UDP Holdings Pty Ltd (subject to deed of company arrangement) (rec and mgr apptd) v Ironshore Corporate Capital Ltd (No 2)
[2019] VSC 645
•9 October 2019
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
INSURANCE LIST
S ECI 2016 00027
| UDP HOLDINGS PTY LTD (ACN 167 100 692) (SUBJECT TO DEED OF COMPANY ARRANGEMENT) (RECEIVERS AND MANAGERS APPOINTED) | Plaintiff |
| v | |
| IRONSHORE CORPORATE CAPITAL LTD ON ITS OWN BEHALF AND ON BEHALF OF THE UNDERWRITING MEMBERS OF SYNDICATE 4000 FOR THE 2013 UNDERWRITING YEAR | First Defendant |
| and | |
| INTERNATIONAL INSURANCE COMPANY OF HANNOVER SE | Second Defendant |
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JUDGE: | GARDE J |
WHERE HELD: | Melbourne |
DATES OF HEARING: | 11–13, 17–18 June 2019 |
DATE OF JUDGMENT: | 9 October 2019 |
CASE MAY BE CITED AS: | UDP Holdings Pty Ltd (subject to deed of company arrangement) (rec and mgr apptd) v Ironshore Corporate Capital Ltd (No 2) |
MEDIUM NEUTRAL CITATION: | [2019] VSC 645 |
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INSURANCE – Buyer warranty and indemnity insurance policy – Share sale agreement – Seller’s warranties that accounts represented a true and fair view of the financial position of the business and the absence of a material adverse change – Warranties false – Interpretation of commercial contracts – Interpretation of insurance contracts – Quantum of loss – Valuation methodology – Capitalisation of future maintainable earnings – Valuation date – Annual future maintainable earnings – Earnings multiple – Discounts for risks – Acquired liabilities – Defence costs – Recovered amounts – Determination of loss – Recovery of arbitration costs – Duty of utmost good faith – Determination of loss – Limit of liability – Retention – Insurance Contracts Act 1984 (Cth) ss 12, 13; Civil Procedure Act 2001 (Vic) s 7; Evidence Act 2008 (Vic) s 50.
ESTOPPEL – The indemnifier’s exception – Decision of arbitrator – Whether ‘a fact in the world’ – Estoppel by pleading – Abuse of process.
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INTEREST – Power of Court to award interest – Effect of policy conditions – Underwriters’ actions – Date for award of interest – Rate of interest – Insurance Contracts Act 1984 (Cth) s 57; Supreme Court Act 1986 (Vic) s 60.
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M Scott QC with Mr C Young | Ashurst |
| For the Defendants | Ms W Harris QC with Mr W Thomas | Norton Rose Fulbright |
TABLE OF CONTENTS
INTRODUCTION.............................................................................................................................. 1
Sale agreement and policy background.................................................................................... 1
The Lion overcharging................................................................................................................. 3
Group financial difficulties......................................................................................................... 4
Brief chronology of proceedings................................................................................................ 4
The position of the parties................................................................................................................ 6
Issues for determination................................................................................................................... 7
The sale agreement............................................................................................................................ 8
The Seller’s warranties............................................................................................................... 14
The policy.......................................................................................................................................... 15
Interpretation of commercial contracts......................................................................................... 22
Interpretation of insurance contracts............................................................................................ 24
ISSUE 1 – ARE THE UNDERWRITERS ESTOPPED FROM DENYING OR DISPUTING THE ARBITRAL AWARD?............................................................................................................... 25
General submission of estoppel.................................................................................................... 25
UDP’s general submission of estoppel.................................................................................... 25
Relationship between the sale agreement and the policy.................................................... 26
Conclusion as to UDP’s general submission of estoppel..................................................... 28
UDP’s additional estoppel submissions...................................................................................... 28
The indemnifier’s exception...................................................................................................... 28
Does the indemnifier’s exception apply?................................................................................ 30
Conclusion as to the indemnifier’s exception......................................................................... 32
Did the arbitral award establish a ‘fact in the world’?........................................................... 32
Conclusion whether the arbitral award established a ‘fact in the world’........................... 33
Estoppel by pleading................................................................................................................. 33
Abuse of process......................................................................................................................... 34
Conclusion as to estoppel and abuse of process........................................................................ 36
ISSUE 2 – WHAT IS THE QUANTUM OF LOSS?.................................................................... 36
Introduction................................................................................................................................. 36
The meaning of ‘Loss’ as defined in the policy.......................................................................... 36
Clause 15.1 of the sale agreement............................................................................................. 37
Breach of the Seller’s warranties............................................................................................... 37
Breach of the Insured Warranties............................................................................................. 39
Guiding authorities as to damages............................................................................................... 40
Expert witnesses............................................................................................................................... 42
Loss methodology............................................................................................................................ 43
What methodology should be adopted?...................................................................................... 44
The Buyer’s Methodology......................................................................................................... 44
The No Transaction Methodology........................................................................................... 45
The Purchaser’s Methodology or the Question A Methodology?...................................... 45
Conclusion as to methodology................................................................................................. 46
The capitalisation of future maintainable earnings.................................................................. 46
Annual future maintainable earnings...................................................................................... 47
Table 1 – Annual Future Maintainable Earnings................................................................... 48
The Lion overcharges...................................................................................................................... 49
Quality Incentives............................................................................................................................ 50
Step-up Incentives........................................................................................................................... 50
AW Incentives................................................................................................................................... 50
AW Incentives - South Australia............................................................................................... 51
Conclusion................................................................................................................................... 52
AW Incentive overcharges – data source issue...................................................................... 53
Ms Wright’s opinion......................................................................................................... 53
Mr Meredith’s opinion...................................................................................................... 55
Conclusion................................................................................................................................... 56
Conclusion as to Lion overcharges.......................................................................................... 58
The date to determine value........................................................................................................... 58
The earnings multiple..................................................................................................................... 59
Discount 1 – risks associated with the renegotiation of the Lion agreement.................... 60
Discount 2 - marketability, size and unaudited financial accounts.................................... 60
Mr Samuel’s opinion......................................................................................................... 61
Mr Meredith’s opinion...................................................................................................... 62
Koeplin study.................................................................................................................... 64
De Franco study................................................................................................................. 65
KPMG Practices Survey.................................................................................................... 65
Other studies...................................................................................................................... 67
Conclusion as to published studies......................................................................................... 68
The Deloitte Due Diligence Report.......................................................................................... 68
Conclusion as to discount for marketability, size and unaudited financial accounts..... 69
Discount 3 - additional risks of renegotiating the Lion agreement..................................... 71
Mr Samuel’s position........................................................................................................ 71
Mr Meredith’s position..................................................................................................... 73
Conclusion as to the discount for the additional risks.......................................................... 75
Acquired liability for Lion overcharges....................................................................................... 77
Mr Samuel’s position........................................................................................................ 77
Mr Meredith’s position..................................................................................................... 77
Relevant authority...................................................................................................................... 78
