PMB Australia Limited v MMI General Insurance Ltd
[2000] QSC 329
•26 September 2000
SUPREME COURT OF QUEENSLAND
CITATION: PMB Australia Limited v MMI General Insurance Ltd & Ors [2000] QSC 329
PARTIES: PMB AUSTRALIA LIMITED ACN 057 251 091
(plaintiff)
v
MMI GENERAL INSURANCE LIMITED
ACN 000 122 850
(first defendant)
and
SUN ALLIANCE & ROYAL INSURANCE AUSTRALIA LIMITED ACN 005 297 807
(second defendant)
and
CIC INSURANCE LIMITED ACN 004 078 880
(third defendant)
and
ZURICH AUSTRALIAN INSURANCE LIMITED
ACN 000 296 640
(fourth defendant)
and
SUNCORP GENRAL INSURANCE LIMITED
ACN 075 695 966
(fifth defendant)
and
GIO GENERAL LIMITED ACN 002 861 583
(sixth defendant)
and
QBE INSURANCE LIMITED ACN 000 157 899
(seventh defendant)
and
FAI GENERAL INSURANCE COMPANY LIMITED
ACN 000 327 855
(eighth defendant)FILE NO: 5235 of 1998 DIVISION: Trial Division DELIVERED ON: 26 September 2000 DELIVERED AT: Brisbane HEARING DATES: 8-12, 15-19, 22-26, 29-31 May and 2, 5-6 June 2000 JUDGE: Mullins J ORDER: Proceeding adjourned to a date to be fixed for further submissions. CATCHWORDS: INSURANCE – POLICIES OF INSURANCE – CONSTRUCTION OF POLICY – risks insured – doctrine of proximate cause – infectious disease extension to business interruption policy – proximate cause applies to whether interruption of business is caused by insured event – proximate cause applies to whether loss results from that interruption.
INSURANCE – BUSINESS INTERRUPTION -DOCTRINE OF PROXIMATE CAUSE – CONCURRENT CAUSES
INSURANCE – BUSINESS INTERRUPTION – salmonella contamination of processed product – whether concurrent causes of business interruption – extent to which interruption to business was proximately caused by salmonella outbreak – whether alterations made to plant and processes caused by salmonella outbreak or the need to address the risk of salmonella contamination in the future.
Food Act 1981
Marine Insurance Act 1906 (UK)
Food Standards Regulation 1994
Marine Insurance Act 1909 (Cth)Australian Casualty Co Ltd v Federico (1986) 160 CLR 513
City Centre Cold Store Pty Ltd v Preservatrice Skandia Insurance Ltd (1985) 3 NSWLR 739
Director-General of Social Services v Hangan (1982) 70 FLR 213
Hall Brothers Steamship Co Ltd v Young [1939] 1 KB 748
HIH Casualty & General Insurance Ltd v Waterwell Shipping Inc (1998) 43 NSWLR 601
Ionides v The Universal Marine Insurance Co (1863) 14 CB(NS) 259
JJ Lloyd Investments Ltd v Northern Star Insurance Co Ltd ("Miss Jay Jay") [1987] 1 Lloyd's Rep 32
Leyland Shipping Company Ltd v Norwich Union Fire Insurance Society Ltd [1918] AC 350
McIntosh v Commissioner of Taxation [1978] QdR 354
McIntosh v Federal Commissioner of Taxation (1979) 45 FLR 279
National & General Insurance Co Ltd v Chick [1984] 2 NSWLR 86
Petersen v Union des Assurances de Paris IARD (1995) 8 ANZ Insurance Cases 61-244
Petersen v Union des Assurances de Paris IARD (1996) 9 ANZ Insurance Cases 61-366
Reseck v Commissioner of Taxation (1975) 133 CLR 45
Spika Trading Pty Ltd v Royal Insurance Australia Ltd (1985) 3 ANZ Insurance Cases 60-663
S&Y Investments (No 2) Pty Ltd (in Liq) v Commercial Union Assurance Co of Australia Ltd (1986) 44 NTR 14
Waterwell Shipping Inc v HIH Casualty and General Insurance Limited (1997) Aust Torts Reports 81-444
Wayne Tank and Pump Co Ltd v Employers Liability
Assurance Corporation Ltd [1974] 1 QB 57COUNSEL: Mr C G Gee QC and Mr M K Stunden for the plaintiff
Mr S C Williams QC and Mr J P Kimmins for the defendantsSOLICITORS: McCullough Robertson Lawyers for the plaintiff
Gadens Lawyers for the defendants
MULLINS J: In this action the plaintiff claims $4,795,000 as money due under the Industrial Special Risks Insurance Policy ("policy") held with the defendants in respect of losses arising from insured events which occurred during the period from 30 September 1995 to 30 September 1996.
Background facts
At all material times the plaintiff was carrying on business as manufacturers, storers, processors, importers, exporters, marketers, retailers, wholesalers and distributors of peanuts, peanut by-products and other primary produce from various locations, but principally at Haly Street, Kingaroy in the State of Queensland.
During the period of insurance the plaintiff provided roasted shelled peanuts to Kraft Foods Limited and its subsidiary ("Kraft") to be used as the base ingredient in peanut butter products.
During the period from March to June 1996 there was an outbreak of salmonellosis following consumption of contaminated peanut butter by members of the public. The cause of the contaminated peanut butter which was responsible for the outbreak of salmonellosis was traced to roasted shelled peanuts provided by the plaintiff to Kraft. I shall refer to this dispatch of peanuts contaminated by salmonella which resulted in this outbreak of salmonellosis as "the incident".
Following that outbreak of salmonellosis, on 23 June 1996 Kraft's subsidiary instituted a recall of generic brands of peanut butter. On 24 June 1996 Kraft advised the plaintiff that deliveries of peanut products from the plaintiff to Kraft should cease immediately.
On 25 June 1996 the Queensland Health Department ("QHD") advised the plaintiff that before any further deliveries could be despatched to customers the plaintiff was required to meet certain testing requirements. On 26 June 1996 Kraft instituted a complete recall of ETA peanut butter and Kraft peanut butter.
On 6 July 1996 the QHD sent a facsimile to the plaintiff requiring that no product be delivered until further details had been considered. The plaintiff ceased roasting for all customers on receipt of that facsimile.
On 8 July 1996 a further facsimile was received by the plaintiff from the QHD containing certain recommendations for action, advising that due to the plaintiff's cooperation there was no need to invoke statutory requirements under the Food Act 1981, but confirming that production could not recommence until the QHD clearance had been obtained.
On 20 July 1996 the QHD permitted the plaintiff to recommence production subject to conditions.
The plaintiff claims that its business was interrupted and/or interfered with from 24 June 1996 to 12 November 1996 and beyond, until at least 24 June 1997. The significance of the date of 24 June 1997 is that the indemnity period under the policy is a maximum of 12 months.
The plaintiff pleads that the salmonellosis suffered by members of the public during that outbreak was an illness or disease which arose from or was traceable to foreign or injurious matter in food provided from the plaintiff's Kingaroy premises and caused interruption or interference with the business carried on by the plaintiff at the premises.
Alternatively, the plaintiff pleads that the actions of the QHD constituted a closing of the whole or part of the premises at Kingaroy by a public authority and that closing was a result of the outbreak of salmonellosis which was a notifiable human infectious or contagious disease or was consequent upon defects in the sanitary arrangements at the premises and caused interruption or interference with the business carried on by the plaintiff at the premises.
In the defence, the defendants admit that contamination of peanuts provided from the plaintiff's plant by salmonella mbandaka was an event the consequence of which was interruption of or interference with the business carried on by the plaintiff within section 2 of the policy and the endorsement attached to the policy relating to infectious disease. It is therefore not necessary to consider the alternative claim of the plaintiff based on an alleged closing of the plaintiff's plant by the QHD.
Policy
Section 1 of the policy provides for indemnity in respect of physical loss, destruction or damage to the property insured which is all real and personal property belonging to the plaintiff or for which the plaintiff is responsible. There is no claim by the plaintiff under section 1 of the policy.
Section 2 of the policy which is entitled "Consequential Loss" provides:
"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".
I shall refer to the above provision as "the indemnity clause".
The endorsement attached to the policy relating to infectious disease (to which I shall refer as "the extension clause") is in the following terms:
"It is declared and agreed that the following endorsements shall form part of and be read in conjunction with the Policy ...
INFECTIOUS DISEASE MURDER AND CLOSURE
The term 'Damage' under Section 2 of the Policy is extended to include loss directly resulting from interruption or of interference with the business carried on by the Insured at the premises in consequence of:(i)Closing of the whole or part of the premises by order of a Public Authority as a result of an outbreak of a notifiable human infectious or contagious disease or consequent upon defects in the drains and/or other sanitary arrangements at the premises;
(ii) Murder or suicide occurring at the premises;
(iii)Injury, illness or disease arising from or likely to arise from or traceable to foreign or injurious matter in food or drink provided from or on the premises.
Limit any one claim - $8,000,000".
There are four items under the heading "Basis of Settlement" in Section 2 of the policy. There is a claim by the plaintiff under each of the items.
Relevantly, Item 1 Basis of Settlement provides:
"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,
(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 reduced in consequence of the Damage."
Item 2 Basis of Settlement provides:
"The insurance under this item is to cover such reasonable professional fees as may be payable by the Insured, and such other reasonable expenses necessarily incurred by the Insured and not otherwise recoverable, for preparation of claims under the Insured's Material Damage and Consequential Loss insurance policies and the Insurer(s) shall indemnify the Insured for such reasonable fees and expenses."
It was agreed that Item 3 Basis of Settlement provides:
"THE INSURANCE UNDER ITEM 3 is limited to loss of Payroll 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 Payroll to the amount by which the Turnover during the Indemnity Period shall, in consequence of the damage, fall short of the Standard Turnover."
Item 4 Basis of Settlement provides:
"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 Turnover and/or resuming and/or maintaining normal business operations and/or services."
The definition of "Indemnity Period" is:
"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 of the Business shall be affected in consequence of the Damage."
Relevant definitions are set out in the policy as follows:
| "RATE OF GROSS PROFIT: The rate of Gross Profit earned on the Turnover during the financial year immediately before the date of the Damage ANNUAL TURNOVER: The Turnover during the 12 months immediately before the date of the Damage STANDARD TURNOVER: The Turnover during that period in the 12 months Damage which corresponds with the Indemnity Period RATE OF PAY-ROLL: The rate of Pay-Roll to turnover during the financial year immediately before the date of the Damage | ) )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 practical the )results which but for the Damage would )have been obtained during the relative )period after the Damage." ) |
Each of the definitions is therefore qualified by the words to the right of the brackets.
