasonably susceptible of two constructions”, or to use the words of Mr Sutton, “ambiguous or obscure, or uncertain in application or misleading” (K Sutton, Insurance Law in Australia 3rd ed (1999) at 755).
The relevant clause in the policy is as follows:
“SECTION 2
BUSINESS INTERRUPTION
THE INDEMNITY
In the event of any building or any other property or any part thereof used by the Insured at the Premises for the purpose of the Business being physically lost, destroyed or damaged by any cause or event not hereinafter excluded (loss, destruction or damage so caused being hereinafter termed ‘Damage’) and the Business carried on by the Insured being in consequence thereof interrupted or interfered with, the Insurer(s) will, subject to the provisions of this Policy including the limitation on the Insurer(s) liability, pay to the Insured the amount of loss resulting from such interruption or interference in accordance with the applicable Basis of Settlement.
Provided that the Insurer(s) will not be liable for any loss under this Section unless the Insured’s property lost, destroyed or damaged is insured against such Damage (loss arising out of destruction or damage by explosion of Boilers and/or Economisers excepted) and the insurer or insurers by which such property is insured shall have paid for, or admitted liability in respect of, such Damage unless no such payment shall have been made or liability shall not have been admitted therefore solely owing to the operation of a provision in such insurance excluding liability for loss below a specific amount.”
In dealing with the proper construction of this clause, the Judge said (at [15]):
“Mr Stanley, who appeared for the plaintiff, submitted that at worst, on his case, this sequence of reactive events amounted to causes operating equally and simultaneously with the event causing damage and did not therefore detract from the incident itself as being the ‘… efficient and, in that sense, proximate cause …’ of the loss: HIH Casualty & General Insurance Ltd v Waterwell Shipping Inc & Anor (1998) 43 NSWLR 601, 612 per Sheller JA, Beazley JA and Stein JA agreeing. I am not sure that it is necessary to descend to such an analysis. In my view the matter comes down to interpretation of the clause set out above. The key words are ‘in consequence thereof’. These words could be read as referring to the ‘building … being physically lost, destroyed or damaged …’, or alternatively could refer to the ‘cause or event’ giving rise to the damage. I consider that the first reading is the correct one. I do not think that (after the hotel re-opened) there could be said to have been an interruption to or interference with the business, caused by the damage. I accept that there was a diminution in business because some customers were initially unwilling to maintain their patronage of the hotel. But that is to be contrasted with an interruption to or interference with the ability of the operator to carry on its business at the premises. This limb of the policy responds to loss or impairment of that ability, rather than to changes in attitude or perception in the customers of the operator arising from the relevant event.”
The appellant submitted that the Judge erred because, after having found that there were two ways of reading the relevant clause, she failed to apply the contra proferentem rule of construction and thereby adopt the construction more favourable to the appellant. In my opinion, this submission fails. I agree with the Judge that two readings of the clause are open, but I do not think that fact of itself brings into play the contra proferentem rule of construction. In my opinion, a correct statement of the scope and operation of the contra proferentem rule today is contained in the following passage in the reasons for judgment of Kirby J in Johnson v American Home Assurance Co (1998) 192 CLR 266 (at [275]):
“More recently, it has been accepted that the contra proferentem principle may still be useful where each of the competing constructions is strongly supported by argumentation and where dictionaries and logic alone cannot readily carry the day for either party. Then, it is not unreasonable for an insured to contend that, if the insurer proffers a document which is ambiguous, it and not the insured should bear the consequences of the ambiguity because the insurer is usually in the superior position to add a word or a clause clarifying the promise of insurance which it is offering.”
In this case the contra proferentem rule of construction is not relevant because the construction of the clause advanced by the appellant is not strongly supported by the process of argumentation and reference to the rules of logic referred to by Kirby J. The process of argumentation and reference to the rules of logic leads to the conclusion that the construction adopted by the Judge is the correct one.
