Running Pigmy Productions Pty Ltd v AMP General Insurance Co Ltd

[2001] NSWSC 431

CITATION:	Running Pigmy Productions Pty Ltd v AMP General Insurance Co Ltd and Ors [2001] NSWSC 431
CURRENT JURISDICTION:	Equity Division Commercial List
FILE NUMBER(S):	SC 50097/2000
HEARING DATE(S):	14, 15 & 17 May, 2001
JUDGMENT DATE:	5 June 2001
PARTIES :	Running Pigmy Productions Pty Ltd [ACN 071 459 142] (Plaintiff) AMP General Insurance Co Ltd [ACN 008 405 632] (First Defendant) Royal Sun Alliance Australia Ltd [ACN 005 297 807] (Second Defendant) HIH Casualty & General Insurance Ltd [ACN 008 482 291] (Third Defendant)
JUDGMENT OF:	Palmer J

COUNSEL :	M. Walton SC, J.E. Keesing (Plaintiff) J.W. Stevenson (Defendants)
SOLICITORS:	Gells (Plaintiff) Mallesons Stephen Jaques (Defendants)
CATCHWORDS:	PRACTICE AND PROCEDURE - ABUSE OF PROCESS - ANSHUN ESTOPPEL - Present plaintiff commenced earlier proceedings against defendants as one of two co-plaintiffs - co-plaintiffs had separate causes of actioin against defendants although arising out of same events and under same insurance policy - present plaintiff discontinued earlier proceedings with leave of Court - remaining co-plaintiff proceeded to trial - proceedings settled - present plaintiff commences fresh proceedings against defendants - defence of abuse of process and Anshun estoppel - whether reasonable for plaintiff to have prosecuted earlier proceedings to conclusion - no abuse of process in discontinuing earlier proceedings in order to bring subsequent proceedings with settlement monies derived from earlier proceedings - no Anshun estoppel. - INSURANCE - Claim for property damage - insurers wrongfully deny liability - plaintiff thereby loses opportunity to derive profits from sale of destroyed property and from publication of magazine - general damages for loss of opportunity claimed - principles of valuing loss of opportunity.
LEGISLATION CITED:	Supreme Court Rules Pt.21 r.7, Pt.8 r.2, Pt.8 r.6
CASES CITED:	Brown v Parker [1961] WAR 194 Castanho v Brown & Root (UK) Ltd [1981] AC 557 Henderson v Henderson (1843) 3 Hare 100; (1843) 67 ER 313 Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 Trade Practices Commission v Manfal Pty Ltd (No.3) (1991) 33 FCR 382
DECISION:	1. Verdict for the plaintiff agaisnt the first defendant in the sum of $187,220; 2. Verdict for the plaintiff against the second defendant in the sum of $109,890