In Cloughton Riley on Business Interruption Insurance (8th ed) at pp 51ff there is a commentary on an equivalent provision from a standard United Kingdom business interruption policy.
The words to the right of the brackets are referred to as the "other circumstances clause" or "adjustments clause" or "the bracketed provisions".
The plaintiff relied on the following statements about the adjustments clause which are found at pages 51-52 of Riley:
"It is so wide in scope that it will permit adjustments to the rate of gross profit and the turnover figures used in calculating a claim to meet almost any actual or potential variation in their amount. ...
Without this clause the policy cannot be regarded as fulfilling the basic principle of an insurance, that is to indemnify, because the turnover, charges and profits which would have been realised during a period of interruption are hypothetical and never capable of absolute proof. By the use of this clause it is possible to make adjustments in a loss settlement to produce as near as is reasonably possible a true indemnity for an insured's loss."
The definitions of "Annual Turnover" and "Standard Turnover" in the United Kingdom policy which are the subject of this commentary are set out at page 420 of Riley. Without the adjustments clause, those definitions are:
"Annual Turnover: The Turnover during the twelve months immediately before the date of the Incident.
Standard Turnover: The Turnover during that period in the twelve months immediately before the date of the Incident which corresponds with the Indemnity period."
One minor aspect of the definition of "Standard Turnover" in the policy which was apparent during the trial was that the word "Damage" in the words of the definition preceding the adjustments clause appeared to be superfluous. If the provisions in the policy had their genesis in the United Kingdom policy, the explanation for the word "Damage" is that it is not superfluous, but signifies the omission of the words "immediately before the date of the" before the word "Damage", i.e. the opening words of the definition of "Standard Turnover" may have been intended to be "The Turnover during that period in the 12 months immediately before the date of the Damage which corresponds with the Indemnity Period".
If the Standard Turnover were meant to be the turnover in the period corresponding with the Indemnity Period in the period of 12 months prior to the incident, that makes sense as to why the Standard Turnover then has to be adjusted to provide "for the trend of the Business". The Standard Turnover as adjusted represents "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 is consistent with the commentary on "Standard Turnover" in Riley at page 37.
Neither party suggested that words were omitted from the definition of "Standard Turnover". Both parties approached "Standard Turnover" on the basis that it was to represent the turnover of the business in the Indemnity Period that would have occurred, but for the Damage. That approach is consistent with the definition, as it stands in the Policy, without any modification, but for treating the word "Damage" at the commencement of the definition as superfluous, and gives effect to the bracketed provisions. It should also produce the same result that follows from calculating Standard Turnover for the relevant part of the period of 12 months prior to the commencement of the damage and then adjusting that figure under the adjustments clause. I shall therefore approach "Standard Turnover", as the parties did.
Construction of the policy
Without the extension clause, the indemnity clause covers interruption or interference with the plaintiff's business in consequence of loss, destruction or damage to the property of the plaintiff. In many instances there will be a claim arising under section 1 of the policy which is an event which also triggers a claim under section 2 of the policy.
The extension clause gives an operation to section 2 of the policy which does not depend on the occurrence of an event covered by section 1 of the policy.
Critical to the resolution of the plaintiff's claim is the proper construction of the indemnity clause. The parties have different approaches to the construction and meaning of the indemnity clause.
The plaintiff submits that, apart from the extension clause, what is required to trigger section 2 of the policy is a composite of two elements: physical damage and that the cause of that damage must not be the subject of a specific exclusion. The plaintiff submits that the extension clause simply creates a substitute for the normal composite notion of "Damage".
The plaintiff submits that the indemnity clause provides for a three stage process. The first stage is "Damage" which is admitted on the pleadings in this case, i.e. the contamination of peanuts from the plaintiff's plant by salmonella mbandaka. It is submitted that the second element is that interruption or interference to the business is as a result of that "Damage" which it is submitted is also admitted. The third stage of the process identified by the plaintiff is that the defendants will pay for loss resulting from the interruption or interference in accordance with the applicable Bases of Settlement.
The plaintiff submits that the amount payable under the policy is tied to the interruption or interference and not to the "Damage" and that once it is admitted that "Damage" has occurred, it is not necessary to be concerned with any causal link between the "Damage" and the loss. The plaintiff's explanation of this is that the loss is that which results from the interruption and interference with the business and it is only the interruption or interference with the business which has to be in consequence of the "Damage". The plaintiff submits that the only other way in which the general promise to pay the loss resulting from the interference with the business in consequence of the "Damage" is to be read down is in accordance with the applicable Bases of Settlement.
The plaintiff submits that the extension clause sets up three situations in which "Damage" is taken to have occurred, despite the lack of physical damage to the plaintiff's property. The plaintiff concentrates on the three events identified in the extension clause. The plaintiff submits that the essential work of the extension clause is to create a substitute for the normal composite notion of "Damage" and that the words in the extension clause "loss directly resulting from" tend to obscure what the plaintiff submits is the correct operation of the extension clause and should be ignored. The plaintiff submits that if those words in the extension clause were applied literally, they would set up an entirely different regime for assessing loss, having nothing to do with the Bases of Settlement and the other elements of section 2 of the policy.
The plaintiff therefore submits that it is not necessary to show a direct causal relationship between the loss and interference.
In respect of the concept "in consequence of the Damage" which underlies the indemnity clause and Items 1, 3 and 4 of the Bases of Settlement and the definition of "indemnity period", the plaintiff relies on the decision of the High Court of Australia in Reseck v Commissioner of Taxation (1975) 133 CLR 45, as applied in McIntosh v Commissioner of Taxation [1978] QdR 354 and Director-General of Social Services v Hangan (1982) 70 FLR 213.
The question in Reseck was whether payments were lump sums paid by the employer to the taxpayer in consequence of termination of employment. The phrase "in consequence of" was used in section 26(d) of the Income Tax Assessment Act 1936. Gibbs J (as he then was) stated at 51:
"The question that then arises is whether the allowance was paid in consequence of the termination of the employment of the taxpayer. Within the ordinary meaning of the words a sum is paid in consequence of the termination of employment when the payment follows as an effect or result of the termination. In the present case the payment did follow as a result of the termination of the taxpayer's services. It is not in my opinion necessary that the termination of the services should be the dominant cause of the payment."
Jacobs J stated at 56:
"A consequence in this context is not the same as a result. It does not import causation but rather a 'following on'."
Andrews J (as he then was) also considered the meaning of "in consequence of" in s 26(d) of the Income Tax Assessment Act 1936. He stated at 361:
"... they do strongly support a proposition that a payment may be made in consequence of retirement, notwithstanding, that it is made as well in consequence of something else, for example, the rendering of services or a term in an industrial agreement or award and that it is not essential that a payment come within s26(d) that the retirement be the last event immediately preceding receipt of the payment in order to bring it within the ambit of s26(d)."
The decision of Andrews J in McIntosh was upheld by the Full Court of the Federal Court, reported at (1979) 45 FLR 279.
Hangan was concerned with the construction of s140(1) of the Social Services Act 1947. Toohey J (with whom Fox J agreed) referred to Reseck and the decision of McIntosh in the Full Court of the Federal Court and stated at 221-222:
"In my opinion, the judgments in both cases offer a guide to the proper construction of s140(1) of the Social Services Act 1947."
The defendants submit that the authorities on which the plaintiff relies for the meaning of "in consequence of" are not relevant, as they concern the interpretation of the phrase in a statutory context.
There is force in this submission of the defendants. In the cases concerning s26(d) of the Income Tax Assessment Act 1936, the phrase "in consequence of" was being interpreted in that provision within the context of other relevant provisions of that Act and having regard to the purpose of the provision. Those cases were, in turn, relied on in Hangan for the purpose of construing the same phrase in another statutory context. The words "in consequence of" must be construed in the policy in the context in which they are used in the policy and having regard to the intention of the parties reflected in the words of the policy. The authorities relied on by the plaintiff for the meaning of "in consequence" are of no assistance in construing those words in the policy.
The defendants submit that the extension clause must be taken to partially replace the indemnity clause, so that the indemnity clause modified by the extension clause would then read:
"In the event of Damage, 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 defendants submit that because the term "Damage" is modified by the extension clause to incorporate a concept involving three elements, i.e. an event, interruption of or interference with the business, and directly caused loss, on the incorporation of that meaning into the term "Damage", the indemnity clause becomes irrelevant in respect of those words preceding the identification of "Damage" and the words following "Damage" down to, but not including, "the Insurer(s)" become redundant.
The defendants submit that the use of the word "directly" in the extension clause imports the notion of proximate cause. The defendants also rely on the use of the words "in consequence of" in the indemnity clause, in the definition of "Indemnity Period" and in Items 1, 3 and 4 of the Bases of Settlement, submitting that those words require, in the context of causation, a search for the proximate, rather than the remote, cause of a loss or claim.
The authorities relied on by the defendants to support the proposition that the words "in consequence of" indicate a search for the proximate cause of a loss or claim include Ionides v The Universal Marine Insurance Co (1863) 14 CB(NS) 259, Leyland Shipping Company Ltd v Norwich Union Fire Insurance Society Ltd [1918] AC 350 and Hall Brothers Steamship Co Ltd v Young [1939] 1 KB 748.
The defendants also rely on a number of statements in texts to the effect that it is a fundamental rule of insurance law that, subject to the terms of the contract of insurance, the insurer is liable only for losses proximately caused by the events insured against. It is expressed in Sutton Insurance Law in Australia (3rd ed) at par 15.8 as follows:
"In order to determine whether or not a loss is covered by a policy, the proximate cause of it must be ascertained, for the insurer is not liable for any loss which is not proximately caused by a peril insured against."
It is stated in MacGillivray on Insurance Law (9th ed) at par 19-1:
"It is a fundamental rule of Insurance Law that the insurer is only liable for losses proximately caused by the peril covered by the policy."
The following statement is made in Colinvaux's Law of Insurance (7th ed) at par 4-31:
"The rule of proximity in insurance law, depending as it does on the presumed intention of the parties to a commercial document is a very simple one. Only the proximate cause of a loss is to be looked to. By "proximate" cause is not meant the latest, but the direct, dominant, operative and efficient one. If this cause is within the risks covered, the insurers are liable in respect of the loss; if it is within the perils excepted the insurers are not liable. A loss may be the combined effect of a whole number of causes, but, for the purposes of insurance law, one direct or dominant cause must wherever possible be singled out. The time-honoured maxim causa proxima non remota spectatur must be understood to have this meaning. Even where the policy expressly excludes "all consequences of hostilities," it has been held, this warranty does not extend beyond losses caused proximately by hostilities.