The appellant submitted that although physical loss, destruction or damage to its property was a necessary precondition of recovery under the relevant clause of the policy, it need not be the proximate cause of the interference or interruption with the business of the appellant. In other words, as long as there is a non-excluded cause or event coupled with the relevant type of damage to the appellant’s property, the consequent interruption or interference to business is within the indemnity whether or not the relevant damage to property was the proximate cause of the interruption or interference to business. I do not think that is the proper reading of the clause having regard to both the text of the clause and the results such a reading would produce.
As far as the text of the clause is concerned I would emphasise two points. First, the definition of “Damage” in the clause is a reference to the physical loss, destruction or damage to the appellant’s property albeit that physical loss, destruction or damage resulting from excluded causes or events is excluded. Secondly, the phrase, “in consequence thereof” is important and it means, in my opinion, that the physical loss, destruction or damage to the appellant’s property must be the proximate cause of the interruption or interference with the appellant’s business. The reading advanced by the appellant could produce some unexpected results. I recognise that this might be said about many clauses in insurance policies, but nevertheless it is a relevant consideration. For example, assume a case involving the facts in this case but with no physical loss, destruction or damage to the appellant’s property and assume a case involving the facts in this case but with the only physical loss, destruction or damage to the appellant’s property being the breaking of one beer glass. On the appellant’s argument it would have a right of recovery in the second case but not in the first case.
In my opinion, the Judge was right to construe the clause such that the proximate cause of the interruption or interference to the appellant’s business must be the physical loss, destruction or damage to the appellant’s property, and in finding that that was not shown on the facts in this case. The appellant sought to gain some assistance for its argument from the decision of Mullins J in the Supreme Court of Queensland in PMB Australia Ltd v MMI General Insurance Ltd & Ors [2000] QSC 329 but that case turns on its own facts and the particular provisions in the policy under consideration (affirmed on appeal [2002] QCA 361).
As I understand it, the appellant’s hotel was closed for approximately two hours on Monday 21st February 1999 while the damage to the hotel was being repaired. The respondent accepted that that gave rise to an interruption or interference with the appellant’s business and that if loss could be shown to have resulted from that closure then the loss could be recovered under the policy. Before the Judge the appellant made no attempt to separately identify any loss resulting from the closure of the hotel for two hours on 21st February 1999, and not surprisingly perhaps the Judge did not deal with the point. Although there is a ground of appeal complaining of the Judge’s failure to find a loss resulting from the closure of the hotel, the complaint was not the subject of any submissions to this Court either orally or in writing. In fact, it might fairly be said that the ground of appeal was abandoned during the course of submissions. In any event, in the absence of proof of a resulting loss the ground of appeal must fail.
The respondent has filed and served a cross appeal. The Judge dismissed the appellant’s claim, and only “assessed” damages on the basis that it was convenient to do so in case she was wrong in dismissing the appellant’s claim. That was no doubt a convenient course for the Judge to adopt. The respondent’s cross appeal is to the effect that if the appeal succeeds, the amount identified by the Judge ($147,097.00) is excessive. The difficulty with the cross appeal is that there is no order of the Judge which the respondent challenges. No doubt this Court has a wide range of powers to ensure that justice is done and in other circumstances it might have been necessary to consider how any such difficulty could be overcome. However, I am satisfied for the reasons given by Anderson J that the cross appeal should be dismissed and I think such an order can be made without the need for any other orders.
I would dismiss both the appeal and the cross appeal.
ANDERSON J: The appellant in this matter appeals from a decision of a District Court Judge who refused it indemnity under the terms of a policy of insurance. The appeal point is a matter of construction of the policy. There is also a cross-appeal on the question of the assessment of the business losses.
The appellant company operated the Eureka Tavern at Park Terrace Salisbury. On Monday, 21 February 1999 in the early hours of the morning a group of customers and staff of the hotel were confronted by a group from outside the building who were apparently seeking revenge in relation to an earlier incident that involved some of their number being ejected from the hotel.