Introduction

1    The plaintiff, Running Pigmy Productions Pty Ltd (“RP”) was incorporated in October 1995 to carry on business as a graphic designer and as a publisher of a comic magazine, to be called NuNu . Its business was closely aligned with that of Australian Picasso Collection Pty Ltd (“APC”). APC carried on business as a distributor of limited and open edition prints. Both companies were controlled by their sole director, Mr Alexander Preston, and carried out their operations in the same office premises at Suite 402/3 Small Street, Ultimo (“the Premises”). 2    On 19 August 1997 RP and APC, for their respective rights and interests, entered into a contract of insurance with the defendants (“the Policy”). The Policy covered property damage to a limit of $2,860,000 and consequential loss to a limit of $1,550,000. The period of insurance was from 15 July 1997 to 15 July 1998. 3    On 29 August 1997 a small fire occurred at the Premises. The fire was contained and it seems that there was little damage done. However, on 31 August 1997 a sprinkler in the Premises discharged suddenly, causing extensive water damage to the contents of the Premises. Further, RP claims that certain items of its property were stolen from the Premises between 29 and 31 August 1997. 4    RP and APC notified the defendants’ underwriting agent, Harbour Pacific Underwriting Management Pty Ltd (“Harbour Pacific”) of their claims in relation to the fire, water damage and theft. 5    On 10 September 1997 Harbour Pacific made an advance payment to APC and RP on “a without prejudice basis” to assist in “the early recovery of the operations of Running Pigmy” . 6    RP and APC made further claims under the Policy but, on 22 October 1997, the defendants through their solicitors denied liability on grounds which they now concede were not sustainable. 7    On 6 January 1999 APC and RP commenced proceedings against the defendants in the Commercial Division of this Court to recover their loss from the fire and water damage (“the Earlier Proceedings”). On 10 March 2000 RP sought and obtained leave to discontinue its claims as a plaintiff in those proceedings. The Summons was amended to refer to claims made only by APC against the defendants. 8    On 14 April 2000 terms of settlement were reached between APC and the defendants and orders were made disposing of the Earlier Proceedings. 9    On 13 July 2000 RP, as sole plaintiff, commenced these proceedings. 10    On 15 February 2001 RP filed a Notice of Discontinuance in the Earlier Proceedings. 11    RP claims indemnity under the Policy in respect of damage to, and theft of, its property in the Premises for which, it says, it has not yet been compensated. Further, it claims damages against the defendants for the loss of profits which it asserts it would have made but for the wrongful refusal by the defendants in 1997 to pay any further claims under the Policy. The profits are said to be those which RP would have derived from the sale of prints to APC and from the publication of the comic magazine, NuNu . 12    No claim is pressed against the third defendant, HIH Casualty & General Insurance Limited, as that company is now in provisional liquidation. For convenience, I shall refer to the first and second defendants alone as “the Insurers”. 13    The Insurers contend that the claims made by RP in the present proceedings are so relevant to the claims that APC and RP made (before RP discontinued) in the Earlier Proceedings that it was unreasonable for RP not to have continued to advance those claims in the Earlier Proceedings. In conformity with the principles expressed in Port of Melbourne Authority v. Anshun Pty Ltd (1981) 147 CLR 589 and authorities to the like effect, the Insurers say these proceedings should be dismissed as an abuse of process. 14 Further, the Insurers contend that RP has failed to prove the critical facts to support its case. They say that RP has not proved that any of the property destroyed or stolen was its property; it has not proved the replacement cost of the destroyed or stolen property; it has not proved that that cost exceeds the sum of $40,000 paid by the Insurers in September 1997. Finally, they say that if any further amounts were payable by Insurers in respect of RP’s claims, RP has not proved that by reason of the Insurers’ wrongful refusal to pay such further amounts it has lost, or been delayed in realising, any opportunity of real substance such that RP should now be compensated. Is RP “Anshun-estopped”
15    APC and RP were joined as co-plaintiffs in the Earlier Proceedings in the Summons filed in the Commercial List on 6 January 1999. APC had earlier been placed in liquidation and a receiver and manager had also been appointed to it by a secured creditor. The same solicitors acted for both plaintiffs but, according to Mr Preston, the conduct of the proceedings was principally in the hands of the receivers of APC because Mr Preston and RP had very limited funds at that time. 16    The Summons pleaded that “the plaintiffs carried on business as a distributor of limited and open edition prints and as a magazine publisher respectively” . It pleaded that as a result of the fire and the discharge of sprinklers in the Premises “the property of the plaintiffs located at the premises was damaged” . Particulars to that pleading were given as follows:
“a) 34,143 prints at the agreed value of $50 per print – $1,707,150;
b) plant, fittings and equipment.”
17    It was alleged that as a result of the fire and the discharge of the sprinklers “the business of the plaintiffs has been interrupted and interfered with and the plaintiffs have suffered loss resulting therefrom” . 18    At a directions hearing on 10 March 2000 RP sought and obtained leave to discontinue as a co-plaintiff. On 17 March 2000 a Second Further Amended Summons was filed in the Earlier Proceedings. RP was still shown in the title as second plaintiff but the pleading itself had been amended so that APC alone made claims for relief against the Insurers. The allegations of loss to property were in the same terms as in the Summons as originally filed, save that the damaged property was alleged to be that of APC. The particulars of the property remained the same. 19    The Earlier Proceedings came on for hearing before Hunter J and were settled on 14 April 2000 in accordance with Terms of Settlement handed up on that day. The Insurers agreed to the entry of judgment in favour of APC in the sum of $1,200,000 “clear of any payment to date” . The Insurers agreed to pay APC’s costs. The Terms of Settlement further provide:

“4. The Second Plaintiff agrees to discontinue its action against the First, Second and Third Defendants.

5. Any order for costs as between the Second Plaintiff and the First, Second and Third Defendants be vacated.”
20    The terms are signed by a person over the description “Solicitor for the Plaintiffs” . The title of the proceedings as shown in the Terms of Settlement includes RP as second plaintiff. 21    Despite the content of the Terms of Settlement, the Insurers do not say that they were misled into believing that RP had continued to make a claim against them in the Earlier Proceedings which was finally disposed of by the Terms of Settlement. They accept that after 10 March 2000 they understood that RP was taking no further part in the Earlier Proceedings. Indeed, that must have been obvious from the amended pleading which appeared in the Second Further Amended Summons filed on 17 March 2000. 22    The Insurers do not submit that the Terms of Settlement operate to bar RP’s claim in the present proceedings by res judicata or issue estoppel.

23    The Insurers’ complaint is that when RP was seeking leave to discontinue as co-plaintiff in the Earlier Proceedings it did not tell them that it was doing so in order to bring its own proceedings against them later. They suggest that there was something underhand or even dishonest on the part of RP and Mr Preston in failing to make that disclosure.