Conclusion................................................................................................................................... 79
The amount of acquired liability.................................................................................................. 79
Conclusion to the amount of acquired liability..................................................................... 82
Conclusion as to Loss...................................................................................................................... 82
ISSUE 3 – WHAT IS THE AMOUNT, IF ANY, OF ‘DEFENCE COSTS’?............................. 82
Defence Costs.................................................................................................................................... 82
ISSUE 4 – WHAT IS THE POSITION IN RELATION TO ‘RECOVERED AMOUNTS’?. 83
Recovered Amounts......................................................................................................................... 83
The receiver’s evidence................................................................................................................... 83
Mr Esposito.................................................................................................................................. 84
Mr Esposito’s tax returns........................................................................................................... 85
The Seller........................................................................................................................................... 86
A. E. Brighton.................................................................................................................................... 86
Table 2 – Maximum known equity for recovery in A E Brighton....................................... 87
The Brighton property................................................................................................................ 88
Bunkers Hill property................................................................................................................ 89
Werona property......................................................................................................................... 89
Property equity........................................................................................................................... 90
RCH Nominees Pty Ltd................................................................................................................... 90
National Dairy Products Pty Ltd................................................................................................... 91
UDP Asset Holdings Pty Ltd.......................................................................................................... 91
UDP Employee Share Funds Pty Ltd, as trustee of UDP Employee Share Trust................ 91
Concerns about realisation........................................................................................................ 91
Conclusion as to Recovered Amounts......................................................................................... 92
ISSUE 5 – CAN ‘LOSS’ BE DETERMINED?.............................................................................. 93
Underwriters’ submissions........................................................................................................ 93
UDP’s submissions..................................................................................................................... 94
Is there a ‘Loss’ under the policy?............................................................................................ 96
Conclusion......................................................................................................................................... 99
ISSUE 6 – IS UDP ENTITLED TO RECOVER THE COSTS OF THE ARBITRATION?.. 99
Breach of the duty of utmost good faith...................................................................................... 99
The pleading of the claim for breach of the duty of utmost good faith............................ 100
The April 2016 letter........................................................................................................ 101
The application for a temporary stay........................................................................... 101
UDP’s submissions................................................................................................................... 101
Underwriters’ submissions...................................................................................................... 102
Statutory framework................................................................................................................. 102
Authorities................................................................................................................................. 103
Additional authorities.............................................................................................................. 105
UDP’s submissions................................................................................................................... 107
Underwriters’ submissions...................................................................................................... 107
The stay application................................................................................................................. 108
Finding as to the duty of utmost good faith......................................................................... 109
Effect of commencement of litigation.................................................................................... 110
The effect of litigation in this proceeding............................................................................. 111
ISSUE 7 – IS UDP ENTITLED TO RECOVER INTEREST?................................................. 112
Introduction............................................................................................................................... 112
The stay application................................................................................................................. 113
UDP’s submissions................................................................................................................... 114
Underwriters’ submissions...................................................................................................... 115
Power of the Court to award interest..................................................................................... 116
The date interest commenced...................................................................................................... 117
Relevant authorities.................................................................................................................. 117
The policy provisions............................................................................................................... 119
The underwriters’ actions........................................................................................................ 120
Conclusion................................................................................................................................. 124
Rate of interest........................................................................................................................... 126
Conclusion as to interest............................................................................................................... 126
CONCLUSION............................................................................................................................... 126
Table 3 – Loss suffered by UDP.............................................................................................. 127
Appendix 1 – Summary of correspondence between Ashurst and NRF between March 2015 and October 2018.............................................................................................................................. 128
HIS HONOUR:
INTRODUCTION
The plaintiff, UDP Holdings Pty Ltd (ACN 167 100 692) (subject to deed of company arrangement) (receivers and managers appointed) (‘UDP’) is the insured under a buyer warranty and indemnity insurance policy (‘policy’) underwritten by the defendants. The policy relates to a share sale agreement (‘sale agreement’) dated 11 December 2013 for the sale of all of the issued shares in 5 Star Foods Pty Ltd (ACN 005 714 616) (‘Company’) by Esposito Holdings Pty Ltd (ACN 079 763 303) (‘Seller’).
Under the policy, the underwriters agreed to insure UDP in relation to representations and warranties by the Seller to UDP that the Seller’s warranties were true and accurate, and not misleading or deceptive, and would be so at completion. UDP says that the representation and warranty were breached by the Seller, and claims damages from the underwriters, as well as declaratory relief and interest.
The underwriters resist the claim and say that UDP is not entitled to recover under the policy.
Sale agreement and policy background
The Company and its subsidiary companies (‘the Group’) traded in milk and milk products. It bought and on-sold milk from dairy farmers. It also manufactured specialty cheeses and other products. The Company was founded in 1999 by Antonio Patrick Esposito. By 2014, the Group had 250 employees and a fleet of 20 to 30 trucks.
In 2012, Mr Esposito decided to sell the Group. On 26 June 2013, Mr William Yan Sui Hui of Hong Kong and Mr Esposito signed a confidentiality agreement. Mr Hui, and two business acquaintances, travelled to Australia on several occasions in 2013, meeting with Mr Esposito and briefly with the Group’s managers. The asking price for the businesses was $84 million, but after negotiations was reduced to $70 million.
In late 2013, UDP undertook comprehensive due diligence, reviewing the Group’s financial accounts uploaded into a data room. Audited accounts were available for the financial year 2012 (‘FY12’), but not beyond. Management accounts were provided to September 2013, but not later, despite UDP’s requests. UDP engaged Deloitte to conduct a financial due diligence review of the Group.
Under the sale agreement, the Seller agreed to sell, and UDP agreed to buy all of the issued shares in the Company. Mr Hui guaranteed the performance of UDP’s obligations under the sale agreement. The sale agreement was amended by three deeds dated 17 December 2013, 31 December 2013 and 21 January 2014, although nothing turns on this for present purposes.
On 17 December 2013, UDP entered into the policy which covered specified warranty claims under the sale agreement. The underwriters agreed to indemnify UDP in respect of the sale agreement for the period 17 December 2013 to 31 December 2015. The Seller paid the insurance cover. The underwriters’ liability under the policy was capped at $25 million.
The sale agreement was completed on 31 January 2014, but only $62.5 million of the purchase price was paid on completion.[1] The balance, including adjustments, was to be paid over the following year. Two payments of $1 million each, an Earn Out Amount of up to $7 million, a working capital adjustment and a tax adjustment remained owing at completion.[2]
[1]The exact amount paid was $62,480,510.
[2]Earn Out Amount is defined in cl 1.1 of the sale agreement.
Under the policy and subject to its terms, the underwriters indemnified UDP for all loss notified by UDP during the policy period. The term ‘Loss’ is defined in the policy, and is considered in more detail later. Clause 15.1 of the sale agreement was one of the insured warranties to which the policy applied. The underwriters did not dispute at the trial that the warranty in cl 15.1 was breached by the Seller on both 17 December 2013 and 31 January 2014. While the underwriters have limited rights of subrogation under cl 10 of the policy, neither party suggested that they arose in the circumstances of this case.
The Lion overcharging
The most important customer of the Group was LD&D Australia Pty Ltd (ACN 083 019 390) (formerly known as National Foods Australia Pty Ltd), a member of the Lion Nathan Group (‘Lion’). Sales to Lion respectively represented approximately 47% and 36% of the Group’s revenue in FY12 and FY13.
