Garage Fashions Pty Ltd v Insurance Australia Ltd trading as NRMA Insurance [2011] NSWSC 968 (26 August 2011)

Last Updated: 1 September 2011

Supreme Court New South Wales

Case Title:	Garage Fashions Pty Ltd v Insurance Australia Ltd trading as NRMA Insurance
Medium Neutral Citation:	[2011] NSWSC 968
Hearing Date(s):	9 August 2011, 10 August 2011, 11 August 2011, 12 August 2011
Decision Date:	26 August 2011
Jurisdiction:	Common Law
Before:	Schmidt J
Decision:	The usual order as to costs is that they follow the event. If the parties wish to be heard on the question of costs, they should approach. Otherwise, for the reasons given the orders should reflect that: 1. The defendant is to pay the plaintiff the sum of $192,498, which comprises: (a) Stock - $121,148 (b) Contents - $60,000 (c) Cleaning costs - $5,850 (d) Accounting fees - $5,500 2. The defendant is to pay the plaintiff interest in respect of stock, from 8 June 2011, and otherwise, from 3 November 2009. The parties should bring in short minutes of the final order.
Catchwords:	INSURANCE - Fire insurance - losses and claims - damages - retail fashion shop - whether replacement cost should include mark-ups, expenses and profits - stock purchased through wholesale company - retail and wholesale companies no longer trading - mark-ups - expert evidence - experts' view of value of stock - replacement value of stock - fixtures and fittings - business interruption - interest - section 57 of the Insurance Contracts Act 1984 (Cth) - orders
Legislation Cited:	Evidence Act 1995 Insurance Contracts Act 1984 (Cth) Uniform Civil Procedure Rules 2005
Cases Cited:	Bankstown Football Club v CIC Insurance Ltd (Supreme Court of New South Wales, Cole J, 17 December 1993, unreported) British Traders' Insurance Co Ltd v Monson [1964] HCA 24; (1964) 111 CLR 86 Castellain v Preston (1883) 11 QBD 380 Dasreef Pty Ltd v Hawchar [2011] HCA 21; (2011) 277 ALR 611 Fire & All Risks Insurance Co Ltd v Rousianos (1989) 19 NSWLR 57 Leppard v Excess Insurance Co Ltd [1979] 1 WLR 512; [1979] 2 All ER 668 Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; [2001] NSWCA 305; (2001) 52 NSWLR 705 Roumeli Food Stores (NSW) Pty Ltd v The New India Assurance Co Ltd [1972] 1 NSWLR 227
Texts Cited:
Category:	Principal judgment
Parties:	Garage Fashions Pty Limited (Plaintiff) Insurance Australia Limited t/as NRMA Insurance (Defendant)
Representation
- Counsel:	Counsel: Mr PB Dooley SC with Mr J Jobson, counsel (Plaintiff) Mr P Braham SC with Mr J Hynes, counsel (Defendant)
- Solicitors:	Solicitors: Gerard Malouf and Partners (Plaintiff) Williams Roberts Lawyers (Defendant)
File number(s):	2010/90555
Publication Restriction:

Judgment

1. By statement of claim filed in April 2010, the plaintiff, Garage Fashions Pty Ltd ('Garage'), claims damages under its insurance policy with the defendant, Insurance Australia Ltd trading as NRMA Insurance ('NRMA'), in relation to premises where it was carrying on a retail fashion business under the name 'Trade Stone'. In May 2009, the premises and its contents were damaged by fire, with the result that Garage ceased to trade. At the time, the working director and only shareholder of Garage was Mr Tony Hozeph. The claim was defended by an amended defence, filed in April 2011.

2. The matter was dealt with in a judgment given by McCallum J in March 2011. Her Honour vacated the hearing then fixed to commence, but refused an application to have the matter permanently stayed, in circumstances where documents which NRMA had been pursuing for some time, were produced.

3. While some agreements were later reached between the parties as to what Garage claimed under the policy, including in relation to accountant's fees, they were unable to agree on what NRMA was obliged to pay in relation to the stock and contents destroyed and damaged in the fire, business interruption and interest.

4. At the hearing Mr Hozeph gave evidence and a large number of documents were tendered. Expert accounting evidence was also called. The experts, Mr Paul Russell and Mr Ian Paul, produced a joint report in which a large measure of agreement was reached between them, including in relation to the claims Garage pressed regarding the stock and the business interruption claim. They gave their oral evidence concurrently. The result was that in submissions NRMA relied on that evidence, but Garage urged that their views not be accepted.

5. Before turning to deal with what was in issue, it is important to say something about an unusual feature of this case.

6. There was evidence of the price that Garage had paid for its stock. The stock had almost entirely been purchased from another company, Trade Stone Pty Ltd ('Trade'), of which Mr Hozeph was also the only director and shareholder. Trade was an importer and wholesaler. Mr Hozeph also worked in its business. There was evidence of the price for which Trade had purchased the stock, in the main from Turkish manufacturers, and of the basis upon which Mr Hozeph determined that Trade and Garage would do business with each other. Trade also ceased to trade after the fire. At the time it had no stock. All of its stock had been sold to Garage and it was all destroyed in the fire.

7. Neither party led any evidence as to the price at which Garage could have acquired replacement stock in the market place after the fire. Such evidence could have been led, for example from a valuer, manufacturers, another wholesale supplier, or even from another retailer, as to the price at which it was able to purchase comparable stock.

8. The difficulty with the approach adopted to meeting the onus which fell upon Garage to make out its case, is obvious. Nevertheless, NRMA conceded that in the particular circumstances which arose for consideration, given the way in which Mr Hozeph conducted both of his companies' businesses, that the evidence permitted the replacement cost of the stock to be assessed by reference to the price that Trade had earlier acquired the stock at, together with the costs involved in bringing the stock to Australia.

9. What was in issue between the parties in relation to the stock, finally, was whether its replacement cost, so assessed, should include any amount for mark-up, or any other amounts reflecting Trade's other business expenses, or its profits.

10. On Mr Hozeph's evidence, after the fire, despite his repeated approaches, NRMA did not attend the premises or interview him in relation to the claim until July 2009. In fact, he was interviewed in May. On his evidence, he was then not in a position to recommence operating either Trade, or Garage's business.

11. Mr Hozeph was informed by an NRMA claim adjuster in June 2009 that it was awaiting a police and other reports. After the cause of the fire was established, Garage's claim under the policy was not refused. What was in contention was the payment which was due. NRMA sought Trade's records, understandably it would seem in the circumstances. What stock had been destroyed and damaged, who owned it and what its replacement cost was, had to be established.

12. In June and July 2009, Mr Hozeph provided investigators with tax invoices for all purchases made by Garage, but its claim under the policy was not paid. His evidence was that the landlord was then anxious to renovate the building and in July, he sought legal advice.

13. Mr Hozeph later assisted Abacus Stocktaking Services Pty Ltd ('Abacas') with a stock take undertaken for NRMA. Garage had never itself undertaken any stock take. Mr Hozeph was critical of that stock take, in respects which it is unnecessary to canvass. The figures produced were cross checked by Mr Hozeph, with the result that the stock take was not challenged in these proceedings.

14. There was later a disagreement over removal of the damaged stock from the premises. On 18 August, it was agreed that the stock would be removed to an NRMA storage facility. NRMA refused to bear cleaning costs of the premises, which were paid by Mr Hozeph.

15. In October 2009, Mr Hozeph was informed by his lawyers that a decision about the claim was to be made by 30 October. That did not occur. In further discussions, NRMA pressed for information about Trade. At a meeting in November Mr Hozeph had its records with him, but did not provide them to NRMA. There was still a disagreement about the basis of the assessment of loss and in April 2010 these proceedings were commenced. The matter was listed for hearing in March 2011.

16. In October 2010, Mr Hozeph sold Trade, but NRMA continued to press for the provision of its records. In March 2011, NRMA brought a motion seeking to have these proceedings dismissed. The motion was resolved when Trade's documents were produced, but the hearing was adjourned.

17. In April 2011, the Registrar gave further directions, including in relation to provision of Garage's expert's report. The matter was listed for hearing in August. In June, when NRMA had not complied with certain directions, the matter was referred to Hoeben J, who revisited the Registrar's directions. NRMA then served its foreshadowed expert's report. Garage was due to serve its evidence in reply by 22 June.

18. The directions were not complied with by Garage, but it did not exercise the leave that Hoeben J had given to revisit the directions, on approach to him, if further difficulties were encountered. Instead, without explanation, on 3 August it served an affidavit sworn by Mr Hozeph and in the week before the hearing, it served its accounting report and another expert's report.