24 There is no evidence put forward by the Insurers to the effect that RP or Mr Preston said anything at any time on or before 10 March 2000 which might have induced them to believe that RP was abandoning its claim against them. There is no evidence from the Insurers that on 14 April 2000 they agreed to the payment to APC in settlement of the Earlier Proceedings in reliance upon a belief that RP would make no further claim upon them. It was conceded by Mr Stevenson, who argued the case most capably for the Insurers, that the Insurers must be taken to have known that the ordinary effect of a discontinuance by a plaintiff is to permit the plaintiff to commence fresh proceedings against the defendant claiming the same relief: Supreme Court Rules Pt.21 r.7. 25 Mr Preston explained his reasons for procuring RP to seek leave to discontinue as a co-plaintiff in the Earlier Proceedings. He said that because of the destruction of the businesses of APC and RP and the refusal of the Insurers to pay compensation under the Policy, he and RP did not have sufficient funds at that time to pay for expert evidence in support of RP’s separate claim under the Policy. He believed that the claim against the Insurers by APC would ultimately be successful and that, after repayment of APC’s secured creditor and its other debts, there would be a surplus of funds flowing to him as APC’s sole shareholder which he could then use to fund RP’s claim against the Insurers in respect of its own loss and damage. This was, in fact, what happened. 26 Secondly, Mr Preston says that he was not happy with the way APC’s receiver and manager was conducting the Earlier Proceedings. He says that he perceived some conflict between APC’s interest and RP’s interest in those proceedings and he wished to ensure separate representation for RP if he could. 27 In my view, there was nothing unreasonable or improper in RP seeking leave to discontinue as co-plaintiff in the Earlier Proceedings for the reasons given by Mr Preston.

28    The Insurers submit that if Mr Preston had revealed to the Court on 10 March 2000 the reasons for RP seeking leave to discontinue as a co-plaintiff in the Earlier Proceedings it would have been “inconceivable” that the Court would have given such leave. With respect, in my view it would be inconceivable for the Court to have refused leave.

29    The principles upon which the Court acts in deciding whether to grant leave to discontinue are well encapsulated by Lee J. in Trade Practices Commission v Manfal Pty Ltd (No.3) (1991) 33 FCR 382. At 383, his Honour said:
“It may be accepted that an application for leave to discontinue proceedings against a respondent will normally be granted. However, that does not mean that such an order is granted as a matter of course. If that were so, there would be no need for the Federal Court Rules 1979 (Cth) to provide, as they do in O 22 r 2, that, after pleadings have closed, a proceeding may be discontinued either with the consent of all the parties or with the leave of the court.
The discretion to grant leave is unfettered. (See Covell Matthews & Partners v French Wools Ltd [1977] 1 WLR 876 at 879; [1977 2 All ER 591 at 593; SCI Operations Pty Ltd v Trade Practices Commission (1984) 2 FCR 113, per Sweeney J (at 142-143), per Lockhart J (at 161-162), per Sheppard J (at 184-185). The court will give consideration to the need to refrain from compelling a party to litigate against its will but will also consider the extent to which the proceedings have developed and whether discontinuance against one respondent may impose injustice on another respondent by removing an advantage that respondent may otherwise enjoy in the proceedings or by imposing a disadvantage. In considering the undesirability of an applicant being forced to continue litigation unwillingly, it is relevant to have regard to whether the discontinuance would make any difference to the burden of litigation undertaken by the applicant and whether the application to discontinue results from a conclusion that the litigation cannot succeed against that respondent or is inspired by other reasons.
The requirement of the Federal Court Rules that, in the absence of consent of all parties, discontinuance of litigation against a party only be permitted by leave of the court contemplates a judicial review of all relevant circumstances and the satisfaction of the court that the grant of leave is proper in all the circumstances. In some cases the court may determine that a grant of leave to discontinue should be attended with conditions and in a rare case the court may determine that the only appropriate order is to refuse the leave sought.”
30    It must be borne in mind that, despite the compression of pleading in the original Summons in the Earlier Proceedings, APC and RP were bringing separate causes of action against the Insurers. Each was claiming indemnification for the loss of its separate property. Scant particulars of that property were given in the pleading but at trial each of the co-plaintiffs would have had to adduce evidence as to the loss which it separately claimed to have suffered. 31    For example, compensation for loss of profits by interruption to the publication of NuNu could have been claimed only by RP. RP alone was the intended publisher of that magazine. Compensation for losses arising from the destruction of limited and open edition prints already delivered by RP to APC could only have been claimed by APC. Different questions as to causation and quantum would have arisen in these claims.

32 It is true that there was a common substratum of fact underlying the claims of APC and RP. Both claims arose from the same events of destruction and compensation was claimed under the same Policy. That common substratum made it permissible and convenient, but not obligatory, that APC and RP be joined as co-plaintiffs in the Earlier Proceedings: cf. SCR Pt.8 r.2, Pt.8 r.6. RP could have commenced its own separate proceedings against the Insurers from the beginning, with its own solicitors and counsel. APC would not have been a necessary party in those proceedings. While the Court may well have required RP’s proceedings to be heard simultaneously with the proceedings brought by APC, the evidence in one being evidence in the other, the Court would never have compelled RP to join as co-plaintiff in APC’s proceedings.