Under a contract dated 25 August 2008 (‘Lion agreement’), the Group supplied milk and other dairy products on a cost–plus margin basis to Lion. The Lion agreement defined the price that Lion would pay the Group for the products supplied. Under the Lion agreement, the prices were based on the cost of milk purchased from farmers. The terms of supply ordinarily applicable to farmers were published in the Supplier Information and Quality Guidelines (‘Guidelines’). They included a base price and variable incentives, including Quality Incentive, Autumn/Winter Incentive (‘AW Incentive’) and price Steps-ups.
On 26 March 2013, Lion gave notice of its intention to terminate the Lion agreement with effect from 1 July 2016, but indicated that it was prepared to enter into a new arrangement with UDP on commercial terms acceptable to both parties.
On about 17 February 2014 and after the sale agreement was completed, Lion advised Mark Smith, the Group Chief Executive Officer (‘CEO’) that it had been overcharged on milk by approximately 3.35 cents per litre for the period 2012 to 2014. He estimated that this equalled about $3 million annually.
The Group then requested its auditors, PriceWaterhouseCoopers (‘PwC’) to investigate. PwC concluded that the Group had overcharged Lion by $9.3 million between July 2011 and 31 January 2014.
On 28 March 2014, a settlement agreement was reached with Lion about the overcharging. The settlement agreement is considered later in these reasons.
The undisputed evidence of Mr Hui and others is that if they had been aware of the Lion overcharging, the sale agreement would not have gone ahead. Mr Hui considered that the overcharging of Lion went to the integrity of the Seller.
Group financial difficulties
The Lion overcharging was of great concern to UDP. The Group’s financial position was much worse than shown in the financial accounts available prior to acquisition. Group profits had been inflated and business sustainability exaggerated. Following completion, the Group rapidly found itself in financial difficulty.
On 10 November 2014, Rabobank, a secured creditor of UDP, appointed partners of PPB Advisory (‘PPB’) as receivers and managers to a Group company, and to UDP and other Group companies on 22 April 2015. They sold the Group’s business for $22.5 million. This was $47.5 million less than the purchase price under the sale agreement.
Brief chronology of proceedings
In October 2014, the Seller referred a claim against UDP and Mr Hui as guarantor to arbitration under cl 21A of the sale agreement.[3] The claim was for about $9 million representing the unpaid balance of the purchase price.
[3]Under cl 21A, the arbitration was conducted under the UNCITRAL Arbitration Rules.
On 2 March 2015, UDP by its solicitors notified the underwriters of circumstances which might give rise to a claim under cl 7 of the policy.
In April 2015, UDP and Mr Hui filed defences in the arbitration, and claimed $47.5 million for breach of warranties, and loss arising from the Lion overcharging. Fraud was not alleged.
On 14 May 2015, UDP by its solicitors made a claim on the policy for loss arising from insured warranties, supported by an expert accounting report prepared by PPB on the instructions of the receivers and managers.
On 1 July 2015, UDP filed an amended defence and counterclaim in the arbitration.
On 23 December 2015, UDP provided the underwriters with an updated claim, which included the final PPB accounting report and evidence given by Mr Esposito and others in public examinations. The sum claimed was $47.5 million being UDP’s loss if the acquisition proceeded, or $46.5 million on the basis that had UDP known the true financial situation it would not have proceeded with the acquisition.
In February 2016, UDP commenced the proceeding in this Court claiming loss exceeding the policy limit of $25 million.
On 6 May 2016, the underwriters applied to this Court for a temporary stay of this proceeding. UDP opposed the stay. In July 2016, Hargrave J determined that there was a substantial overlap of issues between this proceeding and the arbitration, and granted a temporary stay of the proceeding until the completion of the arbitration.[4]
[4]UDP Holdings Pty Ltd (rec and mgr apptd) v Ironshore Corporate Capital Ltd (2016) 51 VR 60.
In September 2016, the arbitrator published two partial awards.
In June 2017, the Federal Court set aside parts of the partial awards, and ordered that a new arbitral tribunal deal with the balance of the claims.[5] Subsequently, the disputes in the arbitration were determined by a new arbitrator in favour of UDP.
[5]Hui v Esposito Holdings Pty Ltd (2017) 345 ALR 287; Hui v Esposito Holdings Pty Ltd(No 2) (2017) 345 ALR 352.
In September 2018, the Hon Stephen Charles AO QC, the new arbitrator, published an interim award (‘interim award’), followed by a final award in October 2018 (’final award’) (collectively referred to as ‘arbitral award’). The arbitrator determined that the Group overcharged Lion in the total amount of $12,440,150 during FY12, FY13 and FY14 (until completion on 31 January 2014), and declared that the Group had suffered loss and damage of $54,144,847. The arbitrator also declared that on and from completion, the Seller held the purchase price on constructive trust for UDP.
On 5 October 2018, Croft J made an order giving effect to the final award as a judgment of this Court. However, this order was stayed until after an application to set aside the award was heard on 22 November 2018.[6]
[6]UDP Holdings Pty Ltd v Esposito Holdings Pty Ltd(No 2) [2018] VSC 741.
On 1 November 2018, the stay of the proceeding granted by Hargrave J was lifted.
On 7 December 2018, Croft J dismissed the application to set aside the award with the result that recognition and enforcement of the award by this Court took effect from this date. No amount awarded by the arbitrator has been recovered to date.
By way of pleadings, UDP relies on a Further Amended Statement of Claim filed 1 November 2018 (‘statement of claim’) and a Reply to the Second Further Amended Defence filed 31 May 2019 (‘reply’). The underwriters rely on their Second Further Amended Defence filed 30 May 2019 (‘defence’).
The position of the parties
In this proceeding UDP claims that it is entitled to recover from the underwriters for ‘Loss’ under the policy. It submits in summary that:
(a) the arbitral award made in its favour for breaches of warranties by the Seller established that it had suffered loss and damage for the purposes of the policy, for which it is entitled to be indemnified by the underwriters;
(b) the arbitral award has been enforced by an order of this Court, and the underwriters are estopped from denying or contesting the facts underlying the award; and
(c) as its ‘Loss’ exceeds the $25 million limit of liability, it is entitled to an order in that amount together with the arbitration costs, and interest.
The underwriters contest UDP’s claim and submit that:
(a) the arbitral award established UDP’s contractual entitlement as a right to recover against the Seller for breach of cl 7.6 of the sale agreement;
(b) a contractual entitlement under cl 7.6 does not engage the definition of ‘Loss’ in cl 4.1 of the policy;
(c) for a ‘Loss’ to be established, UDP’s contractual entitlement to recover against the Seller for a breach of cl 15.1 of the sale agreement, ‘Defence Costs’ and ‘Recovered Amounts’ must all be determined by the Court and taken into account; and
(d) UDP has not taken reasonable steps to bring in ‘Recovered Amounts’, and therefore ‘Loss’ cannot be ascertained.
If the Court determines that UDP has established ‘Loss’ under the policy, the Court must then decide:
(a) the quantum of Loss;
(b) whether UDP is entitled to the costs of arbitration as a result of the underwriters’ breach of the duty of utmost good faith; and
(c) the interest, if any, due to UDP.