The doors of the hotel were barricaded to prevent the group from entering but despite that, the building sustained a considerable amount of damage involving the destruction of plate glass windows. Vehicles in the hotel car park belonging to patrons were also damaged.
Both during the trial and in the trial Judge’s reasons the incident was referred to as “the riot”.
As a result of the damage caused to the building, the hotel was closed for a short period but was able to re-open later the same day. Not surprisingly, the riot attracted publicity in the newspapers and media and the company claimed that they lost trade as a result of the adverse impact on their turnover caused by people’s reluctance to visit the premises.
The claim which the appellant company made was pursuant to an Industrial Special Risks insurance policy with the respondent company. The policy contained in Section 2 a Business Interruption clause. This hotel was just one of a number of hotels operating within a group in common ownership that were insured under the same policy.
The respondent denied liability to pay any amount pursuant to Section 2 of the policy on the basis that any loss which was occasioned to the appellant after the business re-opened was not within the scope of that section. It was argued that such loss was not incurred as a result of the building being physically lost, destroyed or damaged by any cause or event under the policy. It was common ground that “the riot” was not an excluded event.
I set out hereunder the relevant clause in the policy:
“SECTION 2 - BUSINESS INTERRUPTION
THE INDEMNITY
In the event of any building or any other property or any part thereof used by the Insured at the Premises for the purposes 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 respondent’s case in this Court was, as they argued successfully in the District Court, that the indemnity would only apply in respect of or in consequence of the physical damage itself and that following the completion of repairs to the building any further loss, unless related to the physical damage, was not referrable to the damage but to the cause of the damage being “the riot”.
It is important to note, as already stated, that although “the riot” occurred in the early hours of the morning, the hotel was re-opened and operating within a few hours. The physical damage had been repaired and the hotel was able to operate normally when it re-opened.
The learned trial Judge found that there was no interruption to or interference with the business which was caused by the damage although there was evidence of diminution in the business. Her Honour found that the policy responded to loss or impairment of the ability of the appellant to carry on business at the hotel and not changes in the attitude or perception of customers arising from “the riot”. Putting it another way, the actual physical damage caused to the hotel property was not a cause in itself of the diminished trade which was due to the apprehension of customers immediately following “the riot”. That apprehension in turn was not caused by the physical damage to the property.
The appellant argues that the learned trial Judge erred in breaking the relevant clause of the policy into parts for the purpose of construing the clause. It is a rule of construction that a contract must be construed as a whole. The suggested error is that her Honour construed the words, “in consequence thereof,” as referring to, “the building being physically lost, destroyed or damaged”, rather than to the “cause or event,” giving rise to the damage.
The respondent says that on reading the policy as a whole, the indemnifiable event is business interruption in consequence of damage to the insured’s property. The respondent refers to the indemnity clause itself and in addition points to the whole of the policy as being consistent with their suggested interpretation. In particular they refer to the terms used in the “Basis of Settlement” sections of the policy and in the definition section in relation to the “indemnity period”.
The respondent further says that the construction contended for by the appellant ignores the plain meaning of the words, because, whilst the damage may be caused by any event (including a riot), it is the damage itself which must cause the claimed business interruption loss.