The agreed facts

19. The facts agreed were:

"1. The plaintiff is a company that at all material times carried on business as a men's and women's fashion retail shop (the Business) at 153 Oxford Street, Darlinghurst NSW 2010 (the Property).

2. The defendant is a company that carries on the business of an insurer

3. On 31 January 2009, the plaintiff and the defendant entered into a contract of business insurance that was valid until 31 January 2010 (the Policy).

4. The Policy is in writing and is constituted by a Business lnsurance Policy Certificate of lnsurance and a Business lnsurance Product Disclosure Statement and Policy Booklet.

5. The terms of the Policy included: a, the Policy covered, inter alia, the following risks:

i. the risk of loss or damage to the plaintiff's contents and stock in trade at the Property caused by fire; and ii, the risk of loss resulting from interruption to or interference with the Business due to loss or damage caused by fire at the Property;

b. in respect of the risk of loss or damage to the plaintiff's contents and stock in trade at the Property caused by fire:

i. the sum insured for the plaintiff's contents was $100,000;

ii. the sum insured for the plaintiff's stock in trade was $700,000;

iii. if the plaintiff's contents and/or stock in trade at the Property suffered loss or damage caused by fire, the defendant would, at its option, pay for, reinstate, or repair the lost or damaged contents and/or stock in trade on the basis set out below:

1 where the contents and/or stock in trade was lost or destroyed, by its replacement by similar property to a condition equal to but not better or more extensive than its condition at the time of loss or destruction; and

2 where the contents and/or stock in trade was damaged, by repairing and/or restoring it to a condition substantially the same as, but not better or more extensive than, its condition at the time of the damage;

iv. if the Plaintiff's contents and/or stock in trade at the Property was lost or damaged by fire, the defendant would also pay the following costs that were necessarily and reasonably incurred, but only if the plaintiff obtained the defendant's consent prior to such costs being incurred:

1 up to $25,000 for the cost of removing, storing, disposing, demolishing or dismantling debris; and

c. in respect of the risk of loss resulting from interruption to or interference with the Business due to loss or damage caused by fire at the Property:

i. the sum insured for the Business' gross profit for 12 months was $500,000; and

ii. if the Plaintiff suffered loss resulting from interruption to or interference with the Business due to loss or damage caused by fire at the Property, the defendant would also pay the following costs that were necessarily and reasonably incurred, but only if the plaintiff obtained the defendant's consent prior to such costs being incurred:

1. up to $5,000 for the reasonable costs of the plaintiff's auditors or accountants producing and certifying any particular, detail, information, proof or evidence required for the preparation of a:

a, claim for business interruption; or

b. combined claim for fire and business interruption

6. On 11 May 2009, there was a fire at the Property (the Fire).

7. The Fire caused:

a. loss or damage to the plaintiff's contents and stock in trade at the Property; and

b. loss to the plaintiff resulting from interruption to or interference with the Business.

8. On 12 May 2009, the plaintiff lodged a claim upon the Policy. The plaintiff seeks payment of the following:

a. $100.000 in respect of lost or damaged contents

b. $600,000 in respect of lost or damaged stock in trade

c. $5.850 for removing, storing, disposing. demolishing or dismantling debris

d. $196,550 for business interruption; and

e. $5.000 for accountant's fees.

9 The quantum of the plaintiff's loss for removing, storing, disposing, demolishing or dismantling debris is $5,850.

10 Police investigated whether the Fire was caused by an act of arson and accordingly the defendant undertook an investigation into the circumstances of the Fire."

The expert evidence

20. Garage sought to lead evidence from two experts, Mr Robin Cohen and Mr Paul. The plaintiff objected, the reports having been served only in the week prior to the hearing without explanation and beyond the time required in the orders made by Hoeben J. The issue between the parties required consideration of Rule 31.28 of the Uniform Civil Procedure Rules 2005, which required the plaintiff to obtain leave to rely on these reports. Rule 31.28(4) provides:

"(4) Leave is not to be given as referred to in subrule (3) unless the court is satisfied:

(a) that there are exceptional circumstances that warrant the granting of leave, or

(b) that the report concerned merely updates an earlier version of a report that has been served in accordance with subrule (1)."

21. The parties were at issue over what had transpired. Evidence was called from Garage's solicitor, Mr Zubin Hiramanek. That evidence showed that another accounting expert had been instructed for Garage in March 2011 and when difficulties developed, which resulted in him refusing to provide a report, prompt steps were taken to instruct another expert. There was, however, no advice given to the defendant of the difficulty which had developed and no approach, as there ought to have been in the circumstances, to Hoeben J.

22. Having heard the parties, I came to the view that the plaintiff had established a proper basis for the leave sought in relation to Mr Paul's report, which responded to the report prepared by the defendant's expert, Mr Russell. The failure to comply with the Court's orders and to take timely and necessary steps to have the time for filing this report extended, was a combination of unanticipated difficulties with the first expert, which in my assessment could not all fairly be laid at Garage's feet, as well as representative error.

23. That situation, when considered with the concession made for NRMA that there would be no significant prejudice caused to it by the late service of Mr Paul's report and that the experts were still able to meet and prepare a joint report, as had also been ordered, led me to the conclusion that the leave sought should be granted. The result proved to be that the experts came largely to agree with each other, for reasons which appeared in their joint report and were further explained when they gave concurrent evidence.

24. I could not come to the same conclusion in relation to the late service of Mr Cohen's report. Its receipt in evidence would clearly have prejudiced NRMA, in circumstances where further directions could not alleviate the difficulty which had arisen. It could not have responded to the report within the time available. The explanation given for the late production of this report was a late forensic decision, even though in evidence was written advice earlier given to Garage by the first accounting expert it had engaged, of the need to call such evidence. I took the view that could not establish the 'extraordinary circumstances' required to be established under the Rule, before the leave sought could be granted. Nor could leave be justly given, to extend the time for service of the report.

25. There were two further difficulties. The first, that as discussed by French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ in Dasreef Pty Ltd v Hawchar [2011] HCA 21; (2011) 277 ALR 611, to be admissible under s 79(1) of the Evidence Act 1995, the evidence had to satisfy two criteria. They were that Mr Cohen had relevant specialised knowledge based on his training, study or experience and that the opinions which he expressed were wholly or substantially based on that knowledge.

26. Mr Cohen, a director and major shareholder of two Australian and two Hong Kong exporting and wholesaling companies, gave an account of having had many years experience in importing goods into Australia, the Middle East, East Europe, Africa and China. He gave no evidence of having had any expertise in importing goods from Turkey to Australia, or of any experience in the import of high fashion goods of the kind here in question, into Australia. The closest his relevant experience appeared to come was importing clothes for sale to Big W and school uniforms. He also imports electronic goods, stationary and furniture into Australia. There was no evidence of any experience in retail. In those circumstances, it was difficult to see that he had relevant expertise.

27. On the basis of this experience, amongst other things, Mr Cohen purported to give an opinion as to the quality of the goods which Garage had imported, which he had assessed by reference to photographs he had been shown and of the replacement value of those goods. That was determined by way of a calculation undertaken from the retail prices Garage charged for the goods, discounted by retail mark-ups. There was no explanation given as to the basis for the retail mark-ups Mr Cohen had selected, nor the basis upon which the retail prices Garage charged for the goods was considered to be the relevant starting point for a determination of their replacement cost.

28. It was apparent from the report that the opinions expressed did not rest on relevant specialised knowledge and that they were not wholly or substantially based on that knowledge. There were other difficulties with the form of the report, which it is unnecessary to explain in any detail. As the defendant argued, it was certainly not prepared in accordance with the approach discussed by Heydon J in Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; (2001) 52 NSWLR 705, or more recently by the High Court in Dasreef Pty Ltd .

The principles

29. There was common ground as to the approach to be adopted to the resolution of what remained in issue between the parties. The starting point is their contract. Garage is not entitled to make a profit at NRMA's expense. It must recover its actual loss, but may not recover more. (See British Traders' Insurance Company Ltd v Monson [1964] HCA 24; (1964) 111 CLR 86 at 94; Roumeli Food Stores (NSW) Pty Ltd v The New India Assurance Co Ltd [1972] 1 NSWLR 227 at 236 - 238.) As discussed long ago in Castellain v Preston (1883) 11 QBD 380 at 386:

"The very foundation, in my opinion, of every rule which

has been applied to insurance law is this, namely, that the contract

of insurance contained in a marine or fire policy is a contract

of indemnity, and of indemnity only, and that this contract means

that the assured, in case of a loss against which the policy has

been made, shall be fully indemnified, but shall never be more

than fully indemnified. That is the fundamental principle of

insurance, and if ever a proposition is brought forward which is

at variance with it, that is to say, which either will prevent the

assured from obtaining a full indemnity, or which will give to

the assured more than a full indemnity, that proposition must

certainly be wrong."

