QBE Insurance (Australia) Limited v Tropical Reef Shipyard Pty Limited [2009] FCAFC 161 (12 November 2009)

QBE Insurance (Australia) Limited v Tropical Reef Shipyard Pty Limited [2009] FCAFC 161

PRACTICE AND PROCEDURE – Application for leave to appeal – No substantial injustice if leave not granted supposing the decision wrong – Determination of separate question before trial not appropriate – Mixed question of fact and law not capable of resolution without all relevant facts found or admitted – Resolution of separate question would not lead to judgment in favour of insurer as insurer claimed – Answer to question would not affect evidence to be led at trial and might be reconsidered by the trial judge in light of evidence and other matters – Leave to appeal denied

Décor Corporation Pty Ltd v Dart Industries Inc [1991] FCA 655; (1991) 33 FCR 397
Jacobson v Ross [1995] 1 VR 337
Bass v Permanent Trustee Company Limited (1999) 198 CLR 334; [1999] HCA 9
Tropical Reef Shipyard Pty Ltd v QBE Insurance (Australia) Limited [2009] FCA 1088
Bofinger v Kingsway Group Ltd [2009] HCA 44; (2009) 260 ALR 71

QBE INSURANCE (AUSTRALIA) LIMITED (ACN 003 191 035) v TROPICAL REEF SHIPYARD PTY LIMITED (ACN 098 851 775)
VID 779 of 2009

KENNY, GORDON AND JAGOT JJ
12 NOVEMBER 2009
MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY GENERAL DIVISION	VID 779 of 2009

BETWEEN:	QBE INSURANCE (AUSTRALIA) LIMITED (ACN 003 191 035)
AND:	TROPICAL REEF SHIPYARD PTY LIMITED (ACN 098 851 775)

JUDGES:	KENNY, GORDON AND JAGOT JJ
DATE OF ORDER:	12 NOVEMBER 2009
WHERE MADE:	MELBOURNE

1. The motion for leave to appeal, notice of which is dated 26 October 2009, be dismissed.

2. The parties file and serve any written submission in respect of costs within seven (7) days, failing which each party pay its own costs of and in connection with the motion referred to in paragraph [1] above.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using eSearch on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY GENERAL DIVISION	VID 779 of 2009
ON APPEAL FROM THE FEDERAL COURT

BETWEEN:	QBE INSURANCE (AUSTRALIA) LIMITED (ACN 003 191 035)
AND:	TROPICAL REEF SHIPYARD PTY LIMITED (ACN 098 851 775)

JUDGES:	KENNY, GORDON AND JAGOT JJ
DATE:	12 NOVEMBER 2009
PLACE:	MELBOURNE

1 By a notice of motion dated 26 October 2009, QBE Insurance (Australia) Limited (QBE) sought leave to appeal against part of a judgment of the primary judge, being one of the answers to four questions that his Honour ordered to be determined before the trial in the proceeding. On 9 November 2009 we refused the application for leave. These are our reasons for so doing.

2 The principles to be applied to an application for leave to appeal were not in dispute. QBE accepted that the relevant test is whether: (i) the decision is attended by sufficient doubt to warrant its reconsideration, and (ii) substantial injustice would result if leave were refused assuming the decision to be wrong (Décor Corporation Pty Ltd v Dart Industries Inc [1991] FCA 655; (1991) 33 FCR 397 at 399).

3 We refused leave because we were not satisfied that substantial injustice would result if leave were refused assuming the decision to be wrong. To understand the reasons leading to this conclusion we need to say more about that part of the judgment which was the subject of the application for leave.

4 Tropical Reef Shipyard Pty Ltd (TRS) claims an indemnity from QBE under two insurance policies QBE issued styled "Instant Profits Insurance - Cash Flow Insurance – Simplified Business Interruption Insurance". By its claim dated 10 March 2009, TRS alleged that three separate incidents caused damage to the slipway and associated structures which it uses to carry out its business of repairing ships. TRS claimed that its business was interrupted and interfered with by reason of the damage that occurred during each of the three incidents. TRS claimed that QBE was liable to indemnify TRS in certain specified amounts pursuant to a contract of insurance renewed for each of the periods 31 October 2005 to 31 October 2006 (known as the 2005 renewal) and 31 October 2006 to 31 October 2007 (known as the 2006 renewal).