Issues for determination
The issues for determination in this proceeding are considered in these reasons in the following order:
(a) Issue 1 – are the underwriters estopped from denying or disputing the arbitral award?
(b) Issue 2 – what is the quantum of ‘Loss’?
(c) Issue 3– what is the amount, if any, of ‘Defence Costs’?
(d) Issue 4 – what is the position in relation to ‘Recovered Amounts’?
(e) Issue 5 – can ‘Loss’ be determined?
(f) Issue 6 – is UDP entitled to recover the costs of the arbitration?
(g) Issue 7 – is UDP entitled to recover interest?
It is convenient to commence by setting out the relevant provisions of the sale agreement and the policy.
The sale agreement
Clause 1.1 of the sale agreement is the definitions clause. Relevant definitions include:
Accounts Date means 30 June 2013;
…
Claim includes a claim, notice, demand, action, proceeding, litigation, prosecution, arbitration, investigation, judgment, award, damage, loss, cost, expense or liability however arising, whether present, unascertained, immediate, future or contingent, whether based in contract, tort or statute and whether involving a Third Party or a party to this Agreement or otherwise;
…
Earn Out Cap means $7,000,000;
…
EBITDA means earnings before interest, Tax, depreciation and amortisation;
…
Loss means losses, liabilities, damages, costs, charges and expenses and includes Duties and Taxes;
…
Material Adverse Effect means, when used in a Warranty in relation to a Group Member, a financial impact on the earnings, assets or earnings prospects of the relevant Group Member in excess of $200,000 (when compared to what the earnings, assets or earnings prospects (as the case may be) of the Group Member would be if the Warranty were true);
…
Warranty Claim means any Claim by the Buyer (or any person making a Claim through or on behalf of the Buyer) against the Seller for breach of any of the Seller's Warranties in this Agreement or for breach of any other obligation of the Seller express or implied by this Agreement or otherwise relating to the sale of the Shares to the Buyer, other than an Indemnity Claim, any obligation of the Seller under clause 22;
The conditions for completion are set out in cl 7.6 of the sale agreement, and include:
(a)The obligations of the Buyer, the Company and the Seller under this clause 7 (other than a requirement that has been waived under clause 7.7) are interdependent. Completion is conditional on, and will not be taken to have occurred until, each of the Buyer, the Company and the Seller have complied with all of their respective material obligations under this clause 7 (other than a requirement that has been waived under clause 7.7) and subject to the Buyer and the Seller (acting reasonably) agreeing that the items to be delivered by each other under clause 7.7 are in agreed form.
(b)If the Seller becomes aware that a Seller Warranty is or is likely to be incorrect or untrue at or before Completion, the Seller must inform the Buyer of the incorrect or untrue Warranty and why it is incorrect or untrue (Pre-Completion Warranty Claim Notice).
(c)The parties agree the Buyer may terminate this Agreement by notice in writing to the Seller if a Seller Warranty is incorrect or untrue at or before Completion (including any one of a series of Warranty Claims arising from the same event or circumstances) which has or is likely to have either:
(i)a negative effect on earnings of the Group on a consolidated basis equal to or greater than $1,000,000; or
(ii)a negative impact on the value of the assets of the Group of an amount equal to or greater than $3,000,000.
(d)If the Seller or the Buyer fails to fully comply with their obligations under this clause 7 and Completion does not occur, then the other of them may terminate this Agreement by giving notice to all other parties and each of the Seller and the Buyer must promptly:
(i)return to the other all documents delivered to it under this clause 7;
(ii)repay to the other all payments received by it under this clause 7 and clause 2.5; and
(iii)do everything reasonably required by the other to reverse any action taken under this clause 7 and clause 2.5,
without prejudice to any other rights any party may have in respect of that failure.
The Seller’s warranties and indemnities (‘Seller’s warranties’) are contained in cl 15. Clause 15 provides:
15.1Warranties
The Seller represents and warrants to the Buyer as an inducement to the Buyer to enter into this Agreement that, subject to the limitation in the clause 15 and clause 16, each of the Seller’s Warranties is true and accurate, and not misleading or deceptive, at the Agreement Date and, except as expressly stated, will be true, accurate and not misleading or deceptive at Completion.
15. 2 Disclosure Material
The Buyer acknowledges that the Seller’s Warranties are qualified by all information fairly disclosed in the Disclosure Material.
15.3 Separate Warranties
Each of the Seller’s Warranties is a separate warranty and is not limited or restricted by any other warranty, except if that limit or restriction is clearly stated in the Seller’s Warranty.
15.4 Reliance
The Seller acknowledges that the Buyer has entered into this Agreement, and will complete the Agreement, in reliance on the Seller’s Warranties.
15.5 Indemnity for breach of Seller’s Warranty
(a) The Seller indemnifies the Buyer against, and must pay the Buyer an amount equal to, any Loss suffered or incurred by the Buyer in connection with a breach of a Seller Warranty, or arising from the facts, matters or circumstances that make a Seller Warranty untrue, except to the extent that the Seller Warranty or the Seller’s liability for the Loss are limited or qualified under clause 16.
(b)For the avoidance of doubt, in respect of any breach of any Seller Warranty, Loss includes any amount that would be necessary to put the Buyer in the same position as if the Seller Warranty had been true.
…
Clause 16 provides for claims under the Seller’s warranties. Clause 16.1 provides for notice to be given of a claim under the Seller’s warranties and states:
(a) If the Buyer becomes aware of any matter that may give rise to a Warranty Claim, the Buyer must notify the Seller of the Warranty Claim in writing as soon as practicable after the Buyer becomes aware of the matter and provide the Seller with reasonable details of the nature of the matter and an estimate of the amount claimed.
…
Clause 16.3 states that the Seller must pay damages for the breach of a Seller’s warranty under the sale agreement:
Subject to clause 15 and the other provisions of this clause 16, if the Buyer makes a Warranty Claim and the Buyer complies with its obligations under clause 16 in respect of the Warranty Claim, the Seller must pay to the Buyer damages for the breach of the Seller’s Warranty or other matter giving rise to the Warranty Claim.
Clause 16.7 imposes a cap on the amount that UDP can recover:
(a) Subject to clause 16.7(c), the maximum total amount that the Buyer may recover for all Claims … under or in connection with the Agreement including Warranty Claims … must not exceed $25,000,000.
(b)Subject to clause 16.7(c), the maximum total amount that the Buyer may recover for … Indemnity claims … or any Claim arising under or in respect of the Agreement in respect of the Esposito Guaranteed Amounts (in aggregate), whenever made, is limited to the Purchase price actually paid by the Buyer to the Seller at the time of the relevant Claim …
(c)For the avoidance of doubt and notwithstanding any other provision of this Agreement, the total maximum amount that the Buyer may recover for all Claims under the Agreement in aggregate must not exceed the Purchase Price actually paid by the Buyer to the Seller at the time of the relevant Claim (as adjusted under this Agreement).