There is no difference, as will appear, in the application of the law of proximity, between marine and non-marine insurance law." (footnotes omitted)
The plaintiff points out that the defendants rely on cases which involve analysis of marine insurance policies which must be read against the background of statutory enshrinement of the common law both in England and Australia that "the insurer is liable for any loss proximately caused by a peril insured against, but, subject as aforesaid, he is not liable for any loss which is not proximately caused by a peril insured against". See section 55 of the Marine Insurance Act 1906 (UK) and section 61(1) of the Marine Insurance Act 1909 (Cth).
The statements in the texts relied on by the defendants about the universal application of the law of proximity in insurance law do not support the plaintiff's contention that the principle that a loss is proximately caused by the peril insured against is limited to marine insurance policies. Some of the statements made in the marine insurance cases relied on by the defendants do not appear to be limited to marine insurance.
The court in Ionides was concerned with the construction of an exception in a marine insurance policy in the terms "warranted free from capture, seizure and detention, and all the consequences thereof or any attempt thereat, and free from all consequences of hostilities, riots, or commotions". Erle CJ stated at 285:
"The maxim causa proxima non remota spectatur is peculiarly applicable to insurance law. The loss must be immediately connected with the supposed cause of it."
Willes J stated at 289:
"... whether we are to apply to this case the ordinary rule of insurance law, that, in ascertaining the relative rights of the parties, you are not to trouble yourself with distant causes, or to go into a metaphysical distinction between causes efficient and material and causes final; but you are to look exclusively to the proximate and immediate cause of the loss."
Byles J stated at 296:
"But this is plain, and is admitted on all hands, that, in the construction of the contract of insurance, the proximate or immediate cause of the loss alone is that to which we can look."
The statements in the texts about the universal application of the principle in insurance law that, subject to the terms of the contract of insurance, the loss for which the insurer is liable must be proximately caused by the insured peril is supported by statements in many other authorities outside the marine insurance cases. I shall refer to a few instances.
In Australian Casualty Co Ltd v Federico (1986) 160 CLR 513, 534-535 which concerned a disability insurance policy, Brennan J referred to the "rule in applying (sic) contracts of insurance is that the proximate cause of loss is alone regarded". The general application of the rule was referred to by Kearney J in connection with a public liability insurance policy in S&Y Investments (No 2)Pty Ltd (in Liq) v Commercial Union Assurance Co of Australia Ltd (1986) 44 NTR 14, 20.
In considering an Industrial Special Risks Insurance Policy in Spika Trading Pty Ltd v Royal Insurance Australia Ltd (1985) 3 ANZ Insurance Cases 60-663 Rogers J proceeded on the basis that he had to determine what was the proximate cause of the loss in respect of which a claim had been made and stated at 79, 111:
"It is well accepted that, in determining what is the proximate cause of a loss, in the case of an insurance claim one applies commonsense."
In Petersen v Union des Assurances de Paris IARD (1995) 8 ANZ Insurance Cases 61-244 the court was concerned with a claim for damage to business stock under a policy that covered loss or damage caused by wind and/or water, but excluded flooding other than from watermains, pipes, gutters, drains, water tanks or apparatus. Rolfe J set out some general principles at 75,749 including:
"Firstly, the plaintiffs must establish that the cause of the loss and/or damage was a result of an insured peril, in the sense that the insured peril was the dominant or effective proximate cause."
Rolfe J's decision was upheld on appeal, reported at (1996) 9 ANZ Insurance Cases 61-366. Priestley JA with whom the other members of the court agreed stated at 77,034:
"Further, there seems to me a more general reason why the appeal should fail. It appears to be accepted in insurance law generally that when the cause for the damage in respect of which the claim is being made is being sought, the court must look for a cause formerly routinely called proximate cause, later sometimes also described as the real or effective cause, it now being accepted that proximate does not mean the closest cause in the sense of time: see Leyland Shipping Company Ltd v Northern Star Insurance Co Ltd [1918] AC 350 at 369; Wayne Tank at 66; Wood v Associated National Insurance Co Ltd (1984) 3 ANZ Insurance Cases ¶60-614 at 78,756; [1985] 1 Qd R 297 at 306."
I therefore proceed with the construction of the policy on the basis that, subject to the terms of the policy, it is a fundamental rule of insurance law that the insurer is liable only for losses proximately caused by the events insured against.
The indemnity clause provides for two stages of causation. It is not a case of simply looking for the loss caused by a peril. The indemnity clause provides for an event which causes interruption or interference with the business which results in loss.
There is nothing in the indemnity clause (whether read with or without the extension clause) which suggests that the parties intended to displace the usual rule about proximate cause. In fact, the words of the indemnity clause when the extension clause has effect reinforce that the event must be the proximate cause of the interruption of or interference with the business.
The interpretation of the indemnity clause, when the extension clause has effect, is complicated by the fact that the extension clause literally extends the term "Damage" not just to the three events which are the subject of the extension clause but to include "loss directly resulting from interruption of or interference of the business carried on by the Insured at the premises in consequence of" one or more of the three specified events. It does not make sense to read the indemnity clause, so that the word "Damage" includes the loss specified in the extension clause. That is because the existing words of the indemnity clause also deal with the payment of loss resulting from the interruption or interference with the business in consequence of the "Damage".
The extension clause specifically provides for the relevant loss to be "directly resulting from interruption of or interference with the business" (emphasis added). The adverb "directly" does not otherwise qualify the words "resulting from" in the indemnity clause. It is apparent from the words used by the parties in the extension clause that it was their intention that the loss resulting from interruption of or interference with the business in consequence of one or more of the three events specified in the extension clause was intended to be direct loss.
If the plaintiff's submissions on the construction of the indemnity clause (when the extension clause applies) were accepted, no effect would be given to the incorporation of the word "directly" in the extension clause. In an insurance policy, the use by the parties of the word "directly" must connote a direct causal connection. Although there are difficulties in incorporating the extension clause into the indemnity clause, when the extension clause is operative, it should not be done in a way which fails to give effect to such a significant word.
If the indemnity clause is read, so that the extension clause is substituted for the word "Damage", then the only interpretation which is consistent with the concepts incorporated into the word "Damage" is that the words "the amount of loss resulting from such interruption or interference" in the indemnity clause must be read as referring to direct loss resulting from the interruption or interference with the business in consequence of one or more of the three events identified in the extension clause.
It must follow that the usual rule about proximate cause applies to the first stage of causation, i.e. between the event and the interruption of or interference with the business. It would be an odd result if different concepts of causation applied to each stage of causation in the indemnity clause.
I therefore conclude that, as a matter of construction of the policy, where one of the three events in the extension clause occurs, the indemnity is triggered and the insurers are liable for the loss which directly results from the interruption of or interference with the business which has been proximately caused by the triggered event. The calculation of that loss then proceeds in accordance with the applicable Bases of Settlement.
Claim
The defendants have paid $700,000 on account of the plaintiff's claim under the policy. The balance of loss claimed by the plaintiff of $4,795,000 is calculated in the amended statement of claim as follows:
Item Details Amount 1(a) Loss of Gross Profit $ 775,000 1(b) Increased cost of working 3,179,000 2 Claims Preparation Costs 208,000 3 Pay-roll 733,000 4 Additional Increase/costs of working 600,000.00 Additional Increase/costs of working 600,000 Total Claim $5,495,000 Less Credit for Progress Payments received 700,000 Balance of loss claimed $4,795,000
During submissions the plaintiff produced alternative calculations of its claim (Exhibits 91 and 92) to accommodate the evidence on the appropriate method of calculating the yield loss component of the claim under Item 1(b) Basis of Settlement. This had an effect on the quantification of the amounts claimed under Items 1(a) and (b), but did not alter the total claim.
Witnesses
The main witness for the plaintiff was its managing director, Mr Robert Hansen. Other employees or former employees of the plaintiff who gave evidence were Mr Michael Read, Ms Sharon Jones (formerly Shearer-Smith), Ms Michelle Gilchrist and Ms Shirley Rodda. A former director of the plaintiff, Mr David McDougall, who is a partner in KPMG and has been a corporate adviser to the plaintiff also gave evidence.
The plaintiff also relied on evidence from Mr Jeffery Currie who is presently the general manager for procurement and supply chain of Kraft, but was the logistics manager at the time of the salmonella crisis, microbiologist Dr Peter Wood, QHD employee Mr Robert Holmes and chartered accountant and loss adjuster, Mr Murray Rowley.
The defendant called one witness only, chartered accountant and loss adjuster Mr Geoffrey Wheeley.
The defendants made a substantial attack on the reliability of the evidence of Mr Hansen. The fact that Mr Hansen wrote a letter to Mr Rowley dated 10 October 1996 in which reference is made to maximising aspects of the insurance claim is not a ground for disbelieving Mr Hansen's evidence. The letter was written at a time when Mr Hansen was frustrated about the delays in the processing of the plaintiff's claim. The contents of that letter reflect the commercial attitude that one would expect from the managing director of the plaintiff. Seeking to ensure that all that can be recovered by the plaintiff under its insurance policy is recovered does not equate to seeking to recover more than the plaintiff was entitled to under the policy.
Mr Hansen obviously prepared himself thoroughly in order to give evidence at the hearing. He exhibited detailed knowledge of the operations of the plaintiff that were relevant to his evidence. There is no doubt that his memory had been refreshed by the preparation which he undertook for the hearing. The perusal of the tender bundle (Exhibit 83) indicates, however, that Mr Hansen was at the forefront of all aspects of the plaintiff's operations following the salmonella outbreak. His evidence about those matters clearly came from his experiences at the time.
I formed the impression from my observations of Mr Hansen when he was giving his evidence that he endeavoured to answer all questions in a straightforward and honest manner. In some respects his evidence was affected by the viewpoint which the plaintiff adopted as to the construction of the policy, so that his evidence has to be viewed in that context. That qualification in no way affects the favourable view I reached abut his honesty. I note that although the defendants sought to rely on Mr Hansen's reading of the transcript during the course of his evidence as possibly tainting his evidence, no specific example of tainting was suggested by the defendants.
History of the plaintiff and its operations
In 1924 the Peanut Marketing Board was established for the purposes of acquiring and marketing peanuts on behalf of the growers of Queensland. It operated in association with the Queensland Peanut Growers Co-operative Association Limited. A restructuring took place in 1991-1992 which resulted in the Peanut Marketing Board ceasing to exist and its activities, assets, liabilities and commitments being transferred to the Co-operative. On 24 August 1992 the Co-operative converted to a public company named PMB Australia Limited which was the plaintiff.
In October 1994 the plaintiff commenced trading as Peanut Company of Australia ("PCA"). On 11 September 1997 the plaintiff's name was changed to Peanut Company of Australia Limited.