5 The contract of insurance (for both the 2005 and 2006 renewals) defines the cover provided as follows (the policy):

6 Item 1 of the Schedule specifies a weekly sum insured ($201,000 in the 2005 renewal and $183,900 in the 2006 renewal). The policy also specifies a rating classification percentage (72% in the 2005 renewal and 62% in the 2006 renewal). It defines the terms "Business", "Actual Average Weekly Turnover", "Weekly Sum Insured" and "Indemnity Period", amongst others.

7 TRS annexed to its claim various schedules of loss said to have been suffered by reason of interruption to and interference with its business caused by the material damage in each of the three incidents. These annexures were in the same form. Each identified weekly sales for a period before the alleged incident. These sales were averaged on an annual basis to provide an average weekly turnover unaffected by the incident. For the period after the alleged incident TRS identified the actual weekly turnover. If the actual weekly turnover exceeded the average then the amount claimed was zero. If the actual weekly turnover was less than the average then TRS claimed the rating classification percentage (72% or 62%) of the difference up to the maximum weekly sum insured. In other words, TRS’s calculations made no allowance (or gave no credit) for the weeks in which its sales exceeded its average sales unaffected by the alleged incident.

8 In circumstances where before any alleged incident TRS’s actual weekly sales ranged from as low as $208 to as high as $2,485,571, QBE disputed TRS’s method of calculation. Amongst other things, QBE contended that weeks in which TRS’s sales exceeded the actual average of weekly sales had to be taken into account in determining the loss during the indemnity period. QBE contended that, on its approach to the operation of the policy, TRS’s actual loss of turnover was less than $2,000,000. QBE had already paid TRS more than that amount. Hence, TRS’s claim could not be sustained.

9 Before the primary judge, the parties sought an order for the determination of certain questions relating to the construction of the policy before all other issues in the proceeding (a process contemplated by Order 29 r 2 of the Federal Court Rules). The transcript of a hearing before the primary judge on 16 June 2009 disclosed that, despite the primary judge’s misgivings about the questions possibly involving a hypothetical exercise (or, to use his Honour’s words, the giving of a "bit of free legal advice"), the parties both considered that the questions could be framed and answered on the basis that, for the purpose of the determination of the separate questions only, QBE would assume the truth of the facts asserted by TRS in its claim. QBE described this course as a type of demurrer permissible by reference to the reasoning in Jacobson v Ross [1995] 1 VR 337 and Bass v Permanent Trustee Company Limited (1999) 198 CLR 334; [1999] HCA 9. QBE considered that, if this course were to be adopted and the questions answered in its favour, it would be dispositive of TRS’s claim but for (possibly) what it described as "lumped extension". Before the primary judge, TRS did not dispute any of these propositions by QBE. To the contrary, TRS agreed that QBE’s proposal "could work".

10 Consistent with QBE’s proposal the primary judge dealt with the separate questions before any other issue in the proceeding. His Honour delivered reasons for judgment on 25 September 2009 (Tropical Reef Shipyard Pty Ltd v QBE Insurance (Australia) Limited [2009] FCA 1088). The primary judge rejected QBE’s submission that the policy required TRS to give credit for the weeks in which its actual sales after the alleged incidents exceeded its actual average weekly sales unaffected by the alleged incidents. At [14] of the reasons for judgment, his Honour said:

11 The primary judge directed the parties to submit short minutes of proposed orders to give effect to his reasons. The parties did so by reference to the separate questions. Question 4, to which [14] of the reasons relates, appears as follows in his Honour’s orders of 20 October 2009:

12 QBE submitted that if the resolution of the appeal cannot dispose of TRS’s claim (in effect, by judgment being entered for QBE), the parties will have to proceed to a hearing estimated to take between 4 to 6 weeks. QBE contended that this would work a substantial injustice against it if, as it submitted, on the proper construction of the policy, TRS’s claim as pleaded could not lead to judgment in TRS’s favour. QBE accepted, however, that the evidence it would lead at the hearing would not be affected by the answer to separate Question 4 in respect of which it sought leave to appeal. In answer to a question from the presiding Judge on the leave application, Kenny J, the following exchange took place with counsel for QBE:

13 The evidence would not be affected because, as QBE said from the outset, it was prepared to assume the correctness of the facts alleged by TRS only for the purpose of the determination of the separate questions. For the purpose of the hearing QBE reserved the right to put all facts in issue.

14 These submissions disclose the problem for QBE in establishing substantial injustice as required. If leave were granted to appeal, resolution of it could not lead to judgment in QBE’s favour. This is so for a number of reasons.