Clause 16A deals with Indemnity Claims:
16A.1 Notice of Indemnity Claims
If the Buyer becomes aware of any matter that may give rise to a Claim against the Seller under an indemnity under this Agreement (Indemnity Claim), the Buyer must notify the Seller of the Indemnity Claim in writing as soon as practicable after the Buyer becomes aware of the matter and provide the Seller with reasonable details of the nature of the matter and an estimate of the amount claimed.
16A.2 Time limits for Indemnity Claims
The Buyer cannot make an Indemnity Claim, if the Buyer does not notify the Seller of the Indemnity Claim in accordance with clause 16A.1 on or before:
1.in the case of an Indemnity Claim relating to Tax, 48 months and 30 days after the lodgement of the income tax return for the Company for the period that includes Completion; or
2.in all other cases, 24 months after Completion.
…
16A.4 Maximum amount the Buyer may recover
The parties acknowledge and agree that the maximum total amount that the Buyer may recover for any Indemnity Claim is set out in clause 16.7(b).
Clause 17 provides for UDP to have the benefit of the policy:
(a)The Buyer has entered into a warranty and indemnity insurance policy (Warranty and Indemnity Insurance Policy) and the Buyer acknowledges that the Warranty and Indemnity Insurance Policy is acceptable to the Buyer and each matter the subject of a Warranty Claim and/or an Insured Indemnity is taken to be an Insured Warranty for the purposes of this clause 17. For the purposes of this clause 17 a "Warranty Claim" includes a Claim in respect of an Insured Indemnity.
(b)The Warranty and Indemnity Insurance Policy must:
(i)be provided by a reputable insurer of good standing (Insurer);
(ii)be in the name of the Buyer;
(iii)include an acknowledgment by the Insurer that it underwrites the Warranty and Indemnity Insurance Policy on the basis of, and despite, the limitations of liability contained in this clause 17 (and having regard to the limits on Warranty Claims set out in clauses 16 and 16A of this Agreement);
(iv)include a waiver of the Insurer’s rights of subrogation, contribution and rights acquired by assignment against the Seller (except in the case of fraud);
(v)be in respect of Warranty Claims under the Insured Warranties; and
(vi)be obtained at the Seller’s cost.
(c)The Buyer acknowledges there is no excess or any other amount payable by the Seller under the Warranty and Indemnity Insurance Policy or this Agreement.
(d) The Buyer must not:
(i)agree to any amendment, variation or waiver of the Warranty and Indemnity Insurance Policy (or do anything which has a similar effect) without the express prior written consent of the Seller (such consent not to be unreasonably withheld); or
(ii)novate, or otherwise assign its rights under, the Warranty and Indemnity Insurance Policy without the express prior written consent of the Seller (such consent not to be unreasonably withheld).
Clause 17.2 releases the Seller from warranty claims by UDP for breach of an Insured Warranty leaving the policy as the sole recourse for such claims:
(a) Subject to clauses 17.2(b) and 17.2(c), the Buyer:
(i)agrees to the extent permitted by Law that the Seller does not, and will not at any time, have any liability whatsoever (whether under this Agreement or statute, at common law or in equity) in respect of the Insured Warranties;
(ii)irrevocably releases the Seller from all Warranty Claims to the extent such Warranty Claims relate to a breach of an Insured Warranty;
(iii)agrees not to commence or maintain any Warranty Claim against the Seller to the extent such Warranty Claim relates to a breach of an Insured Warranty;
(iv)agrees its sole recourse in respect of any Warranty Claim, to the extent such Warranty Claim relates to a breach of an Insured Warranty, is against the Warranty and Indemnity Insurance Policy;
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(vii)agrees the Seller may plead this clause as a bar to any Warranty Claim brought by the Buyer to the extent that Warranty Claim relates to a breach of an Insured Warranty.
(b)The release and other provisions in clause 17.2(a) do not apply in respect of Warranty Claims to the extent the:
(i)relevant Warranty Claim arises directly out of the fraud of the Seller or its officers; or
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(c)For the avoidance of doubt, the release and other provisions in clause 17.2 do not operate to prevent the Buyer from making a claim under the Warranty and Indemnity Insurance Policy and notifying the Seller of this claim provided the Buyer’s claim is made strictly on the basis the Seller has no liability whatsoever in relation to the Buyer’s claim except as set out in clause 17.2(b).
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Clause 21A deals with dispute resolution:
(a)Without limiting clause 21, if any dispute or difference arises between the parties … (Dispute) concerning this Agreement or its performance, a party may give written notice to the other party (Dispute Notice) specifying the nature of the dispute or difference to the other party.
(b)During the period of 10 Business Days after delivery of the Dispute Notice, or any longer period agreed in writing by the parties (Initial Period), each of the parties must use their reasonable endeavours and act in good faith to resolve the Dispute by discussion and negotiation.
(c)If the parties are unable to resolve the Dispute within the Initial Period, the Dispute must be referred to a respective authorised person of the parties to resolve the Dispute (each an Authorised Person).
(d)If the relevant Authorised Persons are not able to resolve the Dispute within a further 10 Business Days the matter will be referred to and finally resolved by arbitration in accordance with the UNCITRAL Arbitration Rules then in force (Rules).
(e)The seat of arbitration will be in Australia. The language of the arbitration will be English.
(f)The tribunal is to consist of a single arbitrator appointed in accordance with the Rules.
(g)The arbitration will be administered by the Institute of Arbitrators and Mediators Australia under the UNCITRAL Arbitration Rules in force at the date of this Agreement.
The Seller’s warranties
The Seller’s warranties are set out in sch 6 of the sale agreement. Warranty 8 is concerned with the financial statements, and states:
(a)The Accounts disclose a true and fair view of the affairs, financial position and assets and liabilities of the Group as at the Accounts Date and of the income, expenses, results of operations and cash flow of the Company for the financial year ended on the Accounts Date.
(b) The Accounts were prepared:
(i)in accordance with the Accounting Standards, the requirements of the Corporations Act and all other applicable Law;
(ii)on a basis consistent with the audited financial statements of the Company for the financial year preceding the financial year ended on the Accounts Date; and
(iii) in the manner described in the notes to them.
(c)The Accounts include all liabilities of the Group Members at the relevant balance dates in accordance with the requirements referred to in sub-paragraph (b) above.
(d)The Management Accounts have been prepared by the Seller with due care and attention, show a materially accurate view of the financial position and state of affairs of the Group for the period in respect of which they have been prepared but the Buyer acknowledges that they are not audited or prepared on a statutory basis.
(e)The Management Accounts include all liabilities (actual or contingent) of the Group Members at the relevant balance dates.
(f)The books of account of each Group Member are up to date, in the relevant Group Member’s possession and are true and complete in accordance with the law and applicable standards, principles and practices generally accepted in Australia.
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In Warranty 9, the Seller undertakes that there have been no material adverse changes since the ‘Accounts Date’:
Since the Accounts Date:
(a)there has been no material adverse change in the assets, liabilities, turnover, earnings, financial condition, trading position or affairs of the Company or a Group Member;
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(c) the Company and each Group Member have carried on the Business in the ordinary and usual course, in a manner comparable to that in which it was conducted for the 12 month period before the Agreement Date;
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Warranty 13 provides that the records of the company:
(a) are in the possession or under the control of the Company;
(b)will be up to date and comply with applicable Laws as at Completion; and
(c)do not contain or reflect any material inaccuracies or material discrepancies.