Mr Hansen became the managing director of the plaintiff on 1 November 1993.
The bulk of the plaintiff's peanut stock is purchased from Australian farmers who grow peanuts. The plaintiff's peanut seed sales commence from about September each year. Peanuts in Queensland are planted in October, November and December and are normally harvested in the following March to July.
The financial year of the plaintiff runs from 1 April to 31 March. This corresponds approximately to the marketing of a peanut crop.
A peanut comprises an outer pod or shell. Inside are two kernels. Each kernel is covered by a red skin called the husk or testa.
The plaintiff receives the peanuts in shells from the farmers. Foreign material such as dirt, sticks and stones is removed from the farmers' stock and the peanuts in shell are stored in the plaintiff's silos.
The first stage in the process is usually shelling. Blanching is the process of removing the testa from the kernels. Roasting is the process where the peanuts are roasted.
In general terms, the plaintiff sells peanuts in a raw form, a roasted form or a roasted and salted form.
A major quality issue for the plaintiff in processing peanuts has been aflatoxin. It is a toxin that is carcinogenic to mammals and is produced by two fungi called Aspergillus flavus and A parasiticus. The process to eliminate the 1% or 2% of peanuts which contain aflatoxin is to dry the peanuts, as the heating process changes the colour of the peanuts, and colour sorters are then used to eliminate the contaminated peanuts by association with colour.
Pre-incident the process by which the peanuts were processed and marketed at the plaintiff's Kingaroy plant was described by Mr Hansen and Mr Read by reference to a diagrammatic layout of the plant which is reproduced below.
Area (N) was the discharge area for raw peanuts coming to the plant. The raw peanuts were received into the area (I) and tipped into the roaster (A) where the product was dried down. They were then moved to external storage (B) by conveyor belt. The peanuts were allowed to rest in these external silos after the roaster which allowed them to cool and shrink, so that the red skin was then easier to remove, making them easier to blanch. After approximately eight hours in storage, they were removed from (B) through the blanchers (D) (where the testa was removed), colour sorters (E), picking belt (F) to the bag off point at (G) or stored in bulk 1 tonne bins south of (J). The discoloured peanuts which have the high risk of aflatoxin were rejected during the colour sorting stage. The picking belt enabled final inspection by human eye to remove any discoloured peanuts which had been missed by the colour sorters. The rejected product was then taken back to area (I) to be reworked (put through the roaster, blancher and sorters again). The roasted product would go out through areas (I) and (N) either to the cold store or shipped direct to the client.
All kernels that were not suitable for edible peanuts and the by-products (including the shell and husk) were then sent to the crushing plant where they were crushed and crude oil extracted which were sold to Meadowlea and from which protein meal was also obtained which was sold as stockfeed.
Pre-incident the plaintiff was implementing a plan to add value to the products, on the basis that that would give improved profit margins and result in an increase in sales revenue and profitability. The plaintiff had built its blanching plant in 1980. Since that time there was a progressive increase in the volume of blanching and then roasting undertaken by the plaintiff. By mid 1994 it became critical for a secondary support roaster to be added. It was estimated that blanched and roasted sales contracts for 1994 were approximately 35% higher than 1993. In July 1994 the Board approved the expansion of the blanching plant with the addition of the value adding roaster and room which was undertaken in late 1994. Further expansion was approved in late 1995 which was implemented in December 1995. The value added plant was intended to produce a variety of roasted products.
Relationship with Kraft
Kraft had been a customer of the plaintiff since about 1980. Kraft's product is manufactured by the plaintiff pursuant to product specifications issued by Kraft from time to time. There are different specifications for different brands of Kraft product, depending on whether it is a name or a generic brand.
Pre-incident Kraft had issued to the plaintiff its "General Raw Material Specification" version 28/09/94 and a document entitled "Supplier Expectations" dated 31 January 1995. Reference is made in general terms in those documents to a requirement that "All suppliers of sensitive food products or ingredients will have in place a system to prevent, control and detect undesirable micro-organisms".
The General Raw Material Specification was to be read in conjunction with the appropriate detailed raw material specification. Each of the raw material specifications that was applicable to roasted peanuts and granulated peanuts did not set out any micro-biological criteria against which the finished product had to be assessed.
About twice a year commencing in 1994, Kraft personnel would visit the plaintiff's premises to conduct a supplier audit.
In 1995 supplier audits were conducted by Kraft on 5 January and in March. In 1996, prior to the incident, Kraft had conducted a supplier audit on 18 April 1996.
Kraft produced a report dated 17 May 1996 which summarised the status of key issues arising from the audit conducted on 5 January 1995. The report noted that the audit specifically targeted foreign matter prevention systems. The issues arising from the 5 January 1995 audit were:
"1. Objective data to display the effectiveness and efficiency of the foreign material removal processes e.g. primary and secondary cleaners, laser and colour sorters. Changes in processes to gain improvement have not been verified.
2. Environment in the blanching and roasting plant is substandard for a food processing facility. Risk areas include:exposed light globes over filling areas
poor employee GMP
open doors, windows
glass windows
use of rodent bait pellets
housekeeping is generally poor
Coupled with exposed product during filling, the risk of foreign matter contamination is high.
3. Hold and Release system not documented. No physical identification of nonconforming product.4. Storage room for pallets of product are positioned too close to walls and one another, restricting access to inspection of bait stations.
5. High traffic area around filling line which increases risk of foreign matter contamination.6. No formal pre-start up inspection on processing lines to detect loose or damaged items on process equipment.
7. No metal detector on roasted peanut filling line for bulk bags. Metal detector exists on 45kg bagging line."
As at May 1996, the current status in relation to issue 2 was:
"Light globes now covered.
Employee GMP has improved however the standard is still not satisfactory.
Open doors still found.
Glass windows still present.
Rodent bait pellets still used.
Housekeeping standard unchanged.
Exposure of product during filling is unchanged."
The Kraft auditor, Ms Sylvie Jemali, visited the plaintiff's plant on 3 June 1996 and discussed the current outstanding issues with Ms Jones. According to Ms Jones' notes of that attendance with Ms Jemali, Ms Jemali informed Ms Jones that Kraft was not going to press issue 4. Ms Jones explained that Kraft would continue to do business with the plaintiff, even though, the plaintiff was not willing to make the changes which issue 4 required.
It was not until 25 June 1996 that Kraft sent a copy to the plaintiff of one of its parent company's internal documents which identifies salmonella as a hazard to be controlled during the heat treatment of raw peanuts. The document is entitled "Philip Morris Worldwide Food Companies HACCP Standard Appendix B-Model CCPs" in relation to nut/peanut heat treatment. The document identifies time and temperature as critical control points and sets out the minimum time for heating at the respective temperatures of 130°C, 135°C and 140°C. Mr Currie did not believe that Kraft in Australia was aware of this document until the incident. It certainly did not form part of the specifications supplied by Kraft to the plaintiff in respect of roasted peanuts, prior to the incident.
In April or May 1995 the plaintiff commenced negotiations with Kraft for the plaintiff to do all the roasting of peanuts for Kraft. At that time Kraft undertook some of its own roasting at its plant at Oakey. An agreement was reached by November 1995 that the plaintiff would roast all Kraft's peanut requirements, of which a minimum of 75% would be raw product purchased from the plaintiff. This resulted in the closure of Kraft's Oakey plant in March 1996. Kraft's purchase order for 1996/1997 was for 5,450 tonnes supplied and roasted by the plaintiff and 1,440 tonnes toll roasted by the plaintiff.
The incident
In June 1996 cases of salmonella poisoning in Victoria were linked to peanut butter. On 23 June 1996 one of Kraft's subsidiaries recalled its generic brands of peanut butter. On 26 June 1996 Kraft recalled all ETA and Kraft brands of peanut butter and implicated the plaintiff as the supplier of the contaminated nuts.
On 30 June 1996 the plaintiff was advised Lot B0520 being roasted peanuts from production run 732 at the plaintiff's plant on 10 January 1996 and sold to Kraft tested positive for salmonella mbandaka.
The QHD collected samples from the plaintiff's premises on 27 June 1996, some of which tested positive. Salmonella mbandaka was isolated from 25 grams of floor sweepings in the granulator area. This was of concern to the QHD as it suggested that salmonella was in the factory environment or in the product that was being processed through the granulator at the time of sampling. Other varieties of salmonella were isolated from the dust receival area and from screenings "ex-shelling plant".
Microbiologist Dr Peter Wood was invited to act as a consultant to the plaintiff on 27 June 1996. On 2 July 1996 he was appointed as the plaintiff's technical representative to advise on salmonella and other bacteria.
Dr Wood produced a draft report on 5 July 1996 in which he identified an auger which was used to feed fines into lot B0520 as the most likely source of the salmonella. Those fines were the flour from granulation of roasted product. Investigations showed that the auger had been stored externally to the plant for a considerable period of time. It was soiled with broken down peanut material and would have been a site for scavenging and possibly nesting rodents. It was dismantled and scrubbed with a wire brush and hosed down with cold water. There was still some difficult to remove organic material remaining after this cleaning process.
As a microbiologist, Dr Wood would have classified the auger as "grossly soiled". After cleaning, the auger was left in the external environment for some days possibly exposing it to further rodent contamination. The auger was placed on line for feeding fines to lots B0518, B0519 and B0520. Samples of lots B0518 and B0519 tested negative. Dr Wood suspected that lot B0520 received a slug of rodent contaminated material that grossly contaminated the product.
Dr Wood also produced another report in which he identified other possible causes of the salmonella contamination and estimated the risk and probability of contamination from that source. As a matter of probability, however, Dr Wood remains of the opinion that the auger was responsible for the salmonella contamination of Kraft's product.
On 5 July 1996 officers of the QHD carried out an inspection of the plaintiff's factory and processes.
By letter dated 8 July 1996 the Chief Health Officer of the QHD made interim recommendations to the plaintiff. The letter stated:
"Your cooperation in attempting to resolve this matter is greatly appreciated and it is expected that our relationship in this regard will continue. In such case it will not be necessary for me to invoke statutory requirements of you or your company under the provisions of the Food Act 1981.
You should not recommence roasting operations until I am satisfied that the organism has been eliminated from the factory. Preliminary results of laboratory tests of environmental samples taken by officers of this Department on Friday 5 July 1996 should be available in the next few days.
It is requested that you not dispatch any roasted products from the premises until such time that I have had the opportunity to assess the processing and test results from samples examined."
The letter contained 18 recommendations which required immediate action, 5 recommendations which required action within the medium term which was described as within 3 months and a further 3 recommendations which were for the long term. A further immediate recommendation and a further medium term recommendation were made in the Chief Health Officer's letter dated 10 July 1996 to the plaintiff. Using the same numbering given to these recommendations by the plaintiff, those recommendations were:
Immediate
1. Carry out the cleaning of reusable shipper bags in an appropriate area outside the General Store and cease to introduce such bags to the store until they have been adequately cleaned.