33    It is not an abuse of process for a plaintiff to discontinue a proceeding merely in order to be able to bring the same proceeding later in circumstances in which the plaintiff believes there will be a greater prospect of success or a more substantial recovery: see e.g. Castanho v Brown & Root (UK) Ltd [1981] AC 557, at 576. These circumstances may legitimately include the possibility of a subsequent increase in the limit of recoverable damages due to legislative amendment (see Brown v Parker [1961] WAR 194) and the enhanced prospect of enforcing a verdict by commencing proceedings in another jurisdiction (e.g. Castanho v Brown & Root (UK) Ltd (supra)). I would include amongst such circumstances the prospect of the plaintiff being able to conduct the second proceedings more effectively than the first by reason of an improvement in the plaintiff’s financial position enabling the plaintiff to procure expert evidence which would have been prohibitively expensive at the time of the first proceedings. A fortiori is this so when the plaintiff’s financial inability to conduct the first proceedings effectively is the result of the defendant’s own act or omission, whether or not that act or omission ultimately proves to be legitimate. 34    I am of the view that if RP had commenced its own separate proceedings against the Insurers and had sought leave to discontinue for the reasons which Mr Preston gave, it would have been granted leave subject only to the appropriate conditions as to payment of the Insurers’ costs. The fact that RP was a co-plaintiff seeking leave to discontinue in the Earlier Proceedings rather than the plaintiff in its own separate action would have made no difference to the granting of leave. The possibility of a conflict of interest arising if APC and RP were retained as co-plaintiffs in the Earlier Proceedings with the same legal representation would have been a further ground justifying the grant of leave to RP to discontinue. 35    If, as I hold, the discontinuance by RP as co-plaintiff in the Earlier Proceedings was not an abuse of process, then no question of “Anshun estoppel” arises in the present case. As noted by Handley JA in “Anshun Today” (1997) 71 ALJ 934, the decision in Port of Melbourne Authority v Anshun Pty Ltd (supra) is part of an extended doctrine of abuse of process which has been developed from Henderson v Henderson (1843) 3 Hare 100; (1843) 67 ER 313. As his Honour says:
“The extended doctrine, of which Anshun is only part, supplements the doctrines of merger, cause of action estoppel and issue estoppel. It can apply where the parties or the causes of action are different. It has never been suggested, however, that it extends an issue estoppel to decisions on questions of fact or law which were not fundamental to the earlier decision. The extended doctrine also applies to later proceedings which are vexatious and hopeless in the light of an earlier decision, and to proceedings which are a collateral attack on an earlier decision …”
36    It is clear, in my opinion, that the category of abuse of process represented by “Anshun estoppel”, in so far as it is applicable to a plaintiff, is concerned with the situation which arises when that plaintiff prosecutes a cause of action to its conclusion by judgment or settlement and later that plaintiff, or that plaintiff’s privy, seeks to prosecute against the same defendant another cause of action which should reasonably have been prosecuted in the first proceedings. The rationale for the doctrine in Henderson v. Henderson , as developed by Anshun , has no application to the case where the plaintiff, or the plaintiff’s privy, has commenced earlier litigation against the defendant, but has, with the Court’s leave, discontinued that litigation rather than prosecuting it to a conclusion by judgment or settlement. 37    I am of the view that the Insurers’ defence based upon abuse of process or “Anshun estoppel” fails. What destroyed property was owned by RP? 38    The Insurers do not contest that property in the premises was destroyed or damaged in August 1997, nor do they contest that the Policy covers loss or destruction of property of that character. The Insurers do contest that RP has proved that it was the owner of any such destroyed property. 39    Proof of RP’s claims as to the loss of property and as to general damages has been rendered difficult because the financial records of RP and APC have not been produced. It seems to be accepted by all parties that that is so because most of those records were destroyed by the water damage which occurred in the Premises on 31 August 1997. It appears also that such financial records as were then in existence were relatively rudimentary. It has not been suggested by the Insurers that RP has deliberately destroyed or concealed financial records for the purpose of enhancing its prospect of success in these proceedings. 40    In these circumstances, the evidence as to what destroyed property was owned by RP as at August 1997 has been the evidence, largely uncorroborated, of Mr Preston. The Insurers’ fundamental submission is that that evidence is insufficient to discharge the burden of proof which RP bears as plaintiff in the proceedings. 41    I approach the issue of RP’s ownership of property in the light of the apparently conceded fact that, through no fault of RP or Mr Preston, there is no better evidence now available than that of Mr Preston himself. I must therefore have regard to the inherent probabilities of what he says and to my impression as to the accuracy of his recollection and as to his truthfulness. 