30. As Gleeson CJ said in Fire & All Risks Insurance Co Ltd v Rousianos (1989) 19 NSWLR 57, adopting a technique of valuation for the stock in question which results in Garage being better off after the fire, may not be employed (at 63). The questions of fact arising here to be determined must have regard to the particular circumstances of Garage, its capacity and intentions, at the time of the fire (see Leppard v Excess Insurance Co Ltd [1979] 1 WLR 512; [1979] 2 All ER 668 at 673-4).

What was Trade's business?

31. In order to come to conclusions about the matters over which the parties joined issue, it is necessary to consider the evidence of what Trade's business was at the time of the fire; what it was then selling to Garage, what the financial records of the two companies reveal and what happened to Trade after the fire.

32. Mr Hozeph's evidence was that he started Trade's design/manufacturing/wholesaling business in 2006, after he moved to Australia from Canada in 2005 with his Australian wife. This business involved him designing goods which were manufactured in Turkey on the basis that he would sell those designs in Australia and the Turkish manufacturers would sell them elsewhere in the world. Thereby Trade was able to import its stock into Australia, very cheaply.

33. Mr Hozeph was born in Iraq and had gone to live with his family in Canada in 1993, after having moved to Turkey in 1990, to escape the Gulf War. Beforehand he had operated two retail stores in Baghdad and Kirkuk. He had started his working life in Iraq as a 12 year old, working in a shoe factory. In the 2006/07 financial year, Trade supplied some 60 Australian retail customers with high end fashion items. At that time, Garage did not exist.

34. In 2008, it was Garage which took insurance cover with NRMA for some $350,000. Trade was not insured. There was some evidence of attempts to have the amount of the insurance cover increased by Garage, without success. The premises were inspected by an NRMA representative in December 2008. It then had a security alarm monitored by a security company, Nycom Security, on a back to base basis. Garage was then able to increase its insurance cover to $700,000. Mr Hozeph claimed that this was initiated by NRMA, which it disputed. It is unnecessary to resolve this controversy, the amount was agreed.

35. There was a fire at Garage's premises on 11 May 2009, which destroyed or damaged all of the fixtures, fittings and the stock. Mr Hozeph was in Bangkok at the time. He returned to Australia and shortly afterwards made a claim under Garage's policy. There was a police investigation into the fire, which finally concluded that there had been arson, but did not implicate Mr Hozeph. It was common ground that processing Garage's insurance claim was delayed by this investigation.

36. One of the things which came to be in issue in these proceedings, was the nature of the business in which Trade was involved at the time of the fire. Mr Hozeph has given different accounts of Trade's business at that time. In his affidavit, sworn in August 2011, his evidence was that he 'purchased only A+ grade quality goods from Turkey and had them manufactured'. He did not sell 'bulk products or designs' and had decided to 'focus on unique and limited number products'. His evidence was further that:

"12. Using my expertise and knowledge in October 2006 I started the Wholesale business known as Trade Stone Pty Ltd. To obtain stock I was required to travel overseas to produce products. As I had significant experience in sourcing materials from Turkey and decided to continue to obtain garments from Turkey.

13. I have been involved in every aspect of the Design/Manufacturing/Wholesaling business and know how to design, develop, source and manufacture products. I have a large amount of knowledge in the retail and manufacturing and wholesale industries and have been successful in running multiple businesses.

14. I was involved in developing the brand, and designing the product that I would manufacture. The cost involved in the design would be quite high and would take considerable time. I would be travelling all around the world to understand the market and latest trends and learn about the new methods of manufacturing. I would obtain ideas and develop new designs. I would be away from my family for months at a time.

...

16. I intended to make a profit from Trade Stone Pty Ltd and as the brand was still developing I hoped to make a higher profit in the long term.

...

18. To develop and manufacture the product I used my connections with Factories and expertise and knowledge of the trade. An agreement was made directly with each factory which would mean that I would provide my original design on the condition that they would produce my designs in volume and use them and would sell it back to me at cost price. I would retain the sole rights to sell my product in Australia.

19. I then arranged for a shipping company known as Faysal Tekstil Dis Tic Ltd Sti to send the products to Australia. They would for an additional charge package and Quality Assurance for my product prior to transport via Air Freight.

20. I believed that by having unique and high quality clothing my product would hold the value for longer. I had researched the Australian Market and had decided to sell in the high end area.

...

22. I was selling up to 60 other retailers and had plans to increase my importing through Trade Stone Pty Ltd. From 2007 my profits were steadily increasing as it was a new product with limited branding. I had to develop the branding prior to being able to sell to larger retailers."

37. In his oral evidence, Mr Hozeph explained:

"A. I was devoting at least three month each time I was travelling to do a new style, a new stock.

Q. And how often would you do that?

A. I used to do 3, 4 times a year.

Q. That is almost the full year?

A. Correct.

Q. How much time was spent travelling and preparing your stock?

A. Most of the year I was travelling."

38. Clearly, this can only have been in the period before Garage was established, given Mr Hozeph's evidence of the amount of time he had to spend on its business, after it was established.

39. In cross-examination Mr Hozeph said:

"Q. In terms of acquiring stock before 2008 when you were Trade Stone only, you were the person who went to Turkey to acquire stock, correct?

A. Correct.

Q. As you had been doing for a very long time?

A. Yes.

Q. And you have given evidence of having been involved in acquiring designs for that stock, correct?

A. Correct.

Q. That was something which, as you have said, was time consuming, expensive and difficult, correct?

A. Correct.

Q. And ultimately is it the case, you found it more convenient and easier to simply buy products ready made in Turkey rather than involving yourself in design?

A. Ready made in Turkey is expensive, that's why I didn't do that.

Q. You started buying things off the rack, as it were, in Turkey, rather than involving yourself in design?

A. No, never buy off the rack in Turkey, very small percentage I would buy off the rack. Always design my own and manufacture in Turkey.

Q. What about ready made garments in Turkey?

A. In small percentage.

Q. That was your business model by mid 2008, to buy ready made garments rather than involve yourself in design?

A. Not from Turkey, from Bangkok.

Q. You sure about that, Mr Hozeph, that you didn't buy ready made garments from Turkey?

A. I said I did, very small percentage. I didn't say I didn't."

40. Mr Hozeph had, however, earlier given quite a different and inconsistent account of Trade's business to an investigator, during an interview after the fire, on 28 May 2009. Then he said:

"I did design some of them and manufacture some of them myself. Otherwise I just buy them ready made from Turkey. I find out manufacturing is not very profitable because you've got to do a lot of quantity of one item, so was not doing alright for me, so I didn't pursue it. So I just bought ready-made garment."

41. When cross-examined about this account, Mr Hozeph's evidence was both that what he told the investigator in 2009 was the truth, but also that his business model then was different. That is difficult to accept. His explanation was also difficult to follow. When pressed, he said, for example:

"Q. You told the investigator, didn't you, that you found the manufacturing wasn't very profitable because you had to do a lot of quantity of one item and it wasn't doing all right for you so you didn't pursue it?

A. I did not give them my secret of the business. It's the secret of the business, the nature of business that I spent 30 years of learning. I just can't go and give it to someone and let them go and copy the idea and try to do exactly what I do.

Q. So you lied to the investigator?

A. I did not lie.

Q. Was it the truth or was it false, what you said to the investigator?

A. Ask the question again.

Q. Did you say to the investigator, "I find out that manufacturing is not very profitable because you got to do a lot of quantity of one item so it was not doing all right for me, so I didn't pursue it"?

A. Yes.

Q. You did say that?

A. I did. The reason you have--

Q. Was it true or false. Was it the truth or a lie?

A. It is the truth but you are not letting me talk. You just want to hear what you want to hear.

Q. Did you say to the investigator "so I just bought ready made garment"?

A. No.

Q. You deny saying that?

A. I'm not denying it. I said I used to manufacture and I used to buy ready garments."

42. In a submission which Mr Hozeph was permitted to make himself, at the close of his counsel's submissions, with leave which was not opposed, he submitted:

"Now, first thing Trade Stone was involved in designing aspects and designing would take a lot of work and a lot of knowledge and a lot of travelling, a lot of time to go around the world and go to a lot of trade fairs and gather ideas and purchase samples from a lot of companies, a lot of wholesalers, and then find that product and sitting and creating your own concept from that idea, then you have the very first initial design.