Warranty 32 provides for the accuracy of information provided by the Seller:
(a)The information set out in Schedules 1, 2, 3, 4 and 7 and the Annexures to this Agreement are complete and accurate in all material respects.
(b)So far as the Seller is aware, the information concerning the Business prepared by or on behalf of the Seller and contained in the Disclosure Materials is accurate and complete in all material respects.
(c) So far as the Seller is aware, as at the Agreement Date, all material information regarding the Business has been included in the Disclosure Materials and the Seller is not aware of any materially adverse information relating to the Business that has not been made available to the Buyer before the Agreement Date.
The policy
Clause 1.1 of the policy contains the following definitions:
Breach means any of the following:
a)breach of clause 15.1 of the Sale Agreement in respect of the General Warranties;
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c)any circumstances giving rise to a Policy Claim under the General Indemnity;
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in each case in respect of any of the Insured Warranties and Indemnities.
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Defence Costs has the meaning attributed to it in Clause 8.1 (including such costs retrospectively approved by the Underwriters under Clause 8.2b)).
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General Indemnity means the general indemnity in Part D of the Warranty and Indemnity Table.
General Warranties means the general warranties identified in Part A of the Warranty and Indemnity Table.
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Insured Warranties and Indemnities means the General Warranties, General Indemnity … to the extent referred to in the Warranty and Indemnity Table.
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Limit of Liability means the amount set out in Item 4 of the Policy Schedule.
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Loss has the meaning attributed to it in Clause 4 of this Policy.
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Recovered Amounts means, in respect of a given Loss, the amount actually paid to or actually recovered by the Insured or a member of the Insured Group from any source other than the Underwriters, plus the value of benefits actually obtained by the Insured or Insured Group as a direct consequence of the matter which gives rise to such Loss, such as a refund, credit or other reduction granted to the Insured.
Relevant Person means:
a) the Seller;
b)the advisers of the Seller that have provided the Due Diligence Reports on a strictly non reliance basis; and
c)the current and former officers and executives of the Target Group and each of the persons in items a) to b), and each is a Relevant Person.
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Retention means the amount stated in Item 5 of the Policy Schedule.
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Third Party Demand means any demand made or civil action brought against the Target Group by any person (other than a Group Company of (a) the Insured, (b) the Target Group or (c) the Underwriters) in respect of which the resulting payment would constitute Loss in respect of a Breach.
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Clause 1.2 provides:
Interpretation
a) The headings of this Policy do not affect its interpretation.
b) No party to this Policy shall have the benefit of any presumption regarding the interpretation or construction of this Policy based on which party drafted it.
c)Words importing the singular include the plural and vice versa, words importing a gender include every gender and references to persons include corporations, partnerships and other unincorporated associations.
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g)The Policy shall be interpreted in accordance with legislation in force as at the date of this Policy.
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Clause 3.1 contains the indemnification clause in relation to the policy:
Subject to the terms, conditions and limitations of this Policy, the Underwriters shall indemnify the Insured, or pay on the Insured’s behalf, for all Loss which is notified (or deemed by clause 7.4 of this Policy to have been notified) by or on behalf of the Insured to the Underwriters during the Policy Period.
Clause 3.2 relates to claims by UDP against the Seller, and provides:
Notwithstanding that the Insured has a right to claim against the Seller pursuant to the Sale Agreement for a Breach, the Insured shall not be required to exercise such a right:
a) for a Loss to be capable of eroding the Retention;
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c) before making a Policy Claim.
Clause 3.3 sets out the aggregate limit of liability:
The Limit of Liability is the limit of the Underwriters’ aggregate liability for all Loss under this Policy. The Retention is not part of the Limit of Liability.
Clause 4.1 sets out how loss is calculated for the purposes of the policy:
Subject to the other provisions of this Clause 4, Loss means:
a)that part of the amount to which the Insured is contractually, or would have been, entitled to recover against the Seller under the Sale Agreement for a Breach of the Sale Agreement, with the term ‘fairly disclosed’ in clause 15.2 of the Sale Agreement being given the meaning in clause 16.4(a) of the Sale Agreement; plus
b) any Defence Costs; less
c) any Recovered Amounts,
in each case disregarding the effect of the Limitation Provisions.
The Insured is not obliged to seek recovery of any amounts from any third party prior to making any Policy Claim in respect of any Insured Warranty and indemnity.
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Clause 5 provides for the Retention to be borne by UDP:
5.1 Liability in excess of the Retention
The Retention shall be borne by the Insured and the Underwriters shall only be liable to pay Loss once the Retention has been fully eroded.
5.2 Erosion of Retention
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a)the Retention shall be eroded by Loss for which the Underwriters would be liable under this Policy but for the Retention;
b)in the event a Loss (or the aggregate amount of all individual Losses) is equal to or exceeds the Retention, the Underwriters shall then be liable for the amount of Loss which exceeds the Retention; and
c)the Retention under this Policy is taken to be the same as and not addition to the aggregate claims specified threshold in clause 6.3(a)(2) of the Sale Agreement and shall not separately apply to any claims under this Policy.
Clause 7.2 states as to claim notices that:
The Insured shall deliver a Claim Notice to the Underwriters, as soon as reasonably practicable after the Insured becomes aware of any of the following that may be reasonably expected to give rise to a Policy Claim:
a)any fact or circumstance which will, or could reasonably be expected to, in whole or in part, erode the Retention;
b)any fact or circumstance which could reasonably be expected to give rise to a Loss; or
c) a Loss.
Clause 7.3 sets out the information required in a claim notice:
a)The Claim Notice shall describe (to the extent known by the Insured as at the date of the Claim Notice):
i.A fair summary of the facts and circumstances relating to the erosion or potential erosion of the Retention;
ii.the facts and circumstances relating to the Loss or potential Loss;
iii.an estimate of the amount of Loss (to the extent reasonably practicable); and
iv.specific references to the relevant Insured Warranties and Indemnities (where appropriate and to the extent known).
b)A Claim Notice shall not be invalid solely for failing to provide all necessary facts and circumstances and other details relating to the Policy Claim.
Clause 7.5 provides time limits for the response by the underwriters to a claim notice:
As soon as reasonably practicable, and in each case no later than 20 Business Days after the Underwriters receive a Claim Notice, the Underwriters shall respond by:
a)acknowledging or denying liability for Policy Claim and in the case where the underwriters have denied Policy Claim, the Underwriters shall be required to specify the reasons in writing for such denial; or
b)If the Underwriters are not in a position to determine a final cover position on the information provided in a Claim Notice within the period specified in Clause 7.6, then the Underwriters shall request such additional information in writing as they may reasonably require from the Insured in order to fully assess the Policy Claim. As soon as reasonably practicable and in each case no later than 20 Business Days after receipt of the requested information, the Insured shall respond by acknowledging or denying cover for the Loss claimed for or requesting further information (and in the case where the Underwriters have denied the Policy Claim, the Underwriters shall be required to specify the reasons in writing for such denial).[7]
[7]It appears that the reference in cl 17.5 b) to cl 7.6 is a typographical error.