42    Mr Preston gave evidence that the following items of equipment, which were destroyed in August 1997, were purchased during the period from February 1997 to August 1997: two Apple computers, scanner, printer, Zip discs, Zip drive, CD ROM, floppy discs, CD burner, software for computers, and printing materials. He said that this equipment was paid for in cash or from a bank account operated by another of his companies, Vertigo Design Pty Ltd (“Vertigo”). RP did not have a separate bank account and, according to Mr Preston, payments for this equipment were made on behalf of RP by cheques drawn on Vertigo’s account. The payments were later debited to RP in the inter-company accounts of Mr Preston’s group of companies. 43    Mr Preston said that the equipment purchased for RP was specialised equipment used in the creation and design of images. It was RP, not APC, which according to Mr Preston carried on the business of designing and creating images not only for the production of limited and open edition prints for sale to APC but also for the proposed publication of NuNu . 44    Mr Preston’s evidence in this regard was neither improbable nor was it seriously challenged by the Insurers. It is clear that RP’s business was essentially that of designing and producing images. The damaged equipment which he particularises was apt for that purpose. 45    I am satisfied that the items of property particularised by Mr Preston as being damaged or destroyed were the property of RP. What was the cost or reinstatement value of the destroyed property? 46    Mr Preston said that the cost of the Apple computers which had to be replaced was $3,500 each. Again, the Insurers did not seriously dispute that evidence. There is no evidence as to the replacement cost of the other items of destroyed property. RP therefore claims only $7,000 in respect of damaged equipment. 47    The more substantial claim for property damages arises from the loss of 26 images said to have been stored on computer disc for supply to APC. By a contract dated 14 April 1997 between Mr Preston and APC, APC had agreed to purchase “all the prints in any format (limited edition and open edition and screen prints) published by Alexander Preston at a value of $36.50 each print” . Mr Preston agreed to publish a minimum of 25 images and 3,000 prints of each image by the end of October 1997. All the costs of publishing were to be borne by Mr Preston. 48    By a contract dated 23 May 1997 between RP and Mr Preston, RP agreed to supply to Mr Preston a total of 60 sea-scape images in two lots of 30 images. The first set of images was to be supplied by October 1997. The price to be paid by Mr Preston for each image was $15,000. 49    It will be seen that the effect of these contracts is that RP agreed to supply to Mr Preston 30 images by October 1997 at a total price of $450,000 and Mr Preston in turn was to supply to APC by the end of October 1997 a minimum of 3,000 copies of each of 25 prints (a total of 75,000 prints) at a price of $36.50 per print. 50    The obligation of APC to pay $450,000 to Mr Preston for 30 images was partially guaranteed by Elizabeth Street Finance Pty Ltd (“ESF”). Under a deed of guarantee dated 14 April 1997 ESF agreed to guarantee two-thirds of the sale price of prints delivered by Mr Preston to APC. 51    While the agreements between Mr Preston and RP and between Mr Preston and APC were agreements between Mr Preston and companies totally controlled by him, and while the documentation supporting these transactions, including the guarantee from ESF, is brief to the point of terseness, there is no suggestion by the Insurers that all or any of these agreements were shams put in place to enhance RP’s claims in these proceedings. ESF appears to be a substantial finance company controlled by Mr Barry Short who gave evidence on affidavit for RP but was not required for cross examination. 52    RP contends that it is entitled to the costs of replacing the 26 images which had been created by it as at August 1997 for supply to Mr Preston pursuant to the contract between RP and Mr Preston dated 23 May 1997. 53    Mr Preston said that the costs of replacing each of the images would be “somewhere around the $3,000 mark” . He calculated this figure by taking a “charge--out rate” of $100 and $120 per hour respectively for the work of the two artists who had been engaged by RP to produce these images and a “charge-out rate” of between $150 and $300 per hour for his own work. He applied those rates to a time of between 20 and 30 hours for the creation of each image. 54    Mr Preston’s evidence did not reveal how much of the time taken in the production of an image was, on average, spent by himself and how much was spent by the other artists, nor how much time was spent by the senior artist at a rate of $120 per hour rather than by the junior at a rate of $100 per hour. Further, the rate per hour which he was giving in respect of time spent by himself and the other artists seemed to be a “charge-out rate” by RP to third parties, not a cost based on actual remuneration paid by RP to Mr Preston and the other artists. 55    While the evidence calculating the cost of replacing each image is very vague, it is clear that some cost of replacement would have been incurred by RP and that that cost would not have been trivial. On the state of the evidence as it is, I am of the view that a reasonable cost of replacement for each image should be fixed by allowing an average of 25 hours for the recreation of each image at an average cost to RP of $100 per hour. That gives a total replacement cost of $2,500 per image. 