Having the concept, that makes it a very unique item. Having unique item I used to go to the factories. First of all, before I go even to the factory I try to source the material and fabric that would suit that concept. After having that I used to approach the manufacturing with the idea of the concept and if we would have come to an agreement they would have buy that concept from me with the condition of they would get the right of selling that product to the entire world except Australia, to give me the exclusive right to sell it to Australia, with the condition of buying it at the bond price, which mean bill of material. So I was paying the lowest price every you can imagine to the product because of selling my idea to them. I was never at any time being able to purchase a product from no-one at that price.

So when calculating the cost of product, when you come to $70,000 that is a crime into my business because there is no way on earth anyone on this planet can pick up the phone, call that factory and get that price. It is just impossible. Takes four to five years of work and hard work and travelling and staying overseas away from your family to be able to create the first concept of having this style and fashions and is the most difficult business in the world today to have the new style come up to be able to sell that idea from you to be able to sell it to somebody.

So, for me to come up with the idea, that would take a lot of time for me and being away from my family, first of all, and not being able to just pick up the phone and reorder. Not worth to pick up the phone and reorder. The reason for that, when you produce a fabric you start with the thread and you choose the colouring on the thread and runs into the factory to produce one of a kind and has limited, minimum of 1,000 metres to produce it. When you produce that fabric and when you got the company, the factory, to buy that fabric, it's finished.

There is no way they would go back to that fabric again and repurchase it again to reproduce the same material. They will never do it, because the fashion finishes there.

So, for me to pick the phone and say I just want to reorder, there is no such thing as called reorder. Because when they were producing the 1,000 garments I was getting a very small percentage to bring to Australia to sell it because Australia is only a small country in the world that actually can handle fashion, and we are too far away, two seasons behind fashions.

When I have the stock in my possession and not revealing it to the customers altogether would have hold the value of it. I never lose it because of the uniqueness of the product and nobody has the right to sell it in Australia or to produce it in Australia."

43. These submissions were not supported by other evidence, which it is also necessary to consider in determining what Trade's business was, at the time of the fire.

44. It was in February 2008 that Garage commenced to trade in the retail store at Oxford St Darlinghurst under the name 'Trade Stone'. Mr Hozeph intended thereby to build up that brand. In March 2008, Trade ceased supplying its other customers. Thereafter it supplied only to Garage. Mr Hozeph initially owned 51% of the shares. It was his evidence that when he became the sole director and shareholder of Garage in 2008, he had to devote much more of his time to its business. That he would then not have had time to spend on Trade's original business model, which required him to be overseas for long periods, virtually over the entire time over the course of a year, researching trends, designing and manufacturing goods, must follow. His evidence that this was still Trade's business model at the time of the fire in 2009, given his evidence as to the work which he then had to undertake in relation to Garage's retail business, may not be accepted.

45. Trade's financial records also support the account of its activities which Mr Hozeph first gave the investigator in 2009, shortly after the fire. Accepting that the way in which Mr Hozeph initially conducted Trade's business, required him to live away from Australia and his family for most of the year, designing and manufacturing goods and that this is what Trade's financial records reflected, in the period before Garage was established, that is not what the records reflect after Garage began to trade. The financial records suggest that the goods which Trade sold to its other customers before March 2008, could have been goods which Mr Hozeph had been involved in designing and manufacturing. Trade paid more for them, than it later paid for the goods it sold Garage. That business model had relatively limited success, before Garage was established.

46. Garage was involved in high end fashion retail, which as Mr Hozeph described it, involved quickly changing trends and fashions. Trade's financial records show that the cost of the goods which Trade paid for the goods it sold Garage, when it was Trade's only customer, fell significantly by comparison to the cost of the goods it had earlier sold to other customers. Mr Hozeph's evidence that Trade only bought a small percentage of ready made goods from Turkish manufacturers, is not consistent with these records. They are consistent with Trade purchasing cheaper ready made stock from Turkish manufacturers which it sold to Garage, rather than the goods which Mr Hozeph had earlier designed and manufactured himself. That is also consistent with Mr Hozeph then having to spend more time in Australia, to conduct Garage's retail business, as was his evidence. Given what Garage's records show as to what little it spent employing other staff for the store, that Mr Hozeph spent considerable time working in the retail store, on his evidence more time than was reflected by the payment which Garage made him, must be accepted.

What was the stock which had to be replaced after the fire?

47. On all of this evidence, it must be concluded that the stock which Garage had to replace after the fire, was in the main ready made garments and accessories which Trade had acquired from Turkish manufacturers, with whom Mr Hozeph had had business dealings for many years. He was not involved in the design or manufacture of those goods, which were acquired more cheaply by Trade than the goods which Mr Hozeph had been involved in designing and manufacturing, before Garage was established. It was goods of that kind which Trade had earlier sold to its other customers. While Garage bought some of that stock from Trade, that was stock which Trade had left over, having been unable to sell it to its other customers, before Garage was established. Trade earlier sold that stock at considerably lower mark-ups to its other customers, than it later sold cheaper ready made stock, to Garage. That explains, in part, how Trade came to make a profit in 2008/09. Another part of the explanation is the considerably higher mark up which Trade charged Garage, for the cheaper stock which it sold to it.

48. Without Garage's business in 2007/08, Trade would have made another loss. Mr Hozeph explained in cross-examination that Trade sold a large volume of stock to Garage in 2008, because Garage then had to stock an entire shop. For its part, Garage also traded at a loss that year. Having sold to March 2008 only some $121,000 stock to its other customer, Trade sold some $292,021 worth of stock to Garage before July 2008 and before the fire in 2009, another $385,349 stock. Garage only sold $71,782 stock by retail to June 2008 and thereafter in the 9 months to 31 March 2009 made $194,737 sales.

What did the companies' records show?

49. The experts had some difficulties in analysing the financial and other records maintained by the two companies, but Trade's profit and loss account disclosed that it had traded at a loss in 2006/07 of some $48,770. Mr Hozeph explained that this reflected that it was then a start up business and that this was its first year of trade.

50. In February 2008, Mr Hozeph established Garage with a friend, Mr Raad Korkis, who took a 49% interest in the company and initially operated the retail store. He could not continue, due to his financial situation and Mr Hozeph then became its sole director and shareholder, spending more of his time on Garage's business thereafter. Garage obtained almost all of its stock from Trade. While Mr Hozeph claimed that this was initially Mr Korkis' decision, he also explained that it was his approach, because of his knowledge that he could not obtain items of the quality that Trade offered, from any other wholesaler, for the price.

51. There was a written agreement made in June 2008, requiring Garage to make monthly instalment payments to Trade of 10% of its purchases. In cross-examination, Mr Hozeph claimed that amounts in excess of what was required monthly, was paid to Trade. The experts agreed, however, that the companies' records did not show that any payments at all had been made by Garage for the stock, even though the financial records of the two companies indicated that nothing was owing between them.

52. In cross-examination, Mr Hozeph insisted that there had been payments made by Garage to Trade, in cash 'from cash flow'. He claimed that he had made some cash payments into Trade's bank account and in other cases, the payments were made to him in cash, which he used to make cash payments for Trade in Turkey. This account is difficult to accept, given the state of the records. It is convenient to refer to some of the confusing and implausible explanation which Mr Hozeph gave as to payments which Garage had purportedly made:

"Q. Did Garage Fashions ever make any payment to Trade Stone?

A. Yes.

Q. When?

A. From time to time whenever there was a cash flow. There is $170,000 of cash flow in the company.

Q. Whenever there was cash in Garage Fashions?

A. Correct.

Q. Is that what you mean?

A. Yes.

Q. What would it do with the cash?

A. Used to have pay it to Trade Stone.

Q. How?

A. To the bank or to whichever way - I don't understand what you mean.

Q. You know the money didn't go into Trade Stone's bank account?

A. It did.

Q. You know neither your account (sic) nor the accountant engaged on behalf of the defendant have found any evidence of money of that sort going into Trade Stone's bank account?

A. It did go to Trade Stone's bank account.

Q. Is that the only way money was paid. You say all the money paid to Garage Fashions to Trade Stone were made by Garage Fashions depositing cash into the Trade Stone's bank account?

A. And director's loan to the company.

Q. How was that done, Mr Hozeph? How did the director come to lend money to Garage Fashions?

A. I invested the initial capital to start the business.

Q. How was that relevant to Garage Fashions paying Trade Stone for the--

A. From the director's loan.

Q. Physically what would happen when a payment was paid, Mr Hozeph?

A. Physically, will pay Trade Stone money.

Q. Taking cash from somewhere and putting it somewhere else?

A. Yes.

Q. Taking cash from where?

A. From Garage Fashions.

Q. From the till in the Garage Fashions, is that right?

A. From the money that I invested in Garage Fashions.

Q. Isn't it the position, Mr Hozeph, that these are just ideas in your head but there was, in fact, no physical payment ever by Garage Fashions to Trade Stone?