The learned trial Judge said in dealing with the question of indemnity at [15]:
“Mr Stanley, who appeared for the plaintiff, submitted that at worst, on his case, this sequence of reactive events amounted to causes operating equally and simultaneously with the event causing damage and did not therefore detract from the incident itself as being the “… efficient and, in that sense, proximate cause …” of the loss: HIH Casualty & General Insurance Ltd v Waterwell Shipping Inc & Anor (1998) 43 NSWLR 601, 612 per Sheller JA, Beazley JA and Stein JA agreeing. I am not sure that it is necessary to descend to such an analysis. In my view the matter comes down to interpretation of the clause set out above. The key words are “in consequence thereof”. These words could be read as referring to the “building … being physically lost, destroyed or damaged …”, or alternatively could refer to the “cause or event” giving rise to the damage. I consider that the first reading is the correct one. I do not think that (after the hotel re-opened) there could be said to have been an interruption to or interference with the business, caused by the damage. I accept that there was a diminution in business because some customers were initially unwilling to maintain their patronage of the hotel. But that is to be contrasted with an interruption to or interference with the ability of the operator to carry on its business at the premises. This limb of the policy responds to loss or impairment of that ability, rather than to changes in attitude or perception in the customers of the operator arising from the relevant event.”
I agree with the learned trial Judge. It seems to me that the clear purpose of the business interruption clause is to indemnify for monetary loss arising as a consequence of the physical damage to the premises. I agree therefore that her Honour was correct in dismissing the appellant’s claim.
Her Honour accepted the evidence showing that there were business losses because of customers’ unwillingness to attend at the hotel and went on to assess such losses pursuant to the terms of the policy in the event that the decision in relation to the indemnity was wrong.
The learned trial Judge applied the section of the policy headed “Basis of Settlement” and dealt with the evidence as to loss of business following “the riot.”
Witnesses spoke of the downturn and reasons were offered for the downturn in trade. It is quite apparent that there was a significant downturn in trade as evidenced by the figures which were produced. The learned trial Judge accepted that there was an impact on the business and then dealt in some detail with a methodology for calculating the losses.
An expert accounting witness, Mr Fox, had computed the amount of loss by using a comparison of the turnover of the Stockade Hotel because it was almost next door to the Eureka Hotel and was similar in its operation. He was able to speak of trends and analysed these trends in his calculations.
Her Honour found specifically that “Mr Fox’s methodology was sound, at least as a matter of theory”. Her Honour then proceeded to go through the various calculations which had been made and found that the results of the business were adversely affected as a result of “the riot” for at least three months following “the riot”. A larger period had been contended for by those acting in the hotel interests. They had suggested a period of 26 weeks.
Finally, the learned trial Judge selected a period of 14 weeks. The calculation used by her Honour is set out below:
“CALCULATION FOR INDEMNITY
PERIOD ENDING 31.5.99ITEM 1: Loss of Gross Profit
Eureka standard turnover 21.02.98 – 31.05.98 (14 weeks) $2,042,232
Eureka actual turnover 21.02.99 – 31.05.99 (14 weeks) 1,981,675Trend Analysis
Stockade turnover 21.02.98 – 31.05.98 1,724,771
Stockade turnover 21.02.99 – 31.05.99 1,909,919\ Turnover increased by 10.73%
Eureka standard turnover 2,042,232 x 110.73% = 2,261,363
Less: Actual turnover -1,981,675Reduction in turnover = 297,688
Reduction in turnover x rate of gross profit:
279,688 x 33.17% = 97,772Then apply proviso being 87.3% : ______
92,772 x 87.3% = 80,990
ITEM 2: Reasonable Professional Fees
Hood Sweeney’s fees 4,750
ITEM 3: Loss in Respect of Payroll
Rate of payroll is 16.29%
Payroll limits: 100% for 8 weeks
50% for balance
8 x 16.29% x reduction in turnover :
14 weeks
8 x 16.29% x 279,688 x 1/14 = 26,035
Plus: 6 x 16.29% x 279,688 x 1/14 x1/2 9,76335,798
ITEM 4: Increase in Cost of WorkingIncrease in security costs and entertainment costs
38,258 + 9,2097 x 14/26 = 25,559
Add Items 1, 2, 3 and 4 = $147,097”
Therefore if her Honour had found that the insurer was required to indemnify the insured, the quantum of loss would have been assessed in the sum of $147,000.