2. Cease to store product awaiting further processing in the open. (Cages of kernels were observed stored outside the receival section of the secondary processing plant).
3. Separate incoming and outgoing product in the receival area of the secondary processing plant.
4. Cease to use the large fan to inflate polythene liners for shippers and introduce a system based on injection of clean air which will not cause aeration of dust in the processing and packing areas.
5. Take the necessary action to seal all openings to the external silos and conveyors used for blanched and roasted kernels at the secondary processing plant to prevent access by water and foreign matter.
6. Investigate the use of single use outer transporter bags for bulk products to replace the reusable outer bags currently in use.
7. Ensure that all product including input ingredients stored and transported in cages, bins and hoppers throughout the premises are adequately protected from contamination at all times particularly by more attention to adequate and effective sealing and covering products stored in cages.
8. Replace the woven fabric covers used for covering fines stored in stainless steel hoppers with close fitting stainless steel covers or lids.
9. Close and maintain closed the large roller door in the vicinity of the granulator and packing area and other doors of doorways throughout the secondary processing plant which are not used on a regular basis for transporting product into or out of the plant.
10. Develop and institute a hygienic sampling plan for the collection of samples for microbiological examination.
11. Cease using brooms and compressed air jets to sweep floors in the secondary processing plant and instead utilise a suitable vacuum cleaning system fitted with adequately filtered exhausts.
12. Investigate the likelihood of blanched kernels contaminating conveyors if they are not rendered free from organisms by the blanching process and the likelihood of roasted kernels being contaminated from conveyors subsequent to roasting if roasting follows blanching.
13. Cause all paved areas surrounding the secondary processing building to be adequately cleaned on a regular basis and maintained free from excessive dust and dirt.
14. Introduce a training program to train all staff engaged in processing activities in basic food hygiene practices. Supervisors must be sufficiently trained in food handling and hygiene practices to adequately advise and oversee activities of all employees under their control.
15. Engage a consultant to assess the food processing activities currently carried out and proposed and prepare a report on necessary alterations, equipping and rebuilding necessary to redevelop the factory and implement a HACCP based food safety plan in line with modern food processing practices.
16. Develop a plan to manage the commissioning of any new equipment introduced to the secondary processing plant.
17. Develop a program of environmental auditing to be carried out on a weekly basis.
18. Develop a detailed sampling and testing plan for clearance and auditing the microbiological quality of finished product.
Medium Term (within 3 months)
19. Cease the use of reusable shipper bags for bulk transportation of product and replace them with suitable single use bags.
20. Relocate the air intakes for the oven to a higher level and install a suitable filtration system on such air intakes to eliminate the introduction of dust and microorganisms to the processing area.
21. Install above the kernel discharge point of the oven a false ceiling to prevent dust and other material from ducts above falling into blanched and roasted product.
22. Seal or grass the unpaved areas surrounding the secondary processing building to minimise dust generation.
23. Replace the external silos used for holding treated kernels with new silos located within the secondary processing building.
Long Term
24 Provide fully enclosed lined and ceiled processing areas for all processes carried out subsequent to blanching and roasting to eliminate potential for contamination of treated products.
25. Introduce filtered and controlled positive pressure atmospheres to all processing areas subsequent to blanching and roasting.
26. Implement the recommendations of the consultant engaged to assess the food processing activities.
Immediate
27. Take the necessary action to rodent proof, as far as practicable, all processing areas and storage areas including the general store by closing, where possible, openings in walls, including junctions of walls with floors and ensure that all doors, when closed, effectively deny access to buildings by rodents.
Medium Term (within 3 months)
28. Replace wooden pallets used for storage of unsealed product in the cold rooms and throughout the processing areas with new pallets constructed of impervious material and capable of ready cleaning.
Any species of salmonella is a prescribed pathogen for the purpose of the Food Standards Regulation 1994. That gave the chief health officer power under section 16 of the Regulation to give directions for the purpose of identifying the source of, and controlling the danger caused by, the pathogen.
On 10 July 1996 the plaintiff appointed Mr Stephen Miller, a food technologist formerly employed with the Mars Corporation, to be its consultant, in compliance with the QHD recommendation 15.
Mr Miller inspected the plaintiff's plant on 10 July 1996 and prepared a report on that date. As a result of his inspection, he stated:
"The process follows traditional operation developed in the early 80's and much of the plant appears to have been built then. As such many aspects can be brought up to a better standard. This is not to say that a wholesome product cannot be manufactured on the installed equipment, but it will require more cleaning and most likely lower conversion efficiency.
I will divide my thoughts into two aspects;
(a) what can/should be done NOW with the current equipment and layout to achieve compliance with Health Department wishes {i.e. a wholesome product} and,
(b) what could be done in the future to bring the plant up to latest 'modern food processing factory', as asked for by Dr. Diana Lange of the Queensland Health Department."
Mr Miller made recommendations about how the cleaning of the factory had to be carried out. Before final sanitising he recommended (while noting that his recommendations were discretionary) that a list of "improvements" be implemented as follows:
"1. Seal raw material dumping from finished roasted nut area by physical barrier {wall}
2. Fit easily removed (for cleaning) covers for ALL roasted peanut conveyors and holding hoppers.
3. Seal all outside windows with screens to prevent airborne insects getting into plant and close off all doors not absolutely required to operate the plant.
4. Seal all wall to floor interfaces with impervious barrier to rodents, insects and moisture, preferably with internal cove finish to ease cleaning.
5. Seal all equipment support stands in contact with the floor in the post roasting area. Ideally all support stands should be sealed and coved to aid cleaning and prevent stagnant water buildup.
6. Make good all cracks and gaps in the floor around the whole process and paint with an epoxy finish to prevent moisture adsorbtion (sic) and aid dry cleaning."
After giving instructions on how the sanitising with approved chemicals should then be carried out, Mr Miller concluded that there was good reason to believe that good quality product with satisfactory microbiological standards could be manufactured on the installed plant.
The QHD had taken environmental samples from areas within and around the secondary processing plant on 5 July 1996. The results of laboratory tests were available on 12 July 1996. Salmonella mbandaka was detected in floor sweepings from a waste bag near the sieve, in sweepings from under the external silos and in the accumulation under the conveyor from the roaster to the elevator.
On 12 July 1996 the blanching plant and the value added plant were totally closed and all production was stopped while the plant was cleaned and sanitised. This was supervised by Dr Wood, Mr Miller and the QHD. On 13 July 1996 officers from the QHD swabbed the value added plant and the main roasting plant, after the clean down. Those swabs were negative for salmonella.
Dr Woods expressed the opinion, which I accept, that use of chemical agents to eliminate salmonella, as was done by the plaintiff, is "a bit hit and miss". Dr Woods stated:
"... when you have got the Salmonella embedded in debris, et cetera, in cracks and joins, things like this, it is almost impossible for the chemicals to have a complete elimination."
I also accept Dr Woods' opinion set out in his statement (Exhibit 32) that it could take the plaintiff years to rid its plant of salmonella.
By letter dated 20 July 1996 the Chief Health Officer of the QHD advised the plaintiff that roasting operations could be recommenced on the conditions which were set out in that letter as follows:
"1)Each batch of roasted product processed during the first fourteen days of production following recommencement of roasting operations must be subjected to agreed sampling and clearance arrangements. Details of production together with copies of laboratory reports relating to each batch must be submitted to me for approval before being released unless any such release is to an acceptable bond store in accordance with my endorsement. Roasted products must not be released for sale or from bond until approval has been granted.
2)Subject to all samples taken and tested in accordance with 1) above being free of Salmonella, sampling and testing subsequent to the initial two week period may be reduced to each and every fifth batch of roasted product processed during the following two weeks. Product may be released for sale during this period but results of testing should be forwarded to me for my information.
3)Subject to all samples taken during the four weeks period referred to in 1) & 2) above being free of Salmonella, sampling and testing subsequent to that period should be carried out in accordance with good quality assurance procedures."
Subject to complying with the testing and clearance procedures set out in stage 1 of the QHD letter of 20 July 1996, the plaintiff commenced roasting operations on Sunday 21 July 1996. On 23 July 1996 the Kraft quality assurance auditors ordered production for Kraft to stop. The plaintiff continued roasting operations for other customers.
At the same time the plaintiff was taking steps to comply with each of the QHD recommendations.
On 1 August 1996 the plaintiff received advice from Kraft's corporate quality manager that the plaintiff could begin roasting product for Kraft. Arrangements were made between the plaintiff and Kraft for the product to be shipped to a cold store warehouse to be held pending clearance by the QHD and the Victorian Health Department.
On 27 August 1996 the plaintiff was informed by Kraft that a presumptive positive test result for salmonella was obtained from an environmental swab on the external side of a bag from Lot B0989 produced by the plaintiff for Kraft on 15 August 1996. The sample had been taken at the cold store warehouse in Melbourne where product manufactured for Kraft was held pending the QHD clearance. Kraft instructed the plaintiff to cease production for Kraft.
On 21 August 1996 the plaintiff requested approval from the QHD to move from stage 1 to stage 2. Although approval was received on 22 August 1996, it was then rescinded on 28 August 1996 after the QHD had reconsidered the implications of the positive test result from the bag relating to Lot B0989. The QHD required the plaintiff to resume testing of each batch of roasted product as per stage 1 of the letter dated 20 July 1996. The letter from the QHD to the plaintiff dated 28 August 1996 provides:
"I am writing in regard to the confirmed isolation of Salmonella Mbandaka in a batch of roasted peanuts received by Kraft Foods, Port Melbourne from your plant. The sample relates to Lot 989 produced on 15 August 1996.
It is acknowledged that there is some preliminary evidence which might suggest that the sample was contaminated from the exterior of the shipper bag at the time of sampling, rather than at the time of production or packing. However, for the protection of public health and safety, I require the following action on your part.
1.Until further notice, PCA to resume testing of each batch of roasted product as per the phase 1 regimen which was required when your plant was authorised to resume production. I refer you to the clause marked 1) in my previous letter of 20 July 1996 for the specific details. My previous agreement that the product may be held in bond storage pending the receipt of test results holds.
2.The use of re-usable shipper bags for bulk shipment to all of your customers must cease forthwith. In regard to this, I understand that this has been agreed already by PCA and Kraft.
3.I require that you provide to me copies of the results of all testing of product or environmental samples which you have done or have commissioned since the resumption of production was authorised. I acknowledge that much of this material has been provided previously in accordance with the conditions of resumption of production. Further, it is requested that such results continue to be provided to me until further notice."