A. That's not true. There is physical payments. There is evidence of physical payments.

Q. Describe one such physical payment, how you actually caused it to be made?

A. Back into the bank and paid the money into the account.

Q. We have you putting cash into Trade Stone's bank account?

A. Correct.

Q. Did it occur any other way?

A. I don't understand what you mean, any other way.

Q. Is that the only way Garage Fashions ever made payment to Trade Stone?

A. That was one way it was paid, yes.

Q. It was the only way?

A. That was one way.

Q. What was other way?

A. I had the cash with me.

Q. Another way was for you to just keep the cash?

A. Correct.

Q. How was the fact of those payments, payments of cash into Trade Stone's bank account and payments of cash to you personally, how were they disclosed to the accountant, what record did you give the accountant?

A. Record of payments, notes I was telling me how much I paid from this company to this company.

Q. You just rang them up and told them?

A. Random notes, I handed it to him.

Q. You have not ever seen any of those notes looking at the documents produced in the course of these proceedings, have you?

A. I haven't seen them.

Q. You have not seen them ever since giving them to the accountant, is that right?

A. I don't know what he has done with them."

53. Mr Hozeph's evidence must be considered in light of the experts' agreement that none of the companies' records actually reflect any payments having been made to Trade. While it was Mr Hozeph's evidence that the companies' financial records and tax returns were maintained with the assistance of its accountants, no evidence was called from them, nor had the experts spoken to them. They agreed, however, that the accounts had been kept on an accruals basis. The experts also agreed that the two companies' accounts recorded that they each owed Mr Hozeph considerable sums, although there was no evidence that he had provided such amounts to them.

54. The result is that it must be accepted that the companies' records did not give a complete account of the activities of either company, or of their dealings with Mr Hozeph, particularly in relation to cash. They certainly did not reveal what cash he took, or how it was dealt with, or what cash payments were made by Garage, either to Trade or Mr Hozeph. Nor do they appear to otherwise accurately reflect what payments in fact were made from Garage to Trade. That has an impact on what view may be taken of the claim that the cost of the replacement stock should be assessed by reference to what Garage paid Trade for the stock. On the evidence, what was in truth paid for the stock, as opposed to what the accounts record, is not clear.

55. What is apparent is that Trade was dealing with entities other than Garage, both manufacturers and other retail customers, up to March 2008. Thereafter it continued to deal with those manufacturers, but supplied Garage almost exclusively. Apart from Garage's business, Trade also traded at a loss in 2007/08. Its profit and loss account showed a profit of $39,330. Of the $417,361 sales it made that year, only some $121,000 sales were to other customers and $292,021 to Garage. The sales achieved to other customers reflected only a small increase on the sales which Trade had made the preceding year. In 2008/09, however, it traded at a profit of $210,030, its profit and loss statement showing sales of $385,349, all to Garage. This profit was achieved even though the records show that Trade was then selling considerably cheaper goods to Garage.

56. Garage only traded for some 14 months. On its profit and loss accounts it traded at slight losses in both financial years. In its 2008/09 profit and loss account, it showed payment of 'Salaries, wages - ordinary' of $23,800 and 'Salaries, wages - Associates', which it was common ground referred to Mr Hozeph, of $41,600. On his evidence this was poor recompense for the many hours which he had worked in the business. Given the small amount of wages paid to Garage's employees, that he himself worked many hours in the retail store, must be accepted.

What happened to Trade?

57. Both companies ceased to trade after the fire in 2009. During the investigation, Mr Hozeph resisted providing NRMA with Trade's records, taking the view that they were irrelevant to Garage's claim under the policy. They were not provided until March 2011, after Trade's shares were sold by Mr Hozeph in October 2010 at a price of some $179,000. At that time, Trade was carrying a significant loss in relation to outstanding GST payments and company tax. The sale was evidenced by two statutory declarations, one sworn by Mr Hozeph and the other by the purchaser, Mr Abbas.

58. Mr Hozeph agreed that when it was sold, Trade had no assets and considerable debts. His explanation of the value of what was being sold was:

"Q. The $180,000 that Mr Abbass was paying he was getting nothing at all?

A. That's not true. He was getting all the contact details, manufacturers all - sorry. All the contacts from Turkey.

Q. What was the value?

A. It's price less.

Q. Why?

A. It's 30 years of experience.

Q. You remember me addressing this issue with you before Justice McCallum earlier in the year?

A. Correct.

Q. I asked a similar question then and you said that the invoices were important to that purchaser so he could go to the same manufacturer and import and get a similar pricing; remember that?

A. Yes.

Q. Is that the importance that you ascribe to those contact details?

A. It is the business structure or the business plan. The idea of the business, how to produce and how to have contact of overseas."

59. Later Mr Hozeph said:

"Q. Your understanding in October 2010 was that the supplier records you were selling to Mr Abbass had value because they would enable him to go to the same manufacturer and import and try and get similar pricing to those that you had achieved?

A. Similar business tactics.

Q. You're agreeing with the proposition I put to you?

A. Yes.

Q. The understanding you had at that time in October 2010 is that any one with a degree of business sense and sophistication who had those contact details, could go to Turkey, approach the manufacturers with whom you had dealt and import similar clothes for a similar price?

A. He can possibly try.

Q. You thought it would be something that is achievable?

A. Possible."

What did the evidence show as to mark-ups?

60. The experts agreed that the retail value of the stock destroyed and damaged in the fire, at the price Garage was selling it at the time was some $1,759,415. That this was the price that Garage would have achieved, if it had continued to trade, was not sought to be established. That would have depended on market conditions at the time. Its accounts showed that in the nine months to May 2009, the $235,256 stock it had sold, had been marked up by about 300% on the price it had purchased the goods from Trade. Its gross trading income was $170,091 and it had incurred expenses of some $175,872. The result was a small loss.

61. The experts also agreed that while there was some difficulty in establishing a precise figure on the records, of the mark-up that Trade had sold the goods to Garage, they came to the view that it was some 814%, even though its financial records suggested that it was higher, on average some 960%. The difference between these figures reflected the costs taken into account in the two calculations. Trade's records did not clearly show what costs had been taken into account in determining the figure appearing in Trade's financial records, as to its cost of aquisition of the stock.

62. What the records of the two companies did show was that at the time of the fire, by operating these two businesses Mr Hozeph was able to sell the goods at an extraordinary overall profit, by comparison to the price that they were acquired at from Turkish manufacturers, that is within a range of some 2442% to 2880%, perhaps even more. This no doubt explains both Mr Hozeph's decisions to sell ready made goods and to devote more of his time to Garage's retail business and of his view of the value of what he was selling, when he sold his shares in Trade the following year.

The accounting experts' view of the value of the stock

63. The Abbacus report of 14 July 2009 calculated the retail value of the stock at $1,759,415.69. Both parties accepted this figure.

64. The two accounting experts agreed that:

1. The wholesale cost of the stock which Garage bought from Trade Stone was $671,494.35, exclusive of GST

2. The cost of damaged and destroyed stock at the prices Trade Stone charged was in the range $514,449 to $597,627.

3. The 2009 year was the only year that Trade Stone and Garage traded as sole supplier and customer. It represented 'the clearest indication of the trading relationship between them'.

4. Trade Stone's average mark-up of 9.6 on the cost of its stock on sales to Garage included freight to Sydney from overseas suppliers. Purchase price of inventory and customer duty.

5. The mark up of 8.14 disclosed in Trade Stone's financial statements must have included costs other than stock purchase price, freight and customs, but what those costs were cannot be determined, there being insufficient information.

6. To the extent that costs of internal fright and cartage is not brought to account in the cost of goods sold in Trades financial statements, they must be included as an additional cost of stock. What adjustment if any is required cannot be determined,

7. If the cost of travel and accommodation related to acquisition of stock and is not included in cost of goods sold in Trade Stone's accounts, it should be included in cost of stock. There is not sufficient information to about the costs incurred and the nexus with the acquisition of trading stock.

8. In 2008 and 2009 $103,095 travel and accommodation appears in Trade Stone's financial statements, with the cost of purchase of stock $118,812. Whether this was local or overseas travel was not clear. The cost of travel associated with acquisition of stock could range from $0 to $103,095 or $0 to $0.86 per dollar value of stock. Of the total purchases made, not all remained on hand in 2009.