Clause 8 deals with Defence Costs:
8.1 Definition of Defence Costs
Defence Costs means that part of Loss which constitutes reasonable fees, costs and expenses incurred by the Insured, the Insured Group or the Target Group in connection with the investigation, settlement, negotiation, defence or appeal of a Breach or a Third Party Demand so far as it relates to coverage under this Policy, provided that (subject to Clause 8.2 of this Policy) such Defence Costs were consented to retrospectively by the Underwriters or in writing prior to being incurred (such consent not to be unreasonably withheld, conditioned or delayed). Defence Costs do not include any remuneration or compensation for officers, employees, consultants or any other internal expenses of, the Insured, Insured Group or Target Group (other than consultants specifically retained in connection with the investigation, negotiation, adjustment, settlement, defence or appeal of such Breach or Third Party Demand).
8.2 Reimbursement of Defence Costs
a)Subject to Clause 8.2(b) of this Policy, if the Insured requests in writing, the Underwriters shall, … and provided that the Retention has been fully eroded, reimburse the Insured within 20 Business Days after each calendar month for the Defence Costs incurred and billed during such calendar month, notwithstanding that the Third Party Demand may not have been agreed by the Underwriters in writing, or settled or finally determined.
b)If the Underwriters’ written consent cannot reasonably be obtained before Defence Costs are incurred, the Underwriters will give retrospective approval for such Defence Costs of up to $100,000 in aggregate.
Clause 9.1 requires UDP to act as if uninsured, to mitigate loss and to preserve the underwriters’ position:
The Insured shall, and to the extent within its control following Completion shall cause the Target Group to in response to any matter, information or circumstance which has given rise to a Policy Claim for a Breach thereafter:
a)act at all times as if uninsured and to take all reasonable steps to mitigate any Loss;
(c) noted the position as to information including:
(i) the notification of a potential claim on 2 March 2015, and the provision of the claim notice on 15 May 2015;
(ii) the claim notice was supported by the detailed and comprehensive PPB report;
(iii) further information and documents were provided as requested by the underwriters on 25 May 2015, 29 May 2015 and 2 June 2015;
(iv) further information and documents were provided by a separate letter of 1 July 2015, in response to requests contained in the letter received on 9 June 2015; and
(v) the disclosure material was provided which included:
(i) all information contained in the virtual data room established in relation to the sale under the sale agreement;
(ii) all information set out in and annexed to the sale agreement; and
(iii) all information provided by the Seller or its advisors on and from 1 August 2013 to the Buyer, the Buyer's Guarantor, Johnny Hon Chung Chan, Herbert Smith Freehills, Rothschild, Deloitte and Rabobank;
(d) stated that if the underwriters delayed deciding whether to exercise the right of subrogation, the opportunity to press the claims may be lost to UDP; and
(e) proposed a meeting to discuss the policy response and the approach to UDP’s ongoing participation in the arbitration.
In a letter dated 28 July 2015, NRF requested further additional information and documents.
In a letter dated 18 August 2015, NRF requested a copy of a further document.
In an email dated 24 August 2015, NRF offered a funding agreement to UDP in relation to the arbitration. The agreement:
(a) was on a without prejudice basis to the underwriters’ reservation of rights under the policy;
(b) stated that the underwriters considered it to be in their interests that UDP take an active role in the arbitration whilst they consider the issue of policy response;
(c) contained an offer for the underwriters to pay UDP’s reasonable legal costs in connection with the arbitration after the date of the agreement;
(d) noted that in the event that the underwriters confirmed indemnity to UDP under the policy, the proposed funding agreement confirmed that the counterclaim or separate action would be a subrogated proceeding to be conducted in the name of UDP on instructions from the underwriters in its absolute discretion; and
(e) provided that if any amount became payable to UDP in the subrogated action, the amount distributed must be distributed in accordance with cl 10.4 of the policy.
In a letter dated 23 September 2015, Ashurst:
(a) stated that the request on 28 July 2015 related to 21 additional categories of documents and over 11,000 potentially relevant documents, many of which had limited relevance to the policy claim;
(b) claimed that the document request was a delay tactic, but would provide the documents by 9 October 2015 and expected a response within 20 business day of receipt;
(c) noted that over nine months had passed since UDP’s initial notification and hundreds if not thousands of documents had been provided to enable the underwriters to make a decision as to cover;
(d) they expected the underwriters to make a decision as to cover within 20 business days of that correspondence in accordance with the policy; and
(e) advised that UDP’s current intention was to continue participating in the arbitration.
In a second letter dated 23 September 2015, Ashurst:
(a) claimed that the proposed funding agreement sent on 24 August 2015 was a rewriting of the policy, as cl 10.1 of the policy provides that the right of subrogation arises only after a payment is made under the policy, and fraud on the part of a relevant person has been accepted in writing by that person or finally determined by a judgment of a court of competent jurisdiction;
(b) contended that until payment was made and fraud established, the choses of action available to UDP were assets of UDP; and
(c) that the proposed funding agreement would represent a very significant concession on the part of UDP, and was not commercially acceptable.
In an email dated 5 October 2015, Ashurst provided the determination and reasons of arbitrator following the preliminary hearing in the arbitration.
In a letter dated 9 October 2015, Ashurst provided the documents requested on 28 July 2015 and 18 August 2015.
In a letter dated 15 October 2015, NRF:
(a) contended that the policy should be interpreted by the general principle that the insurer has rights of subrogation on indemnification of, and any payment to UDP under the policy;
(b) that the policy should be given a businesslike interpretation taking into account its commercial objects, and UDP’s interpretation would render the subrogation provisions redundant; and
(c) advised that while the underwriters remained willing to enter into a funding agreement with UDP and give effect to cl 10 of the policy, it noted that UDP did not intend to enter into a funding arrangement at the present time.
In a letter dated 30 October 2015, NRF requested further documents.
In a letter dated 5 November 2015, Ashurst:
(a) confirmed that the underwriters were only able to exercise subrogation rights after payment was made under the policy (cl 10.1), and fraud had been accepted in writing by the relevant person, or finally determined by a judgment of a court of competent jurisdiction (cl 10.2);
(b) advised that UDP recognised that there were potentially valuable claims open to them and/or to the underwriters in certain circumstances, including by way of prosecuting the counterclaim in the arbitration;
(c) advised that UDP remained open to exploring a commercial resolution to the issue of subrogation rights which facilitated the claims being pursued against Mr Esposito subsequent to the underwriters making a decision as to indemnity;
(d) stated that at the conclusion of the examinations, UDP would provide a final position letter; and
(e) invited the underwriters to attend a settlement meeting in November or December if indemnity was granted.
In a letter dated 11 November 2015, Ashurst responded to the document and information requests of 30 October 2015, and provided some additional documents.
In a letter dated 23 December 2015, Ashurst:
(a) provided the updated and finalised PPB report;
(b) provided transcripts and other documents of the public examinations;
(c) required the underwriters to acknowledge or deny liability under cl 7.5 of the policy without any further delay;
(d) requested a decision by no later than 5 February 2016;
(e) noted that they had amended their policy claim according to the PPB final report;
(f) stated there was no utility in a settlement meeting; and
(g) advised that they had instructions to commence proceedings against the underwriters should a decision as to indemnity or satisfactory explanation not be provided prior to 5 February 2016.