56    It follows that RP is entitled to compensation in respect of the replacement cost of 26 images in a total sum of $65,000. General damages for breach of contract 57    In addition to compensation payable under the Policy in respect of the replacement costs of its property lost or damaged, RP claims general damages for the Insurers’ breach of the contract of insurance in failing to pay RP’s claims under the Policy within a reasonable time. It says the Insurers’ failure to pay any amount in excess of the $40,000 paid in September 1997 resulted in such disruption of RP’s business that RP lost the profits which it would have derived from the sale of 30 images to Mr Preston under the contract between Mr Preston and RP dated 23 May 1997. It says that these profits would have been at least $300,000, that being the amount which EFS had guaranteed that APC would pay to Mr Preston for prints produced from these images and which Mr Preston would, in turn, have paid to RP. 58    Further, RP claims that the disruption of its business caused by the Insurers’ breach of contract resulted in RP losing the profits which it would otherwise have derived from the publication of NuNu and from the sale of designs to Star City. 59    RP claims that its loss of profits by reason of disruption of its business caused by the Insurers’ failure to pay compensation under the Policy within a reasonable time was damage of a kind which must necessarily have been in the contemplation of the parties at the time of the insurance contract. 60    The Insurers do not dispute the correctness of the principle upon which RP relies; they say, however, that RP’s quantification of its losses of profit is grossly exaggerated. Profits from RP’s sale of images to Mr Preston 61    Mr Preston gave evidence that there was a substantial market in Australia for the completed prints produced from the images provided by RP to APC. He said that many prints had been sold through APC for prices ranging between $250 and $500 or $600 for a framed print. Mr Preston was not challenged on this evidence. 62    I am satisfied that APC had a genuine and substantial business in the sale of prints produced from images designed by RP and supplied to it through Mr Preston. 63    I conclude that, but for the damage suffered by RP in August 1997 and the Insurers’ subsequent failure to pay the replacement cost of images stored on RP’s computers, RP would have performed its contract with Mr Preston for the supply of 30 images, if not by October 1997 then by the end of 1987. I am satisfied that Mr Preston, with the money to be paid by APC for those images, guaranteed by ESF, would have thereupon paid at least $300,000 to RP under the contract dated 14 April 1997. That payment would have been made to RP by the end of 1997. 64    I am, accordingly, satisfied that RP has suffered damage by reason of the Insurers’ breach of the contract of insurance in the sum of at least $300,000. Because of the absence of figures demonstrating the history of sales of prints to the public and the profits to be derived therefrom, I do not think that it is justifiable to allow to RP a figure for loss of profits having as their source sales of images to APC, which is in excess of the sum of $300,000 which was guaranteed by ESF if Mr Preston performed his contract with APC. Losses from theft 65    RP claims that a number of Zip discs containing stored images was stolen by one of its employed artists, Mr Kazuhiro Matsumura, both before and after the damage to the Premises on 29 and 31 August 1997. It says that the discs contained the work of Mr Matsumura. Mr Matsumura was engaged by RP “to produce drawings for comics in the Japanese style of illustration” pursuant to a written contract made in June 1997. It appears that Mr Matsumura’s work was principally to produce drawings for NuNu . 66    There is no evidence whatsoever as to how many discs were stolen, how many of Mr Matsumura’s drawings were on the stolen discs, how long it had taken Mr Matsumura to produce those drawings, and what would be the cost of replacing or reproducing whatever was stored on the stolen discs. 67    RP has failed to discharge its onus of proving any quantifiable loss in respect of the stolen discs. Designs for Star City 68    RP claims that amongst the work it had in progress, which was stored on discs destroyed in August 1997, were preliminary and finished drawings for work done for the “Star City Project”. There is no specific evidence as to how many hours of work were spent in producing these particular drawings or designs or as to what would be the cost of reproducing or replacing the designs. 69    RP claims that it had a contract with Star City for the production of these designs. A number of invoices addressed to Star City are in evidence. However, the alleged contract with Star City was not in evidence and it was conceded by Mr Preston that Star City was challenging the existence of the contract in other proceedings in this Court. I have no idea of RP’s prospects of success in those proceedings. It may turn out, therefore, that RP was not entitled to any profits derived from a contract with Star City. 70    In my view, RP has not discharged the burden of proving that it has suffered any quantifiable loss from the destruction of work said to be produced for the Star City project. Loss of profits from the publication of NuNu 71    As at 31 August 1997 the publication of NuNu was no more than a possibility but, even so, it was a possibility upon which a great deal of work and time had been expended by Mr Preston and other employees of RP. 72    A “profile” for the magazine had been produced. It is a glossy, highly professional document. It describes NuNu as a free visual magazine which is intended to be a very high quality “CIM (Comic in Motion)”, the first of its kind to be released in Australia. 73    “CIM” is explained in the profile as:

“… influenced by the comic which began in the 1930s. Unlike the slim CIMs from America that Australians are all too familiar with, we have adopted the most popular form: a CIM series in a thick illustrated monthly magazine, a style which has been adopted in the US and Europe in recent years. As audiences have increasingly become visually literate, the concept of visual art has evolved to incorporate complex cinematic techniques and narrative innovation. NuNu will chart the cutting edge of these developments.”
74    The profile contains the following section, which summarises RP’s hopes, ambitions and intentions for NuNu :
“• Overseas success . CIM has been enormously successful in overseas markets.
• Untapped market . This is the first CIM ever to be released in Australia, providing us with an untapped market.
• Circulation . Our circulation 150,000-200,000 per month is at least twice the volume of most existing niche market publications.
• Free . NuNu is free, hence ensuring maximum reach and easy accessibility into the market place.
• Quality . Both print and editorial are of the highest quality. Print is full colour, high quality paper from cover to cover. Editorial will reflect political, social and cultural issues relevant to readers. The articles provided by some of Sydney’s most sought after writers.
• Unique visual images – available only through CIM.”

75    By August 1997 RP had developed several thousand pages of sketches of a few hundred characters and backgrounds for NuNu . It had story boards for at least ten comics and story lines for two separate comics totalling approximately 48 individual issues. The story lines had been developed by Mr Preston. It had two artists as well as Mr Preston working on sketches for the comic. Another artist was producing insert comic strips and cartoons. 76    Because the magazine was to be distributed free to the public, its viability and profitability were entirely dependent upon revenue from advertisers. It appears that by August 1997 RP had engaged the part-time services of a marketing manager, an assistant and a public relations officer for the purpose of securing advertisers for the magazine. A list of more than 250 possible advertisers had been prepared, 79 interested advertisers had been identified and about 40 of those potential advertisers had been visited. 77    However, despite all of this effort and activity, as at 31 August 1997 no advertiser had actually agreed to commit to advertising in NuNu . Further, as at that time no actual “mock-up” or sample issue of the magazine had been produced. 78    RP’s case is that the destruction to its property on 29 and 31 August 1997, the Insurers’ subsequent failure to compensate, and the consequent cessation of activity on publication of the magazine prevented it from continuing with plans for the development and publication of the magazine at a critical time. It says that it has thereby lost a valuable opportunity to make large profits from NuNu , for which it is now entitled to be compensated. 79    The Insurers say that whether or not NuNu would ever have proceeded to publication and whether or not it would ever have made a profit are matters of complete speculation. Further, they say that the opportunity to derive profit from NuNu which RP might have had in August 1997 has not been lost by the disruption to its business and their own failure to compensate – that opportunity, such as it was, has only been deferred. 80    RP frankly concedes that determining the value of the opportunity lost by cessation of activity on NuNu involves a large degree of speculation. However, it says, given the expertise and experience of those involved on behalf of RP and the money which had been spent, the possibility that RP had to make a success of the magazine cannot be dismissed as a fanciful one. 81    RP relies on the well established principle that where a breach of contract has deprived the innocent party of a chance to profit, that breach is compensable in law notwithstanding that it is more probable than not that the innocent party would have failed to realise the profit. Where there has been actual loss suffered by breach of contract, such as the loss of an opportunity which was either expressly stipulated for in the contract or was reasonably within the contemplation of the parties at the time of the contract, then the law does not permit difficulties in calculating the loss in money terms to defeat an award of damages. The Court must simply do its best to quantify the loss by reference to the degree of probability, or possibility, inherent in the innocent party realising the profit had the contract not been breached: see e.g. Sellars v Adelaide Petroleum NL (1994) 179 CLR 332, at 349 per Mason CJ, Dawson, Toohey and Gaudron JJ. 82 In aid of its contention that damages for loss of opportunity to publish NuNu successfully should be substantial, RP adduced the expert evidence of Mr McDonald. Mr McDonald is an accountant who has had some experience in the insolvency administration of magazines. The Insurers countered with the expert evidence of Mr Gower. Mr McDonald conceded, as Mr Gower had pointed out, that virtually all of his calculations which might indicate the profitability of NuNu were founded upon assumptions which could not be tested. 83    For example, Mr McDonald assumed fifty pages of external advertising in a total of 120 pages in each issue of NuNu , although he said that that was, in his experience, a high proportion of advertising. He assumed average advertising revenue of $5,000 per page of advertising, that is, a revenue of $250,000 per issue. He assumed that a print run of 150,000 copies per issue of the magazine was “not unrealistic” and said that the figures for advertising revenue were “a function of circulation” of the magazine. 84    It must be borne in mind that a “mock-up” of the magazine had never been produced, no advertiser had ever committed to advertising in it, neither RP nor APC had a track record of procuring advertising for any publication, neither Mr Preston nor Mr McDonald had any experience in publishing comic magazines, Mr Preston had no track record as a successful writer of story lines for comic magazines and there was no evidence of sales of similar comic magazines in Australia (let alone any figures) indicating what was the actual or potential size of the market in Australia for comic magazines and what advertisers might be prepared to pay in order to advertise in such magazines. In the light of these considerations, Mr McDonald’s discounted figure of $236,000 as the projected revenue per issue of the magazine must be regarded as very close to pure speculation. 85    For the purposes of his calculations, Mr McDonald accepted Mr Preston’s estimate that publishing costs would be $100,000 per issue. As noted, Mr Preston has no experience in publishing a magazine or in printing one. Whatever enquiries he may have made of printers could not have been founded even upon a “mock-up” of the magazine. The printing cost of $100,000 per issue must be regarded as highly suspect. 86    Mr McDonald arrives at an estimated nett profit of $60,000 per issue. He assumes that, but for the Insurers’ breach of contract, the monthly issues of NuNu would have commenced in January 1998; he assumes that there would have been consistent profits of $60,000 per month and has accordingly calculated loss of profits from 1 January 1998 to 31 July 2000 at $1,860,000. 