9. The experts had not been provided with any information such as cheque butts, cash books or general ledgers indicating any payment from Garage to Trade Stone from1 March 2008 to 30 June 2009. No liability to Trade Stone was reflected in the financial statements of Garage at any stage. A director's loan account with a balance of $366,406 as at 30 June 2008 and $666,250 as at 30 June 2009 appeared in Garage's accounts. They were not aware of the transactions which created those balances, but observed that they may have 'related to the director assuming the obligation of Garage to Trade Stone for trading stock'. At the hearing it was relied that there were also such loan accounts in the Trade records. They could not determine the nature of the loan balances from the incomplete records and books provided them.

10. That the appropriate way to determine the measure of performance of Garage, to determine its gross profit, was to utilise its trading results for the 9 months to end March 2009 and apply a gross profit of 72%, after allowing for a corrected closing stock figure of $605,00, with a result of a profit for 9 months of $141,165.

65. What was not agreed was:

1. The calculation of any business interruption claim. Mr Russell's report did not deal with this, but it was discussed and dealt with by the experts at the hearing.

2. Mr Russell was of the opinion that all costs from 31 March 2009 would be saved, as Garage did not trade, or attempt to mitigate its loss and its trading prior to the fire was at a loss and marginal at best.

3. Mr Paul was of the view that salaries paid to associated in the 9 months to 31 March of $31,200 should be treated as a profit distribution and not a cost of running the business. The result is that costs saved in the quarter are $109, 608 (140,808 less $31200), leading to a gross profit of $31,557. Annualised, the business interruption loss was $42,076. This difference was also dealt with at the hearing

66. Mr Russell's report noted that various records of both Trade Stone and Garage had not been supplied to him, including general ledgers, creditor's ledgers, debtor's ledgers, general journals, cash payment and receipt records, records of stock takes, stock orders and sales journals. On Mr Hozeph's evidence there were no stock takes ever undertaken by Garage or its accountants, but there were records of sales kept by Garage, which were provided to its accountants.

67. Mr Russell's examination of the two companies' records showed that Trade's mark up prior to January 2008 was 520%, post January 2008, when Garage was Trade's only customer, the mark-up increased to 1120%, with a resulting average of 960%. On his analysis, however, those mark-ups on the cost of acquisition of the goods were in fact 310%, to the year ending 30 June 2007, 285% to June 2008 and 814% in the year to June 2009. Mr Paul came to different conclusions, but after the experts met and when the concurrent evidence was given at the hearing, he accepted the accuracy of Mr Russell's calculations, which rested on his analysis of various subpoenaed documents.

68. Mr Russell estimated that Garage's cost of stock purchased from Trade, on hand at the date of the fire, was some $597,627. This reflected the price at which Trade had sold its stock to Garage, not the price at which the stock could be replaced, if Garage sourced stock from other suppliers.

69. On Mr Hozeph's evidence this included all of the stock that Trade had acquired, including stock it had not earlier sold to other of its customers, before it ceased trading with them in March 2008. On Mr Russell's analysis, a significant quantity of the stock sold to Garage had been purchased by Trade at least 12 months prior to 1 March 2008.

70. Mr Russell initially concluded that the cost to Garage to replace the damaged and destroyed stock ranged between $62,252.81 and $73,418.55 and in a further report, when additional costs were considered, they ranged from $73,047 to $86,148. At the hearing, Mr Paul confirmed his acceptance of those figures.

71. Mr Paul had been briefed, amongst other things, to provide an opinion as to the replacement cost of the stock purchased by George. He provided no opinion on this question, but gave his views about the average wholesale cost of the stock ($514,449); the total cost to Trade of the stock provided to Garage (of $338,929); and Garage's one year's loss of profits of $41,394. The case which Garage pressed in submissions rested in part on Mr Paul's original report.

72. Mr Paul's report reveals, however, that his instructions did not accord entirely with the evidence. For example, he was instructed that Trade supplied 60 individual retailers across Australia. On the evidence, however, this ceased in March 2008, when it became the sole supplier of Garage, thereafter the only client it supplied the entirety of its stock to.

73. Mr Paul was instructed that Trade designed and sourced stock which it manufactured, transported, stored and sold on a wholesale basis to its retail customers, including Garage. As I have explained, on the evidence, however, apart from some left over stock which Mr Hozeph had designed and manufactured, which Trade had been unable to sell to other retailers before March 2008, the stock it sold to Garage was bought by Trade ready made from Turkish manufacturers. That stock was delivered direct to Garage, which stored all of the stock at its premises. In some cases, suppliers invoiced Garage direct. All of that stock was destroyed in the fire. Trade then had no other stock to sell to Garage and acquired no other stock after the fire, to sell to it.

74. Mr Paul was also instructed that Garage made payments to Trade when cash flow allowed. As I have noted, however, it was later agreed by the experts that there was no evidence of any such payments having been made or received. Mr Russell explained in oral evidence, that his investigations revealed that even on Garage's bank statements, all he found was a series of unidentified payments totalling around $91,000. They were one-off, generally small withdrawals in cash at ATMs. They went up to about $15,000, but did not appear to be what he would consider to be payments to a trade creditor. I have outlined Mr Hozeph's evidence. It simply does not provide a basis for the instructions given to Mr Paul about payments made by Garage to Trade.

75. At the hearing Mr Paul and Mr Russell agreed that the better view of Trade's mark-ups was some 814% on the sales to Garage. This is to be compared to what Mr Paul had noted in his report as to Australian Taxation Office performance benchmarks, which disclosed average mark-ups to be in the range 196% to 158%.

76. Mr Paul noted that Trade mark-ups had varied considerably and that stock purchases in 2009 were less than 10% of the previous year's amount. Mr Hozeph had instructed him that but for the fire, it would have acquired stock to a similar level to the 2008 year. The evidence does not establish a basis for that assumption. To the contrary, stock acquisition in 2009, in order to supply only one customer, Garage, instead of the 60 retail customers Trade had earlier dealt with, suggests quite a different reason for reduced stock acquisition, as does the fact that in 2008, Trade sold Garage a very substantial amount of stock, in order to entirely stock its newly opened store. That such sales could have been replicated in 2009 does not seem possible, given the sales which Garage achieved in the 9 months of that year.

77. The policy permitted loss of profits for one year. Garage's 2009 profit and loss statement showed a loss of $5,778. Mr Paul took the view, however, that the salaries of $41,600 paid to associates should be treated as profits distributed to Mr Hozeph. That led to a profit of $35,822 or $41,394 for a full year. When the concurrent evidence was given, he adhered to that view.

The replacement value of the stock

The policy

78. Mr Hozeph said in his evidence 'I still do not understand on what basis NRMA is not paying the purchase cost of the goods in the store at the time of the fire'. The answer lies in the insurance policy. Garage was not insured for the purchase cost of the goods. The policy was a replacement policy, which in clause 1.3 obliged NRMA to:

" 1.3 Settlement

If you have a valid claim under Section 1, we will , at our option, pay for, reinstate, or repair the Property on the basis set out below.

Settlement Basis

(1) Stock in Trade

For Stock in Trade we will Indemnify you.

79. 'Indemnify' is defined as:

(a) Where the Property is lost or destroyed:

(i) in the case of a Building, the rebuilding; or

(ii) In the case of other Property, its replacement by similar property;

to a condition equal to but not better or more extensive than its condition at the time of loss or destruction; and

(b) where the Property is damaged, the repair and/or restoration of the Property to a condition substantially the same as but not better or more extensive than its condition at the time of damage.

Also refer to Section 9.1 for the definition applicable only to Section 9."

The cases pressed

80. As Garage argued, NRMA could not dictate to it from whom it purchased replacement stock. Indeed, it is not obliged to replace the stock at all, with the moneys which it is entitled to receive under the policy. Neither, however, could Garage dictate the method by which the replacement cost of the stock in question is determined, by reference to the price it had paid Trade for the stock which was destroyed or damaged in the fire.

81. In these proceedings, given the terms of the policy, the cost of the replacement of the stock by 'similar property' must be determined in light of what the evidence revealed as to the nature of the stock in question, as well as the price at which the stock could have been replaced at the time. Given the way in which the parties litigated this matter, that is not easy to determine.

82. The case pressed for Garage was that:

"The indemnity required to be provided by the defendant is the cost of replacing those goods, and they've obviously got choices. If it's easily replaced by contacting an overseas wholesaler and then paying some cartage and the like, then that would be the cost. Or if it could be replaced in Australia at the same or equal price, then obviously purchase them in Australia. You would expect from an insurer of this size that that would be a relatively easy task, and your Honour hasn't heard from them, and your Honour knows Mr Jones, who apparently is able to make a quick assessment of $500,000.