On 29 August 1996 Mr Holmes of the QHD visited the plaintiff's plant at Kingaroy. He informed Mr Hansen and another director of the plaintiff, Mr Jeff Rackemann, that the Chief Health Officer had told him to tell them that if there were any further isolations of salmonella in their product, as distinct from environmental samples, the Chief Health Officer would order production to cease. When Mr Hansen pointed out the dire financial consequences for the plaintiff if that threat were carried out, it appears that the Chief Health Officer was prepared to exercise greater latitude.
Kraft took environmental samples from the blanching plant on 29 August 1996. One of the samples dug out of a crack in the floor next to the outside wall was positive for salmonella mbandaka. After that sample was taken, the plaintiff dug out the cracks, sanitised the space and then filled it with a sealant.
All product from Lot B0989 (which comprised 19 bags of mixed nuts weighing 18,554 kg) was rejected by Kraft on 11 September 1996.
On 20 September 1996 a positive test for salmonella mbandaka was recorded in respect of a swab from the vacuum cleaner used to vacuum the floor in the blanching plant. The plaintiff received advice from Kraft about this positive test on 27 September 1996.
On 26 September 1996 the QHD advised the plaintiff that it was no longer necessary for the plaintiff to obtain the QHD clearance before releasing product which had been tested negative, but the QHD still wanted copies of all test results. By this stage the QHD were conducting fortnightly inspections of the plaintiff's premises.
Kraft started reordering product from the plaintiff on 27 September 1996 in respect of roasting to commence on 30 September 1996.
During late September – early October 1996 the plaintiff negotiated price increases with Kraft to offset increases in costs in the revised processing methods for Kraft and to contribute towards capital expenditure over 3 years.
By letter dated 25 October 1996 the QHD agreed to the plaintiff moving to the monitoring conditions identified as stage 2 of the QHD letter dated 20 July 1996.
On 12 November 1996 the plaintiff received a letter from the QHD granting approval for the plaintiff to move to stage 3 of the conditions set out in the QHD letter. Inspections by the QHD was reduced to a monthly basis. The inspections were still being conducted in February 1997.
Kraft requirements
Kraft sought compliance from the plaintiff with the minimum requirements that Kraft considered had to be met by the plaintiff, in order to restart roasting for Kraft. In addition, Kraft indicated that it assumed that the plaintiff would meet any requirements set by the QHD. The minimum requirements of Kraft were forwarded to the plaintiff by facsimile dated 12 July 1996. They dealt with pest control, cross contamination management, plant structure and equipment design and environmental salmonella sampling. Kraft's requirements were similar to those of the QHD. Kraft's requirements were designed to eradicate post roast contamination from the factory and to ensure that there was no risk of cross contamination between raw/blanched and roasted product.
After the positive result for salmonella notified by Kraft on 27 August 1996, Kraft required the construction of a "clean room" to ensure that the risk of contamination of the product from the environment was removed. Those requirements were notified by Kraft to the plaintiff by facsimile dated 9 September 1996. The work required to prepare the "clean room" and testing required to confirm its effectiveness were not completed until late September 1996.
Scientific knowledge of salmonella pre-incident
It is apparent from Dr Woods' evidence that prior to the incident it was known that there must be a zero tolerance for salmonella in food products including roasted peanuts.
Dr Wood explained that as peanuts grow underground, one could expect occasional contamination with salmonella, but the numbers would be quite low. As peanuts, after harvest, are dried which reduces the moisture in the peanuts, the moderately low water activity prevents proliferation of the salmonella. Dr Wood stated that salmonella could be added to products in the factory environment via rodents, birds, soil, dust, water or contaminated equipment and surfaces, but the product would not support proliferation. Roasting at 150ºC – 170ºC for 12 to 20 minutes destroys salmonella. The blanching process which is normally done around 90°C does not destroy salmonella. This is because peanuts are a high fat, low moisture food which increases the heat resistance of salmonella should it gain entry to the peanuts. The same conditions will also protect any salmonella present, so that they may survive and remain viable in the product for many years. That also serves to lower the infective dose for sensitive consumers to just a few cells.
Dr Wood was of the opinion that control to eliminate the risk of salmonella in processed peanuts requires clear separation between raw nuts and the processing area, rodent control, personal and plant hygiene and the prudent use of water during clean up operations, as any water remaining on equipment can support growth of salmonella and the whole processing environment can become contaminated.
According to Dr Wood, salmonella in the context of peanuts was a low risk prior to the incident and remained a low risk after the incident. Dr Wood provided the plaintiff with information from a text entitled "Microbiol Ecology of Food", Volume 2, published in 1980 by The International Commission on Microbiological Specifications for Foods. It was stated at page 761 of that text:
"Occasionally peanut butter has been contaminated with salmonella, but no outbreaks traced to the product have been reported. The organisms come from cross-contamination between raw peanuts and the roasted product or from the plant environment. When the raw material is contaminated with salmonellae, the numbers present are usually quite low. Under good manufacturing practices, the salmonellae are largely eliminated from the plant environment, along with inert dust, soil, and other foreign material. A Salmonella problem can arise from the imprudent use of water during clean-up operations, because any water remaining on the equipment can support the growth of microorganisms, including Salmonella. Under such conditions, the whole processing environment can become contaminated with salmonellae. Control requires clear separation between raw peanuts and the processing areas. When water is used for cleaning and sanitizing it must be removed completely and promptly from all product-contact surfaces ... ."
Dr Wood was of the opinion that prior to the incident the plant should have been structured to avoid the possibility of cross contamination between raw and processed product. If Dr Wood had been approached prior to the incident about what steps the plaintiff should be taking in order to avoid salmonella contamination, Dr Wood would have made virtually all the recommendations made by the QHD. I found Dr Wood's evidence to be helpful in highlighting the distinction between the plaintiff's need to address the immediate cause of the contamination which resulted in the salmonella outbreak and the need to address the wider issue of reducing the risk of salmonella contamination in its plant and processes.
The plaintiff was ignorant prior to the incident that salmonella was a risk in processing peanuts. Pre-incident none of its customers had specific requirements directed at the risk of salmonella contamination. Pre-incident the plaintiff had occasionally tested samples of its product for salmonella. This had been done to comply with a customer's specification. Mr Read considered and I find that the requirement to provide a test result for salmonella was as a result of the customer's indiscriminate application to peanuts of a specification prepared for another product where salmonella was an issue.
Changes to the value added plant
Immediately after the incident and on receiving the requirements of the QHD and advice from its own consultants, the plaintiff commenced revising and changing processing systems in the plant. Mr Read states that the sole reason for the changes was the need to minimise the risk of a recurrence of the salmonella contamination. All the capital works which were undertaken in the second half of 1996 were addressing specific contamination risks that were identified during the QHD, Kraft and external consultants' inspections of the premises.
The detail of each of the expenditures undertaken in complying with the QHD recommendations are set out in Mr Read's statement (Exhibit 42). The total cost of the expenditures and works was $638,163.19. By reference to the diagrammatic layout of the plant which is set out above, the process for roasting raw blanched peanuts was changed post incident as follows:
(a) raw peanuts were received into area (I) and tipped into the roaster (A) where lower blanching temperatures were used;
(b) the product would then move by conveyor belt through the blanchers (D), colour sorters (E), picking belt (F) without going to the storage area (B);
(c) the raw blanched product was then caged off in specially built steel cages and stored in area (I);
(d) after a complete production stop and clean down the raw blanched product was then retipped for roasting (A) and then transported via cleaned and sanitised conveyor (C) to the specially built filling room (H).
The new process therefore omitted the use of the external silos (B). In order to be efficient about the clean down step between using the plant for blanching and then for roasting, the plant would be used for blanching for a week, before the clean down and sanitising was undertaken. After that had been completed the plant was then used for roasting.
From mid October 1996 a further change was made to the process. The roasting was no longer done in roaster (A). The specially built filling room (H) was decommissioned. Product for roasting would then go to roaster (J). A wall was constructed on either side of roaster (J) to build a barrier between raw peanuts and roasted peanuts. This satisfied Kraft's requirement for a clean room. All of the roasted product was stored in (K) from where it was shipped to the client. If it was to be granulated, it would go to (L) for granulation and be shipped out through (M).
Effects on the plaintiff's business post incident
The plaintiff's normal business operations were immediately affected by the shutdown and cleaning of the value added and blanching plant and then the need to comply with the testing and clearance regime imposed by the QHD. The subsequent tests which revealed salmonella at the plant also resulted in stopping operations, cleaning and restarting of the blanching plant. Disruption was caused to the plaintiff's normal operations by the need to comply with the requirements of Kraft and the recommendations of the QHD in relation to process and plant changes.
Mr Hansen also gave evidence about the effect on the normal business operations of the plaintiff as a result of the time spent by himself and other senior managers of the plaintiff in dealing with issues that arose from customers, farmers and the plaintiff's bank, the Commonwealth Bank of Australia ("CBA"), as a result of the discovery of salmonella on the premises. Mr Hansen described it in paragraph 7.55 of his statement as follows:
"Instead of doing our jobs, we were managing the crisis. We were responding to outside influences everyday, instead of doing our normal day to day jobs and focusing on the matters relevant to making sales and making them profitably, such as closely watching stock levels and stock mixes."
The intense effect of the incident on the plaintiff's operations was reflected in the following answer of Mr Read:
Mr Rowley calculated the value of the gross loss of yield on the basis of $1,432 per tonne for 1,573 tonnes as $2,252,711. To arrive at Mr Rowley's calculation of net loss, a deduction was made for the value of the additional sales revenue derived from the extra reject kernels that were sent to the oil crushing plant. The net claim for loss of yield was calculated by Mr Rowley to be $1,948,237.
The main reasons advanced by the plaintiff for the loss of yield in the 1996 season were the decommissioning of the external silos and the change in processing to require roasted product to be blanched before roasting, so that roasted product went straight to bagging. In the latter case the need to remove skin after raw blanching rather than after roast temperatures resulted in a reduction in the blanching efficiency.
Other reasons for yield losses which were not as significant were identified by Mr Read as:
(a) inefficiencies caused by production changes, such as the line being flushed with up to 1 tonne of product each time it was restarted after work was done on the line or when there was a changeover between raw blanched and roast production;
(b) direct losses due to greatly increased sampling;
(c) additional rejects and losses to oil kernel were experienced every time batches were reprocessed.
Putting the sole purpose test required under Item 1(b) Basis of Settlement to one side, I accept in principle that yield losses which cause an additional amount of feedstock to be used to produce the same turnover which would have been achieved but for the diminution in yield results in an additional expenditure being the cost of additional feedstock to achieve the turnover which would have been achieved prior to the yield loss.