Mr Nicholson, counsel for Suncorp, provided a detailed submission to support a cross-appeal which adjusted downwards the calculations made by her Honour. The first adjustment which should be made according to this argument was to change the 14 week ‘Indemnity Period’ to a nine week period. The second adjustment was to eliminate any allowance for trends which had been made in the calculation made by Mr Fox. It was said that without using the trend analysis the plaintiff in fact suffered a very small loss. Finally it was said that the loss to be awarded to the insured must be the actual loss resulting from the interruption or interference with the business, and that insufficient regard had been placed on this aspect.
Mr Nicholson handed up two calculations which he submitted were the figures which would be arrived at on two alternative bases. In the first instance for the same ‘Indemnity Period’ used by the learned trial Judge, namely 14 weeks, but excluding the trend allowance and on that basis the calculation came to $57,484.
In the alternative, on the basis of a calculation of a nine week ‘Indemnity Period’ with no trend allowance the figure came to $40,311.
During the trial it was apparent that the arguments put to this Court by the cross-appellant were tested in the cross-examination of the expert witness Mr Fox. He acknowledged the existence of the many variables but maintained his conclusion which the learned trial Judge accepted.
In answer to these submissions Mr Stanley, counsel for the appellant, argued that in relation to the ‘Indemnity Period’ her Honour had various options available but finally chose 14 weeks which was a matter for her judgment and that her judgment has not been demonstrated to be wrong. Her Honour had in fact found that the results of the business were affected for as long as up to 26 weeks albeit with a diminishing effect as the time extended beyond the 14 week period.
I agree that it was a matter for the trial Judge who could have chosen either a lesser or a longer period than 14 weeks and this Court should not interfere on that basis.
In relation to the trend, once again it is suggested that this was a judgmental exercise by her Honour on the basis of the evidence before her and having accepted the expert evidence of Mr Fox it is my view that this Court should not interfere in this area.
Both counsel analysed the trading figures in considerable detail. The ‘Rate of Gross Profit’ was not in dispute, but other aspects of the formula set out in the policy were disputed. These included the turnover during the ‘Indemnity Period’, The Standard Turnover (as defined) adjusted for any proved trend and the amount by which the turnover during the ‘Indemnity Period’ shall in consequence of the damage fall short of the standard turnover.
A review of all of the evidence on the effects on patronage caused by “the riot” was called for as against the actual trading figures for the period in question, the period before the riot and similar periods in a previous year.
The analysis included a division into different areas of trade in the hotel to demonstrate whether the learned trial Judge was justified in her consideration of the trend analysis.
Her Honour said at [29]:
“In forming his opinion as to the loss of gross profit (Item No 1) Mr Fox used the total of all departments of the hotel, as opposed to undertaking a department by department analysis. In my view that approach was appropriate. …”
In my view there is no reason why her Honour could not take this approach. It is not shown to be a wrong approach and was based on an acceptance of the expert evidence.
Her Honour was, as has been indicated, well aware of the issue of causation when she reduced the indemnity period to 14 weeks in her balancing exercise, having previously considered the period of 26 weeks.
Like any assessment of damage or loss, this matter involved to a large extent a discretionary exercise by the learned trial Judge. Whilst it is possible to say that there were other conclusions available it is not possible to say in my view that the conclusions reached by her Honour were without foundation. Indeed I believe that they had a logical basis and were supported by the evidence.
Her Honour was entitled to accept the methodology of Mr Fox. Likewise she was entitled to find his evidence as to the use of the trend analysis relevant in the way he used it and finally was entitled to use her judgment in fixing the period of indemnity.
There was clearly evidence available to support her Honour’s findings and accordingly I would not interfere in relation to her Honour’s assessment. Had the insurer been liable, the liability under the policy would have been $147,000. It has not been shown that there is any error in the methodology employed by her Honour nor indeed in the calculation as such.
In my view therefore the appeal should be dismissed for the reasons given. I am also of the view that the cross-appeal should be dismissed. I would hear the parties as to costs.
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