Your Honour also knows the plaintiff has attempted to do it but, for failure to comply with the rules, and quite properly, your Honour has rejected that report. So it's not a matter of him not trying to do. But that still leaves your Honour with the task of having to somehow recreate them. As the cases say, it can be a difficult task. We're happy to leave it to your Honour, as it were."

83. The onus in these proceedings, however, falls upon Garage. It must establish its case to the requisite standard, that is on the balance of probabilities. Whether Garage has met that onus has to be considered in circumstances where, even though Trade was not trading at all after the fire and on Mr Hozeph's evidence, was not able to trade, Garage led no evidence at all as to the price that other wholesalers with whom it might have been able to deal, would then have sold it replacement stock after the fire in 2009. Garage sought to establish this price by reference only to what it and Trade had earlier paid for the stock which was destroyed.

84. Garage's case was that the only person who had given evidence, who had any expertise in retail and wholesale of the goods in question, was Mr Hozeph. The experts could not give direct evidence of what the replacement cost of the stock was and NRMA had not called any of its assessors, who might have shed some light on what was in issue. The proper question to be determined it argued, was what the wholesale cost of replacement of the stock was, an amount which had to include an appropriate margin for profit. The only evidence of margins in the industry was the Tax Department's information, contained in Mr Paul's report and what Mr Hozeph said about margins. It was thus only Mr Hozeph's evidence and how Trade conducted its business, which shed light on the question of the replacement cost of the stock.

85. It is difficult to accept the approach so urged. Mr Hozeph's evidence, of itself, is not a sound basis on which the replacement cost of the stock could rest.

86. This approach was supported by the submission, variously urged for Garage, that I would reject the common views which the experts had reached, after they had met to identify what they agreed and disagreed. I cannot accept that submission.

87. Nowadays, a not uncommonly encountered consequence of the way in which expert evidence is received concurrently, is that experts called by different parties reach common views as to matters over which the parties are litigating. Inevitably that will assist one party, at the expense of another. That, however, is not a basis for rejecting their opinions, if they are persuasive, having in mind what the other evidence led in the case reveals. In this case, given the way in which Garage sought to establish the replacement cost of the stock and Mr Paul's explanation of why he finally came to the same opinions as Mr Russell, in relation to various relevant matters, including its replacement cost, I am satisfied that the expert's evidence is of assistance in resolving the matters over which the parties have joined issue. The fact that they jointly came to hold the same views, is not a basis for rejecting their opinions.

88. Garage pressed its case on the basis of a number of alternatives. Firstly, that an order in the sum of $597,672 would be made, that being the price the experts agreed its financial accounts showed it had paid Trade for the stock which was affected by the fire. That was argued to be a figure which not only reflected what had actually been paid for the stock, but also what it could have been sold for by retail, at a sum identified by the experts to have been some $1.6 million.

89. Secondly, in the alternative, Garage relied on the sum of $500,000 assessed to have been the value of the stock in December 2008 on behalf of the NRMA by its assessor, Mr Jones, before the fire, when the insurance cover was increased.

90. Thirdly, in the further alternative, Garage claimed a figure which reflected the price for which Trade had acquired the goods, marked up by 550%. That figure reflected the average of the mark-up it had charged its various customers, including Garage, over the time it had traded, between 2006 and 2009, plus a further amount to reflect its business expenses and profits over that period. That approach rested on an argument that o verseas or local wholesalers do not sell to anybody at any time, for the cost of acquisition of stock to them. They sell to the market at the cost of acquisition, plus their expenses in running the business, plus profit. This approach would result in a replacement figure of $424,367.

91. On Garage's approach, the lowest figure which could be ordered was some $267,000.59. That was the result of applying a mark-up of 310% to the figure of $86,148, which the experts agreed was the price at which Trade had acquired the stock, plus costs such as cartage and freight.

92. NRMA conceded that a sum representing the amount which Trade had paid the Turkish manufacturers it had dealt with for the stock, plus costs agreed by the experts, could be ordered. Its case was that replacement cost could not be established on the basis of the amount Garage had agreed to pay Trade. They had not dealt with each other at arms length. Their dealings could not establish what the replacement cost of the goods in the market place was. Nor could the replacement cost of the stock be determined by reference to Trade's other expenses of operating its business, its claimed profits, or by the assessment which Mr Jones had made. These matters were all not relevant to a determination of the price at which Garage could have replaced the stock after the fire.

93. On NRMA's approach there would also be no mark-up applied in arriving at a replacement cost, because the evidence established that Mr Hozeph could acquire the goods for Garage direct from the manufacturers he had dealt with for over 30 years. Garage had no need to deal with them through Trade, or any other wholesaler. The replacement cost of the stock, it was conceded, had to include an amount to reflect the travel costs which Mr Hozeph would incur in travelling to Turkey to acquire the stock.

94. Garage's position was that this would not be accepted, because it ignored Trade as a trading entity and also ignored the reality of the market place; and what wholesalers do in that market and the function which they perform. The cost had to be assessed by reference to the wholesale price at which the stock could be acquired. Mr Hozeph was not obliged to buy direct for Garage. That was not its business.

Conclusion

95. The case was fought on the basis of what the two companies' historical records showed, NRMA conceding that the stock could have been replaced at the price Trade had acquired it, plus the costs agreed by the experts. Did Garage establish that the replacement of the stock would have cost it any more?

96. Garage was solely owned and operated by Mr Hozeph, its only director and its controlling mind. It was Garage which was insured with NRMA, not Trade. After Garage's premises were destroyed in 2009, NRMA's consideration of its claim was delayed by the police investigation. It conducted its own investigation, to establish what stock Garage owned and what had been destroyed in the fire. While there was no disagreement about what emerged from the Abacus investigation, in which Mr Hozeph assisted with reference to Trade's records, what resulted was a dispute over the cost of the replacement stock, amongst other things.

97. It was in August 2009 that Abacus was instructed to undertake a stock take of the property on the ground floor of the premises. It was briefed with a schedule of the damaged contents, which listed both quantities and prices. In its exercise, Abacus had regard both to the prices of the stock, disclosed on tags on the clothes which had not been destroyed, as well as Trade's invoices, which were provided by Mr Hozeph. On his evidence at NRMA's request, Mr Hozeph then checked that work and himself added a column of figures, in addition to those Abacus had arrived at, having sought to match stock identified against Trade's invoices.

98. At the time of the fire, Trade itself had no other stock whatsoever, to provide Garage, or to sell to other retailers and on Mr Hozeph's account, no other means by which to obtain other stock. Nor was there any stock which had already been ordered and was yet to be delivered. The result was that both Garage and Trade ceased to trade.

99. On the evidence, had Garage then had the financial means to replace the stock, it was free to acquire replacement stock from anyone it wanted to deal with. At that time, Trade was itself not in a position to trade. That was no doubt because even though its records showed that it had made a substantial profit, it had no funds. Garage had no contractual obligation to Trade, to acquire replacement stock from that company. Having in mind Mr Hozeph's evidence as to his experience and contacts, Garage was unquestionably in a position where it could itself have purchased replacement stock from the manufacturers which he had dealt with in Turkey, for many years. On the evidence there was no reason why those manufacturers could not have sold Garage ready made goods of the kind which Garage had previously bought from Trade. But for the relationship between Mr Hozeph and Trade, it is impossible to think that Garage would then have contemplated dealing with Trade, given what it would have charged for replacement stock. Mr Hozeph was in a position to acquire replacement stock for Garage much more cheaply, by dealing direct with his Turkish contacts, than paying the inflated prices at which Trade had previously sold Garage the destroyed stock.

100. Indeed it was Garage's case that it would have had to purchase replacement stock from someone other than Trade. There was, however, no evidence which established what stock other wholesalers would have offered it, or the price they would have sold at. On Mr Hozeph's evidence, with his contacts, even with Trade's mark-ups, he was able to achieve a better price, than other wholesalers could offer Garage. That was not made out on the evidence, but it is in that context, however, that consideration has to be given to NRMA's case, that Garage did not need to deal with another wholesaler to replace the stock, it was in a position itself to purchase replacement stock direct from Mr Hozeph's Turkish contacts.

101. On the evidence, Garage itself buying direct from Turkish manufacturers would not have been difficult. All the ready made goods which Mr Hozeph had been acquiring for Trade after Garage was established, were already being delivered direct to its premises in Oxford St. Indeed, some of the invoices named Garage, not Trade, to be the purchaser. All that would have altered, had Garage purchased direct, would have been that it was Garage through which Mr Hozeph would buy the stock from the manufacturer, rather than Trade.