Mr Wheeley in his supplementary statement (Exhibit 16) did an alternative calculation of yield loss based on the plaintiff's lost opportunity of selling as blanched product the extra kernels that were sent to crushing as a consequence of the change in processing. The loss was calculated as the difference in sale price between raw and blanched product. In oral evidence Mr Wheeley stated that if no turnover loss were established by the plaintiff, so that the only turnover loss was due to yield loss, it was simpler to value lost yield at selling price rather than at cost to production.
This approach assumes that there would be a turnover loss equal to lost yield and has application only if no other turnover loss were established. I find that the plaintiff's method of calculating yield loss as a cost of production is consistent with the terms of the policy and consistent with the evidence of the plaintiff that during the indemnity period additional feedstock was required to achieve the same turnover that would have been achieved but for the diminution in yield. It is therefore not necessary to consider the plaintiff's alternative claim calculations based on yield loss calculated at sales value (Exhibits 91 and 92) or the defendants' calculations of yield loss at selling value (Exhibits 85 and 86).
One matter on which considerable emphasis was placed by the defendant during the course of the hearing which is relevant to the yield loss calculation is what the plaintiff did with the Kraft returns. I deal later in these reasons with the circumstances which resulted in the return of product by Kraft to the plaintiff. For the purpose of the yield loss calculation, it was relevant to determine whether the Kraft returns sent to oil crushing were included in the 2,760.389 tonnes of oil kernels for the 1996 season which according to the plaintiff's records were sent to oil crushing from the blanching and value added plant. Ultimately, the plaintiff's case was that the amount of the Kraft returns was 394 tonnes. Mr Wheeley conceded that the amount of the Kraft returns was 394 tonnes.
Sufficient documentary evidence (Exhibits 47, 48 and 74) and Mr Wheeley's concessions in cross-examination support the finding which I make that the 2,760.389 tonnes transferred to crushing from the blanching and value added plant did not include the Kraft returns of 394 tonnes which were sent directly from customer returns to crushing.
There was extensive cross-examination of Mr Rowley on his methodology and calculation of yield loss set out in revised appendix 7A to his statement. I am satisfied that the caution which Mr Rowley has displayed in other aspects of the preparation of claim and the care with which he has verified figures produced by the plaintiff applied equally to this calculation of yield loss. I accept the need to make the adjustment identified by Mr Rowley in each part of the calculation for returns of product and the figures which he has used for that purpose.
One problem with the calculation of yield loss set out in revised appendix 7A to Mr Rowley's statement is that it pertains to the period from 24 June 1996 to 23 June 1997 which does not accord with my finding that the indemnity period terminated on 31 March 1997.
On the plaintiff's evidence the significant reasons for the yield loss in the 1996 season were due to changes in processing and the decommissioning of the external sales which I find were caused by the new awareness of the risk of salmonella contamination, rather than the salmonella outbreak itself.
Of the reasons advanced by the plaintiff for yield loss, the only one that is directly related to the salmonella outbreak is greatly increased sampling. The new awareness of the risk of salmonella contamination dictated that a more significant testing regime be undertaken than had been undertaken prior to the salmonella outbreak. The testing regime imposed by the QHD in its letter of 20 July 1996 was more intensive than the regime that became the standard after the QHD's restrictions were lifted in November 1996. The sole purpose of the QHD testing regime was addressing the salmonella outbreak. To the extent that that resulted in loss of feedstock above the regime which became standard by the end of 1996 as a result of the new awareness of the salmonella contamination it could be described as additional expenditure which satisfies the sole purpose test and otherwise falls within Item 1(b) Basis of Settlement.
The plaintiff has not attempted to calculate the loss of feedstock due to the increase in sampling (above what became the standard by the end of 1996) which was therefore due to the salmonella outbreak.
I do not accept that the yield loss due to inefficiencies caused by production changes falls within Item 1(b) Basis of Settlement. Mr Read dealt with the inefficiencies caused during the period when the same production line was used for both blanching and then roast production. Mr Read described how it was necessary to "purge" the system with a quantity of roasted product after the changeover between one run and the next with the resultant loss of that stock. Other losses were also caused by compliance with the protocol developed by Mr Miller and dated 3 September 1996 to ensure that quality and hygiene improvements implemented in the blanching plant were not compromised by engineering and maintenance activities carried out whilst the plant was in operation. That protocol required that after any engineering work was carried out on or near product contact services, the first 2 to 500 kg of product through the plant must be sent to oil crushing. These losses of product were directly related to process changes which arose from the need to avoid the risk of salmonella contamination.
I therefore do not consider that the claim for yield loss by reference to the difference between actual yield and the standard yield adopted of 73.7% falls within Item 1(b) Basis of Settlement.
It is not possible to identify that percentage of yield loss which can be traced to those aspects of the interruption of the plaintiff's business which I have identified as being due to the salmonella outbreak. I therefore invite further submissions from the parties on whether there should be an opportunity for further evidence on this aspect. That evidence may also affect whether it can be concluded that the additional expenditure claimed for yield loss due to the interruption to the plaintiff's business caused by the salmonella outbreak satisfied the sole purpose test applicable under Item 1(b) Basis of Settlement.
If the sole purpose test were not satisfied, the plaintiff makes an alternative claim for yield loss under Item 4 Basis of Settlement. This Item covers increase in the cost of working which is not recoverable under another Basis of Settlement such as Item 1(b) provided that the increase in the cost of working is "necessarily and reasonably incurred during the Indemnity Period in consequence of the Damage". In addition the purpose of the increase must be for avoiding or diminishing reduction in turnover and/or resuming and/or maintaining normal business operations and/or services.
Again, I accept that yield loss can result in an increase in the cost of working for the purpose of Item 4, but the increase must be "in consequence of the Damage".
Again, as the plaintiff's evidence supports the cause of the yield loss being substantially the new awareness of the risk of salmonella contamination, I am not satisfied in respect of the total claim for yield loss that it was "in consequence of the Damage". If it were necessary to consider the claim for yield loss under Item 4, I invite submissions on whether leave to adduce further evidence should be given.
The plaintiff claims $601,000 for direct costs under Item 1(b) Basis of Settlement. The defendants rely on Mr Wheeley's analysis of this claim in accordance with the defendants' interpretation of the policy to submit that the amount which should be allowed is $143,000. Mr Wheeley has primarily allowed expenses attributable to the period 24 June to 20 July 1996. The claim for direct costs therefore can be allowed to the extent of $143,000 under Item 1(b).
The balance of the claim for direct costs comprises the following items:
Capital $50,629 Kraft stock returns 88,644 Balance 50% of KPMG's fees 55,270 Balance of claim for direct costs 263,457 $458,000
What has been called the "capital" item of $50,629 does not strictly comprise items of capital expenditure. It includes Mr Miller's fees of $39,209 for work carried out after 20 July 1996, his accommodation costs of $4,254 and travel costs of $2,113. Consistently with what Mr Miller himself would discern between advising on how to make the existing plant safe and advising on how to bring it up to a modern food processing factory, the prime purpose of his consultancy after 20 July 1996 was addressing the risk of salmonella contamination in the future, rather than the salmonella outbreak which had occurred. The salmonella outbreak and the resultant interruption to the plaintiff's business therefore was not the cause of this expenditure. On the information contained in appendix 14 to Mr Rowley's statement (which is an analysis that was undertaken by Mr Wheeley of the claim for direct costs), I cannot find that the salmonella outbreak and the resultant interruption to the plaintiff's business was the cause of the balance of this "capital" item.
On 29 July 1996 the plaintiff received a facsimile from Kraft setting out details of the stock which Kraft held which was produced by the plaintiff prior to 23 June 1996. The value of the stock involved was $734,549.62. Because of the peanut butter recall, Kraft was unable to use this product and deducted its value from the payment due from Kraft to the plaintiff on 31 July 1996.
Mr Hansen stated that, if pressed, the plaintiff could not guarantee that any products supplied before 23 June 1996 were free of salmonella. He therefore considered that the plaintiff did not have any choice, but to accept the product back and reprocess it by crushing it into oil, in order to mitigate the loss. Mr Hansen sent a facsimile to Mr Currie at Kraft on 9 August 1996 indicating that the plaintiff would accept the returned product so that it could be reprocessed and losses minimised. It was pointed out in that facsimile that some of the product dated back to January 1996 and therefore would be out of specification, based on Kraft's use by dates.
The plaintiff paid freight of $88,644 to have that produce returned to Kingaroy from Melbourne and it is that amount which is included in the claim for direct costs.
Whether or not the plaintiff was legally bound to accept Kraft's decision to deduct this sum of $734,549.62 from the payment Kraft was due to make on 31 July 1996, I find that it was not an unreasonable commercial response on the plaintiff's part in the circumstances. Kraft's peanut butter recall was as a result of salmonella contamination traced to the plaintiff's premises. Kraft was a major customer of the plaintiff and it was critical to the plaintiff's business for the salmonella contamination not to result in Kraft's deciding to discontinue manufacturing peanut butter. What is relevant for the purpose of this expense in considering whether it falls under Item 1(b) Basis of Settlement is whether the expense incurred for freight in bringing the rejected stock back to the plaintiff's factory was additional expenditure necessarily and reasonably incurred for the sole purpose of avoiding or diminishing reduction in turnover. I find that the expenditure was incurred in consequence of the salmonella outbreak. By bringing the stock back, some was able to be resold and the balance was able to be reprocessed and the resales and the sales of the reprocessed product have been included in the actual turnover. If it were not brought back, the actual turnover would have been less. The freight costs of $88,644 therefore fall within Item 1(b) Basis of Settlement.
With respect to the claim for KPMG's fees, Mr McDougall dealt with the work undertaken at KPMG in respect of which the disputed fees were rendered. In July-August 1996, he provided financial advice, including the preparation of cashflows and detailed sensitivity analysis for the directors of the plaintiff following the discovery of the salmonella. Between August 1996 and January 1997, he assisted the plaintiff in negotiations with the CBA in respect of securing seasonal debt funding subsequent to the salmonella incident. The KPMG fees therefore were incurred during the indemnity period and in respect of an aspect of the interruption to the plaintiff's business for which the salmonella outbreak was a cause. I do not consider that this expenditure can be characterised as being incurred for the sole purpose of avoiding or diminishing a reduction in turnover. Under Item 4 Basis of Settlement, the accounting fees can be characterised as being expended for maintaining the plaintiff's normal business operations. The question arises as to the extent to which these fees can also be attributed to the disruption caused by the need to address the risk of salmonella contamination in the future. I invite submissions on whether leave should be given in relation to further evidence and/or submissions on this claim.