87    In my view, such a figure is quite unrealistic. It is calculated by piling unfounded assumption upon unfounded assumption. 88    The value of RP’s lost opportunity to make profits from the publication of NuNu can best be estimated, in my opinion, by having regard to the facts as they existed in August 1997. 89    I take into account that Mr Preston, although having no track record as a publisher of magazines, is clearly a capable artist and an experienced businessman. He managed to attract substantial finance from ESF for the print operations of APC and RP. 90    I take into account that RP employed artists in the production of sketches for the magazine who were likewise talented in this field of illustration. I take into account the evidence of Mr Young, a successful comic book creator and writer, illustrator and graphic designer. He is of the view that Mr Preston’s ideas for NuNu were ahead of his time in predicting where the mainstream future of the comic industry would go. Mr Young believes that Mr Preston had every chance of creating a highly successful and popular comic work. Mr Young was not required for cross examination. 91    I take into account that RP engaged the services of professional marketing personnel who actively sought advertising for the magazine, and that Mr Preston obviously had well developed and orderly ideas as to how to go about marketing and the actual process of publication and distribution. 92    I take into account that a business associate of Mr Preston, Mr Takemura, was impressed with the businesses of APC and RP and considered that NuNu had substantial potential for the Japanese market. Mr Takemura made an offer to Mr Preston in June 1997 to acquire a 55% interest in the businesses of APC and RP for $1,700,000. Mr Preston declined the offer. 93    I do not take Mr Takemura’s offer as indicating that the value of a 55% interest in RP was some proportion of $1.7M. The offer was an exploratory one and made in general terms. It did not apportion the purchase price as between an interest in APC and an interest in RP. Further, the offer was subject to a “due diligence” investigation of the businesses of both companies. However, the fact that an offer was made indicates that Mr Takemura regarded the prospect of success of NuNu as substantial. 94    I take into account that the ideas for NuNu and whatever intellectual property attaches to them remain with RP. Despite the setbacks caused by the damage to the Premises, the Insurers’ breach of contract in failing to pay adequate compensation and the loss of momentum and good will amongst potential advertisers in RP, it is still open to RP to resuscitate NuNu if it still wishes to do so. There is no evidence to suggest that the chance to make a success of NuNu has been lost to RP forever. 95    In summary, I am of the view that due to the business acumen and capabilities of Mr Preston and the other employees of RP, there was a real possibility that, but for the Insurers’ breach of contract, NuNu would have been published and would have made a profit. I do not think it all realistic to suggest that NuNu would have commenced publication in January 1998, even if the Insurers had been prompt in making full payment under the Policy. I think it is possible that NuNu would have commenced publication much later in 1988, possibly in 1989, and that after running at a loss for some time it might have made some profit by the date of judgment in this matter. However, bearing in mind all of the uncertainties and matters of conjecture to which I have referred and bearing in mind the notorious risks and vicissitudes of any new publishing venture, I do not consider that those possibilities amounted to a probability. 96    Doing the best I can and recognising that the exercise is much more a matter of impression than actual calculation, I fix the value of the opportunity to publish NuNu at a profit which was lost by reason of the Insurers’ breach of contract at an amount which is somewhat more than Mr McDonald’s estimate of the nett profit for one issue of the magazine. Accordingly, I determine the value of the opportunity lost as $75,000. Has RP already been compensated? 97    Under cover of a letter dated 10 September 1997 from Harbour Pacific, the Insurers forwarded a cheque for $40,000 on a without prejudice basis “with a view to assisting in the early recovery of the operations of Running Pigmy” . The evidence does not show into what bank account the money was paid. 98    Some of that money is said to have been applied in replacing property of APC, for example, carpets and furniture. Mr Preston says that some of the money (he does not say how much) was used in repairing the damaged Apple computers. He says, however, that the repairs were unsatisfactory and that after the Insurers had refused further compensation RP had to purchase new computers at a total cost of $7,000. 99    However, there is simply no evidence at all upon which I can determine what part of the $40,000, if any, was applied to replacement of, or repairs to, property of APC and what was expended in mitigating the losses of RP. I think it is a fair inference, nevertheless, that all of the $40,000 was expended in one way or another by the time that the Insurers had refused further indemnity under the Policy. Accordingly, at least $7,000 of RP’s own money was expended in replacing the Apple computers after that date. 100    RP, as plaintiff, bears the burden of proving its loss. It has received $40,000 from the Insurers but has not discharged the burden of proving that that money was expended in making good property losses other than those for which it now claims. Accordingly, I must deduct $40,000 from the amount which RP would otherwise receive for property damage. Conclusion 101    RP would have been entitled to compensation under the Policy of $7,000 in respect of the replacement cost of the Apple computers and $65,000 in respect of the replacement cost of 26 images, a total cost of $72,000. From that sum I must deduct $40,000 in respect of compensation already received, leaving a balance of $32,000. 102    RP is further entitled to $300,000 in respect of loss of profits from the sale of images to APC and $75,000 in respect of the loss of opportunity to publish NuNu . 103    The total to which RP is entitled under the Policy is therefore $407,000. However, under the Policy the liability of the Insurers is apportioned as to 46% to the first defendant and 27% to the second defendant. RP has not submitted that either Insurer is liable to it for any greater percentage of loss than the Policy provides. Orders 104    The orders I make are:


1. Verdict for the plaintiff against the first defendant in the sum of $187,220.

2. Verdict for the plaintiff against the second defendant in the sum of $109,890.

105    No submissions have been made as to interest and costs. I will stand the proceedings over to a date to be fixed for the bringing in of agreed Short Minutes reflecting these reasons or for further argument as to interest, costs and other relief.

– o0o –

Last Modified: 06/06/2001