15 First, TRS has not accepted the calculations underpinning QBE’s contention that it has already paid more than TRS could possibly recover if QBE’s construction of the policy is correct. QBE attempted to answer this proposition by observing that the calculations are based on TRS’s own figures and no error had been identified in the calculations. But that is not the point. Unless QBE’s calculations are admitted or proved to be correct they cannot found judgment in QBE’s favour. TRS has not admitted and QBE has not proved its calculations.

16 Second, QBE’s table disregards an alternative basis by which TRS supported its claim. This alternative basis, while not pleaded, was in issue before the primary judge as the reference in [10] of his Honour’s reasons makes clear (that is, the statement that "(t)here is an alternative for the second step which is to calculate actual weekly Turnover as the sum of sales invoiced in each week and any movement of work-in-progress"). Because no facts have been found, the potential effect of this alternative method of calculation on QBE’s approach is not apparent.

17 Third, despite accepting the utility of the separate question process before the primary judge on the basis that TRS’s "pleading is its pleading" thus creating a "plainly stated assumption which is identifiable ... [and] not dependent on any other facts", TRS’s solicitor, by an affidavit sworn on 4 November 2009, has foreshadowed an application to seek leave to amend its claim. QBE, for its part, foreshadowed a possible objection to TRS changing course in this way. But the issue of amendment is a matter for the primary judge. We cannot second-guess his Honour’s ruling on an application for leave to amend.

18 These three factors mean that resolution of the appeal, if leave were granted, cannot be dispositive of the issues between the parties. It follows that, irrespective of the issues on appeal, the matter would have to proceed to hearing. On the hearing, as QBE acknowledged, the evidence it calls will not be affected by the primary judge’s answer to separate Question 4.

19 Accordingly, from QBE’s perspective, its position with respect to the 4 to 6 week hearing will be the same whether the issue of construction involved in Question 4 is answered pursuant to leave being granted in this interlocutory application, or on an appeal as of right once all of the facts have been found.

20 From our perspective, the quandary in which QBE finds itself on this leave application is a consequence of the fact that, despite the apparently common assumption of the parties and the acquiescence of the primary judge, Question 4 cannot be answered on the basis of QBE assuming TRS’s allegations of facts to be true for the purpose only of the determination of the separate question. QBE submitted that the process was a type of demurrer in which it contended that TRS’s claim, taken at its highest, could not in law result in a judgment in TRS’s favour. The problem with this approach should be apparent from the fact that one fundamental premise on which it is based (QBE’s calculations based on TRS’s claim) was not admitted, proved or able to be assumed for the purpose of the determination.

21 The course the parties adopted in relation to Question 4 is inconsistent with the authorities on which they relied before the primary judge (Jacobson v Ross and Bass) and with the most recent statement of principle by the High Court in Bofinger v Kingsway Group Ltd (2009) 260 ALR 71; [2009] HCA 44).

22 In Jacobson v Ross Brooking J emphasised the need to distinguish between cases in which the relevant facts are proved or admitted (on the one hand) and assumed only for the purposes of the preliminary determination (on the other hand). Brooking J said (at 342):

23 Despite QBE’s submissions to the contrary, separate Question 4 in the present case was not a question of law. As the primary judge’s answer discloses, the question involved mixed issues of fact and law. Hence, on the authority of Jacobson v Ross it was not able to be resolved on the basis of assumed facts. QBE had either to be bound by the facts for all purposes or not. If not, it could not seek a separate (and preliminary) determination of Question 4 as it did.

24 At [50] in Bass the High Court recognised the utility of demurrers to answer "legal questions" provided the "pleadings exhaust the universe of relevant factual material". They expanded on this caveat in the same paragraph as follows:

25 In Bofinger the issue involved agreed facts. But the High Court reiterated the same underlying principle at [17]. The High Court said that facts underlying any preliminary determination must be stated with precision because the parties are bound by the answer and cannot subsequently adduce evidence or make submissions tending to show that the answer was wrong.

26 The principles underlying these statements are all derived from the need to ensure that judicial decisions conform to the requirements of judicial process. Judicial decisions must resolve an issue in dispute. They must not be hypothetical. In order to ensure conformity with the requirements of judicial process, judicial decisions must be based on facts proved or admitted. Judicial decisions based on assumed facts are suitable only for questions of law and then only if the facts as pleaded "exhaust the universe of relevant factual material" (Bass at [50]). Judicial decisions based on assumed facts are not suitable for mixed questions of fact and law because the risk of unwitting involvement in a hypothetical exercise is too great. In the present case the question giving rise to the application for leave to appeal, Question 4, involved mixed issues of fact and law. Moreover, it involved an assumed factual substratum which was both incomplete and impermanent.