In a letter dated 11 January 2016, NRF:
(a) noted that the statement of Mr Hui was not included amongst the document uploaded, and that they did not consider that the time period for acknowledging or denying liability pursuant to cl 7.5(a) commenced until this statement had been received by them;
(b) stated that the updated PPB report introduced a number of new elements to the claim; and
(c) said that until the updated PPB report had been considered, they were not in a position to confirm whether the underwriters would be able to respond by 5 February 2016 as requested.
In a letter of 29 January 2016, Ashurst provided a copy of the Deloitte’s report of 16 May 2013 and noted that Mr Hui’s statement was prepared in draft form in October 2015, and that the time period to provide a policy response was not dependent on receiving Mr Hui’s statement. They advised that further delays would not be tolerated, and that a response to the claim was required by 5 February 2016.
In a letter dated 5 February 2016, NRF:
(a) outlined the underwriters’ position by advising that the allegation as to liability and the assertions of fact and law made in the revised claim notice and in the PPB report of 22 December 2015 were not admitted except as otherwise stated;
(b) advised that the underwriters would indemnify UDP for loss within the meaning of the policy arising out of the Quality Incentive and Step-up, but not the AW Incentive;
(c) stated that the underwriters conceded that the Seller had breached a number of warranties;
(d) stated that they considered that the Material Adverse Change claim was excluded under the sale agreement, and that the policy did not respond to this issue;
(e) stated that the underwriters did not accept that the purchase price represented the market value of 5 Stars, and was likely to have been lower than $63 million;
(f) provided calculations as to the amount of loss calculated by the underwriters’ forensic accounting consultant arriving at a difference in business value as a result of the Lion overcharge and the material adverse change of about $16 million; and
(g) noted that there was a significant disagreement between respective clients and consultants as to the merits and quantum of the claim.
In a letter dated 12 February 2016, Ashurst:
(a) noted that proceedings were issued due to the gulf between the amount claimed and that assessed by the underwriters;
(b) noted that over the past year, they had provided the underwriters with:
(i) the PPB report (including hundreds of pages of supporting documents);
(ii) over 2,000 documents;
(iii) transcripts of the public examination of seven individuals with knowledge of matters relating to the policy claim;
(iv) copies of documents from those examinations; and
(v) a sworn statement of Mr Chan;
(c) noted that the underwriters had declined to provide any material to enable UDP to evaluate and consider matters raised in the 5 February 2016 letter;
(d) noted that UDP had concluded that the underwriters were unwilling to properly consider the claim and had been left with no choice but to issue proceedings; and
(e) enclosed by way of service the statement of claim in this proceeding.
In a letter dated 28 April 2016, NRF:
(a) advised that UDP’s prosecution of its claim in the arbitration was consistent with its obligation under cl 9.1 of the policy to act as a prudent uninsured and to mitigate its loss;
(b) advised that any amounts recovered from the Seller must be taken into account in the quantification of any loss; and
(c) given the substantial overlap between the arbitration allegations and the allegations in this proceeding, the underwriters were giving active consideration to seeking a temporary stay of the proceeding pending determination of relevant issues in the arbitration.
In a letter dated 3 August 2016, Ashurst:
(a) noted that the underwriters concession that UDP’s costs in the arbitration were Defence Costs must be paid separately from any assessment of the indemnity for loss;
(b) sought confirmation from the underwriters that:
(i) it will indemnify UDP in respect of the costs of arbitration;
(ii) that those costs were over and above, and not included in the limit of liability;
(iii) that the costs of investigating its claim (to the extent that those costs are not costs of the arbitration) would be paid by the underwriters over and above the limit of liability on the policy; and
(c) noted that UDP was entitled to statutory interest under s 60 of the SC Act.
In a letter dated 13 October 2016, NRF:
(a) denied that any concession were made as to Defence Costs;
(b) contended that Defence Costs fell within the policy cap of $25 million;
(c) noted that the proposed funding arrangement was intended to offer a workable solution to the funding of the arbitration in the absence of a decision on indemnity;
(d) only the costs incurred by UDP in the arbitration which relate to the counter-claim of the alleged breaches of cl 15.1 of the sale agreement were Defence Costs;
(e) advised that the underwriters were prepared to indemnify UDP for past and future costs of the arbitration, and reasonable investigation costs which relate to the counter-claim of the alleged breaches of cl 15.1 of the sale agreement are Defence Costs over and above the retention amount of $700,000; and
(f) that Defence Costs are not in excess of the policy limit.[159]
[159]This letter was marked ‘without prejudice save as to costs’. Its status was challenged by Ashurst in subsequent correspondence. It was tendered into evidence without objection. In the event, nothing turns on this issue.
In a letter dated 14 November 2016, Ashurst noted the underwriters’ position as to Defence Costs and stated that UDP was suffering real prejudice due to the stay granted in the proceeding, and confirmed that UDP’s loss exceeded $46 million in total.
In an email dated 30 August 2017, Ashurst advised that Mr Esposito’s financial position had become clearer. His asset position was weak with significant liabilities, including to the ATO. UDP had determined that continuance of the arbitration was futile and settlement necessary.
In a letter dated 11 October 2018, Ashurst stated that a final arbitral award was made on 1 October 2018, and on that basis demanded payment of $33,475,959 inclusive of the policy limit, interest and costs of the arbitration.
In a letter dated 26 October 2018, NRF:
(a) rejected Ashurst’s demand for payment contending that the Loss claimed was not Loss to which the policy responded to;
(b) claimed that Loss must be calculated net of any Recovered Amounts before the underwriters were obliged to make any payment under the policy;
(c) noted that there had been no effort by UDP to make any recovery against Mr Esposito;
(d) claimed that in assessing the quantum of Loss, the arbitral awards did not differentiate between the Insured Warranties covered under the policy and other losses which were not covered;
(e) queried the evidence adduced in the arbitration which was accepted on an uncontested basis given Mr Esposito’s lack of representation;
(f) advised that the underwriters still lacked the requisite information to properly resolve UDP’s claim;
(g) noted that interest for insurance claims was governed by s 57 of the IC Act; and
(h) asserted that the underwriters were not responsible for any delay.
In a letter dated 30 October 2018, Ashurst:
(a) rejected the underwriters’ position on Loss, quantum and interest;
(b) pointed out that the issue of Recovered Amounts makes no difference to the amount payable by the underwriters, as UDP’s total loss was more than $40 million;
(c) in relation to Mr Esposito and any recovery from a third party:
(i) Esposito Holdings Pty Ltd was facing a winding up application and did not have any assets;
(ii) Mr Esposito had been served with a bankruptcy notice;
(iii) A. E. Brighton owned three properties, each subject to first and second mortgages and caveats lodged by Mr Esposito’s ex-partner, UDP and Mr Esposito’s current solicitors; and
(iv) tracing orders would be required to be made;
(d) stated that the contractual entitlement to recover against the Seller under the sale agreement was determined in the arbitration; and
(e) the underwriters were obliged to indemnify UDP for Loss and pay UDP the limit of liability, interest and costs of the arbitration in amounts totalling over $33 million.
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