For the purpose of considering what expenses included in the balance of the claim of $263,457 should be allowed under Item 1(b) or Item 4, I have had regard to the description of each of the disputed amounts as set out in appendix 14 to Mr Rowley's statement. I consider that, if necessary, I can determine this part of the claim on the basis of the description of each of the expenses. As I am inviting further submissions on other aspects of the claimed amounts, I invite the parties to consider whether I should receive further evidence and/or submissions on this aspect of the claim.
The next claim under Item 1(b) is for additional labour costs. The plaintiff's claim is for $779,000. The defendants concede $107,000, but if the plaintiff proves liability (on its case) concede that the sum should be $679,000.
Mr Wheeley arrived at the sum of $107,000 as the apportionment for the period prior to the recommencement of operations on 21 July 1996 of the amount calculated by KPMG as the actual payroll costs of the major clean up following the closure of the plant. These total labour costs were $132,840. It is artificial to apportion that amount around the date of the recommencement of operations. Even on the sole purpose test which applies to Item 1(b), that total amount for additional labour costs of $132,840 which is directly related to the clean down which took place after the plant was closed should be allowed.
Mr Read dealt with the circumstances which required increased payroll after the salmonella outbreak in paragraph 7.1 of his statement. In summary these were:
(a) plant changes in some cases reduced the throughput rate so more shifts were required to produce the same amount of product per week;
(b) additional staff were required for new jobs such as microbiological sampling and testing, cleaning and inspection;
(c) additional engineering and plant changes required more direct and indirect labour;
(d) there was considerable increase in down time when the entire staff were still employed, but no production occurred such as during the initial few weeks, changeovers and engineering changes;
(e) while the majority of the labour increase was in the blanching and value adding areas, there were times when labour from other areas such as shelling was used for jobs like cleaning in the blanching plant.
I am satisfied that the salmonella outbreak and the interruption that caused to the plaintiff's business is reflected in some aspects of the circumstances resulting in expenditure on additional labour costs until the end of the indemnity period on 31 March 1997. It is not possible to determine what proportion of the balance of the plaintiff's claim for additional labour costs of $646,160 should be allowed under either Item 1(b) or Item 4. I therefore invite further submissions from the parties on whether further evidence and/or submissions should be allowed in respect of this aspect of the claim.
The next claim under Item 1(b) is reprocessing costs of $118,000. This relates to the product returned to the plaintiff by Kraft. Consistently with how I have dealt with the freight paid to bring that product back to the plaintiff, the amount of the reprocessing costs are recoverable by the plaintiff under Item 1(b).
The next item claimed by the plaintiff under Item 1(b) is interest carrying costs of $195,000. The amount of the claim when the action commenced for this item was $75,000. On the defendant's interpretation of the policy, it is conceded that the sum of $32,000 is payable. The defendant concedes that the sum of $36,000 is payable, if the plaintiff proves liability on the basis of its interpretation of the policy. It appears that the increase in the claim from $75,000 to $195,000 arose out of Mr Hansen's calculation that increased borrowing costs for the period April 1997 to June 1997 amounted to $120,000. As that period is outside the period which I have found to be the indemnity period, the plaintiff is unsuccessful to that claim for $120,000. It may be that it is more appropriate to consider the claim for interest carrying costs under Item 4.
Both Mr Rowley and Mr Wheeley expressed the view that the amount payable under this item would be dependent upon the outcome of the proceedings. In the light of the findings which I have made in these reasons, and having regard to the submissions which I am inviting the plaintiff and the defendants to make in respect of the quantum of claims which I have not yet finalised, submissions on what amount should be allowed for interest carrying costs will need to be deferred until the other claims are finalised.
The next item claimed by the plaintiff under Item 1(b) is for net increased sundry costs (including stacking, power and gas) in the sum of $417,000. This claim is for the increase in miscellaneous costs (not covered under other parts of the claim) which the plaintiff claims as a direct result of the salmonella outbreak. The plaintiff's claim comprises the following amounts:
Power and gas $106,000 Packaging 137,000 Stacking @ 50% of the original claim of $348,000 174,000 $417,000
The defendants consider that no allowance should be made as any such increase in costs resulted from the new manufacturing process, but if an allowance were made Mr Wheeley considered that the correct allowance is $243,000 for the items of power and gas and packaging. Mr Wheeley would not allow any amount for stacking.
It may be that this claim should be pursued under Item 4 rather than Item 1(b) to the extent that the increase in costs was for the purpose of maintaining normal business operations, rather than avoiding a reduction in turnover.
Again, it is not apparent from the manner in which the evidence was adduced at the hearing as to how these costs should be apportioned in order to reflect those that relate to the salmonella outbreak. To the extent that the claims result from changes in the plant operations and process changes required by the QHD, they were not a consequence of the salmonella outbreak. To the extent that stacking costs were incurred directly as a result in the delay in blanching and roasting sales that followed the closure of the plant, those costs relate to the salmonella outbreak. The costs of storing the Kraft returns and repackaging those that were resold were related to the salmonella outbreak. Additional storage also had a consequence for power and gas expenditure.
I therefore invite the parties to make submissions on whether further evidence and/or submissions should be allowed as to the appropriate quantum for net increased sundry costs in respect of the indemnity period.
The next item claimed under Item 1(b) is for temporary installation costs of $38,000. That amount is not in dispute, although the liability for it is. The costs relate to items that are no longer in operational use. Although the claim was previously pursued under Item 4, the plaintiff now seeks to recover this sum under Item 1(b) as increased costs of working incurred for the sole purpose of reducing the loss in turnover. The analysis of each expenditure which is sought to be recovered under this claim is set out in appendix 15 to Mr Rowley's statement. They are costs incurred in respect of the Kraft room that was used until October 1996 and expenses in connection with installations in the blanching plant that were subsequently removed. I find that in the circumstances of each of these expenditures, they were for the sole purpose of avoiding a reduction in turnover.
It is therefore necessary to determine in respect of each of these expenditures whether the interruption to the plaintiff's business caused by the salmonella outbreak was the operative cause or whether the expenditure can be primarily attributed to the plaintiff's need to address the new awareness of the risk of salmonella contamination. I therefore invite further submissions from the parties on whether further evidence and/or submissions should be allowed in respect of the claim of $38,000.
In calculating its claim under Item 1(b), the plaintiff has given credit for the increased selling prices for Kraft lines and deducted that amount from its total claim under Item 1(b) Basis of Settlement. The plaintiff has allowed a credit of $937,000. The amount of that credit was calculated by deducting from the total of the Kraft price increases for the period from October 1996 to 23 June 1997 of $1,304,000 the sum of the proportion of that amount attributable to recovery of gross profit (14.47%) under Item 1(a) and the proportion of that amount attributable to the recovery of payroll (13.69%) under Item 3. The amount of the credit will need to be recalculated when the recoveries of gross profit and payroll can be calculated. The starting point for the calculation will be the total Kraft price increases for the period from October 1996 to 31 March 1997 of $994,579.
The last item in the claim under Item 1(b) is an amount of $20,000 for early payment discounts which is conceded by the defendants.
No analysis was undertaken to apply the economic benefit test in relation to any claim under Item 1(b). As any amount which would otherwise be recoverable under Item 1(b) but which is excluded by the economic benefit test would be recoverable under Item 4, the conclusion can be reached that any amount recoverable under Item 1(b) can also be justified as a claim under Item 4.
Item 2 Basis of Settlement
The plaintiff's claim in relation to the preparation of the claim up to June 1998 when this action was commenced totals $208,000 comprising $161,155 paid to GAB Robins and $46,838 paid to Mr Neal. Mr Wheeley claimed that as no details were provided of the make up of those fees, he was unable to comment on them except to say that a portion of the costs would have resulted from the continuing alteration of the claim. It appears that Mr Wheeley picked a figure of $130,000 as an appropriate amount. I will determine the amount which should be allowed for Item 2, when the quantum of the other claims which remain outstanding are resolved.
Item 3 Basis of Settlement
The parties are agreed that the rate of payroll to be applied under Item 3 Basis of Settlement is 13.69%. The amount payable by the defendants under Item 3 is calculated by applying the rate of payroll to the reduction in turnover during the indemnity period. This amount therefore cannot be determined until the amount of the reduction in turnover allowable under Item 1(a) has been determined.
Item 4 Basis of Settlement
Apart from the claims under Item 1(b) which I have found are recoverable under Item 4, the plaintiff claims $600,000 as additional costs of working under Item 4. This claim is based on the plaintiff's costings of the steps it undertook to comply with the recommendations of the QHD. The total amount was $638,163.19. The breakdown of that figure by reference to each of the QHD recommendations is set out in the statement of Mr Read. Another analysis of the expenditures is set out in appendix 15 to the statement of Mr Rowley. Only $600,000 is claimed under Item 4, because the sum of $38,081.48 which was attributable to expenditures for changes to the plant which were temporary was claimed under Item 1(b).
Of the amount of $600,000 specifically claimed by the plaintiff under Item 4, the defendants submit that the expenditure was required due to the state of the plaintiff's premises prior to the contamination and is therefore not recoverable. In addition there is an argument advanced on behalf of the defendants that to the extent that the claim is for capital expenditure it cannot be characterised as an "increase in cost of working".
The capital expenditure limitation relied on by the defendants is not reflected by the wording of Item 4 Basis of Settlement. The limitations on the increases in cost of working which are expressly provided for within Item 4 are that the expenditure be:
(a) necessarily and reasonably incurred
(b) during the Indemnity Period
(c) in consequence of the Damage
(d) for the purpose of avoiding or diminishing reduction in turnover and/or resuming and/or maintaining normal business operations and/or services.
Theoretically, if the expenditure is necessarily and reasonably incurred during the indemnity period and is in consequence of the interruption to the plaintiff's business due to the salmonella outbreak and is for one of the purposes expressly mentioned in Item 4, then there is nothing to preclude the expenditure falling under Item 4, even if it is in the nature of a capital expenditure.
As I have found that the indemnity period concluded on 31 March 1997, the plaintiff must be unsuccessful in pursuing claims for expenditures made after that date.
I can proceed to determine this claim by considering the description of each expenditure set out in appendix 15 to Mr Rowley's statement. As I am seeking further submissions from the parties in relation to other claims, I invite the parties to make further submissions on whether further evidence and/or submissions should be allowed in relation to this claim.
Conclusion
In the light of the number of areas where I have indicated that I wish to receive further submissions on whether I should give leave for further evidence and/or submissions to be given, the proceeding must be adjourned to enable those further submissions to be made. I have also made a number of mathematical calculations in these reasons on which I am prepared to receive submissions from the parties, if errors of a mathematical nature are detected.
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