27 The only certainty in the present case is that, so far as Question 4 is concerned, the pleadings do not reveal the "universe of relevant factual material" (Bass at [50]). They do not do so because QBE reserved the right to challenge the assumed facts on the final hearing; and TRS did not admit the correctness of QBE’s calculations founding QBE’s proposition that its construction, if adopted, would lead to judgment in its favour. Further, the primary judge expressly excluded from his answer all issues relating to "proof of the loss of Turnover and the causal connection required by the terms of each of the policies".

28 Proof of the loss of the turnover and of the required causal connection is central to the ultimate resolution of TRS’s claim and, indeed, central to QBE’s argument on the leave application that the primary judge’s approach would give TRS an unintended "windfall". The primary judge (unlike the parties) is not bound by his answers to the separate questions. His Honour can again consider the questions of construction at the final hearing cognisant of all of the facts as found or admitted. In so doing, his Honour can determine the significance or otherwise of numerous factors which may impinge upon the construction issues and point to another construction being correct or preferable. Those factors include:

(2) the requirement in Special Provision 2 that the interruption or interference be caused by the "material damage";

(3) the requirement in Special Provision 2 that the payment be based upon the loss as described "adjusted and agreed";

(4) the terms of the policy as a whole including the references therein to the loss being the loss sustained during the period of the indemnity (for example, the introduction, the definition of Indemnity Period and the second paragraph of the description of the cover provided);

(6) the texts relied on by QBE in the leave application referring to the need to offset any increase in turnover in accordance with the indemnity principle (David Cloughton, Riley on Business Interruption Insurance, 8^th ed., 1999, at [247], Robert Merkin, Colinvaux’s Law of Insurance, 8^th ed., 2006, at [22-39] and Nicholas Legh-Jones, (general editor), John Birds and David Owen (editors), MacGillivray on Insurance Law, 11^th ed., at [31-013]).

29 These conclusions do not indicate that leave should be granted. As to the past, both parties agreed to the course taken by the primary judge. Neither party sought leave to appeal for that purpose. As to the future, both parties are free to adduce all evidence they consider relevant to the final hearing before the primary judge. QBE, as noted, accepts that the answer to separate Question 4 will not affect the evidence it will call. Both parties will have a capacity to appeal against any final decision. In any appeal both parties will be free to challenge any conclusion about construction including the construction matters underlying the primary judge’s answer to Question 4. The primary judge has not entered upon the consideration of the fundamental issues of proof of loss and causation, which may impinge on final resolution of this construction question. If they do impinge, the primary judge is not bound by his answer to Question 4.

(1) we are not satisfied separate Question 4 could be answered without all relevant facts having been found or admitted;

(2) any doubt we may have about the primary judge’s answer to Question 4 is incapable of being resolved without all relevant facts having been found or admitted;

(3) even if Question 4 could be answered in QBE’s favour, no order could be made giving judgment in favour of QBE;

(4) the parties will thus have the hearing of 4 to 6 weeks which QBE hoped to avoid by the separate question process; and

(5) the evidence the parties will call at the hearing will not be affected by the answer to Question 4,

we are not persuaded that QBE will suffer any injustice (let alone, substantial injustice) if leave is not granted assuming the primary judge’s answer to Question 4 to be incorrect.

31 These are the reasons we refused to grant leave to appeal. We reserved the question of costs. Given the common position of the parties before the primary judge that the separate question procedure was appropriate, our preliminary view is that each party should pay its own costs of the appeal. If either party disputes this proposal, it has seven days in which to file a written submission supporting a different order as to costs.

I certify that the preceding thirty one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Kenny, Gordon and Jagot.

Counsel for the Applicant:	Mr D L Williams SC with Mr H N G Austin

Solicitor for the Applicant:	HWL Ebsworth

Counsel for the Respondent:	Mr P Murdoch with Mr P H Solomon

Solicitor for the Respondent:	Turks Legal

Date of Hearing:	9 November 2009

Date of Judgment:	12 November 2009

Federal Court of Australia - Full Court

QBE Insurance (Australia) Limited v Tropical Reef Shipyard Pty Limited [2009] FCAFC 161 (12 November 2009)