102. Clearly, thereby Trade would have lost the opportunity to make a profit on the purchase of the replacement stock. That is not a reason for concluding that Garage could not have acquired replacement stock itself direct from Turkish manufacturers without Trades' involvement. Trade's position is not a relevant matter under the policy. It was not the insured. At the time of the fire, what Trade was acquiring from the manufacturers with whom Mr Hozeph was dealing, was ready made garments. As was submitted for Garage itself, that was reflected by the extraordinary change from 2008 to 2009 in terms of Trade's cost of sales, which dropped about $100,000, while the amount of its sales to Garage was about the same, but its mark-ups increased from around 300% to 814%.

103. As I have explained, while it may be accepted that before Garage was established, Mr Hozeph was involved in the design and manufacture of the goods which Trade had imported into Australia, that was not the case in 2009 at the time of the fire. It follows that it may simply not be concluded that there would have been any difficulty in replacing that stock, by dealing direct with the same manufacturers or that the replacement cost of the stock may properly be assessed by reference to what Garage had paid Trade in the past for such stock. The massive increase in the mark-up Trade charged Garage, by comparison to what it had earlier charged its other customers, did not reflect either the cost of the stock, or the price at which it could have been replaced by Garage.

104. The basis upon which Trade sold to Garage was clearly not as the result of any arms length transaction, but rather the result of decisions made by Mr Hozeph, as to which of his two companies would reflect particular profit and losses. He was certainly entitled to run his businesses, as he wished. In the circumstances, however, it is apparent that the replacement cost of the stock cannot be established on the basis of what Trade and Garage so agreed with each other.

105. Nor did the evidence of the price at which Trade supplied its other retailer customers, for whose business it was competing with other wholesalers, establish the price that Garage could have acquired the stock from such other wholesalers.

106. Garage also relied on the Crawford investigation report. There, however, it was observed:

"3.8 As outlined in the report from Abacus, the contents have been photographed and a schedule provided, indicating the property has a replacement cost of $153,416. We are satisfied all of the property shown on the contents schedule has either been burnt beyond recognition or contaminated to the extent it is beyond economical restoration. Therefore, we accept the contents schedule provided, subject to verification of the replacement cost claimed.

...

3.10 We have advised the Insured the contents which remain on site are deemed beyond economical restoration, and therefore do not have any salvage value. Rather than collect the contents and incur ongoing storage costs, we are satisfied the damaged contents can be discarded during the removal of debris co-ordinated by the building owners."

107. That cannot establish the replacement costs of the stock as Garage claimed. Nor does NRMA's acceptance at the time that the amount of the insurance cover was increased in 2009, that there was $500,000 goods then in the store, establish the replacement cost of the stock destroyed in the fire.

108. The evidence in that regard was that initially the insurance cover was for a maximum of $350,000. There were several unsuccessful attempts to increase the cover. In Crawford's August 2009 report to NRMA, it was observed that in January 2009, NRMA's assessor Mr Jones, visited the store and was convinced by Mr Hozeph that a fair estimate of the stock in the store was about $500,000. Mr Hozeph told Mr Jones that he was also about to receive two other shipments and it was then agreed that the insurance cover could be increased to $700,000, with a seasonal increase of 30%. On the basis of this information, Crawford recommended that Mr Hozeph's financial records be investigated and a possibility of fraudulent documents was raised. No evidence was called in these proceedings from Mr Jones.

109. Even if it be accepted that Mr Jones' evidence would not have assisted NRMA's case, his evidence cannot provide a foundation for the conclusion that the replacement cost of the stock was $500,000. When the evidence as to the two companies' trading is considered, it must be accepted that this figure was not established as representing the replacement cost of the stock. To make an order on that basis would deliver Garage a windfall to which it is not entitled under the policy.

110. For Garage, it was urged that if these approaches to the assessment of the cost of replacing the stock were not accepted, the calculation of the replacement cost of the stock would be approached by reference to the price Trade had acquired its stock, with a mark-up of some 550%. This reflected an average of the mark-ups it had charged to all of its customers, plus an amount to reflect Trade's other business expenses and its profits. That approach was necessary, it was urged, to pay proper regard to the various expenses Trade had incurred in operating its business (in addition to the expenses incurred in acquiring the goods) and the profit which Trade and other wholesalers like it, were entitled to make on the goods they imported.

111. These figures were derived in part from Mr Paul's report, figures which he did not adhere to, after he and Mr Russell had conferred. During the concurrent evidence, Mr Paul explained that his initial calculations had proceeded on the basis of various assumptions he had been instructed to make, as to the businesses' operations. Having received a better understanding of the two businesses' operations and the investigations Mr Russell had undertaken, he and Mr Russell had reached common views which were reflected in the joint report. They did not support the approach which Garage pressed in its submissions.

112. This approach was put to the experts at the hearing. They both disagreed with it. Their evidence was:

"DOOLEY: Start with you, Mr Russell. In your calculation you have not taken into account the expenses incurred by Trade Stone in the financial years - these are below the line expectations (sic), if I can put them like that, occurred in the financial years ending June 2007, June 2008 and June 2009, is that correct?

RUSSELL: That's correct.

DOOLEY: Do you agree with that Mr Paul?

PAUL: Yes.

DOOLEY: Also not taken into account is any allowance for profit other than what would be shown in the profit and loss accounts for the respective years I have referred to?

RUSSELL: I don't know what you mean by that.

DOOLEY: Well, an allowance for the business to make a profit on conducting its operations?

RUSSELL: I don't know how that fits with the exercise I have conducted.

DOOLEY: I appreciate that.

HER HONOUR: Let me interrupt. I understand that you don't understand how that fits in with the exercise you have conducted. Does that mean the answer to the question is 'no', it hasn't been taken into account?

RUSSELL: Sorry, I don't understand the question.

HER HONOUR: I think the question is, in identifying the cost of purchase by Trade Stone of the stock in issue, whether you took into account any profit?

RUSSELL: No, I didn't.

HER HONOUR: And Mr Paul, I take it you didn't either?

PAUL: No.

HER HONOUR: Really, your next question is, whether that should occur?

DOOLEY: Yes.

RUSSELL: No.

PAUL: No. My approach to the valuation of the cost of stock was prefaced upon the relevant tax ruling and the accounting standard that I referred to in my report. They set out what cost should be included in determining the value of the stock.

DOOLEY: Do you agree with that, Mr Russell, with what Mr Paul said?

RUSSELL: That profit is not included in the standards as a cost of stock?

DOOLEY: Yes.

RUSSELL: Yes."

113. When further questioned about taking profit in consideration in determining the cost of the stock, their evidence was:

"DOOLEY: Mr Russell, if an overseas wholesaler sold for the costs you are describing, 70 to 80 odd thousand dollars, they would have to, out of that, pay for all their expenses of conducting the business. That is, that below the line expenses, wouldn't that be right?

RUSSELL: I imagine so, yes

DOOLEY: How would they do that?

RUSSELL: Well, they did.

DOOLEY: You say they did--

RUSSELL: All I have done is generate the purchase costs to Trade Stone of that stock, so whoever sold it to them you would imagine recovered their cost in achieving it's own cost.

DOOLEY: Also have a mark up?

RUSSELL: Would have to be in the sale price. Are you suggesting to me the person or the entity who sold the stock to Trade Stone sold it at a loss?"

114. It seems to me that this third approach to establishing the replacement cost of the stock, urged for Garage, may also not be accepted. There was no evidence from which it could be concluded that stock similar to that sold by Trade, was being sold by other wholesalers at mark-up levels of 550%. That would also be quite inconsistent with the Taxation Department figures and was much higher than the mark-ups at which Trade sold it to its other customers. On the evidence, as I will explain, it seems likely that prices with mark-ups of less than the 300% at which Trade sold to other of its customers, was available to them in the market from other wholesalers.

115. What was insured under the policy was replacement cost of the stock. That cost did not involve business expenses which were wasted, as the result of the fire. While there must be sympathy for Mr Hozeph's view that he was entitled to operate his businesses as he wished and that NRMA was not entitled to oblige him to purchase replacement stock from Turkish manufactures direct for Garage, without Trade's intervention, the question which arises to be determined in these proceedings is what was established on the evidence that the replacement cost of the stock was. Replacement of the stock clearly did not require that it be purchased from Trade.

116. It is in these circumstances that I am also not able to accept the further approach urged for Garage, namely that the cost of the stock must be assessed by reference to a 310% mark-up, which was described as the 'lowest' figure available on the evidence.

117. That the replacement cost of the stock which Garage lost in the fire, would have been the prices which Trade was able to command from its other retail customers, that is with a 300% mark up, does not follow from the evidence.

118. There was no evidence of the prices which Trade's competitors were charging for similar stock in 2009. Trade's financial records show, however, that in the time before it commenced selling to Garage, it did not achieve sufficient turnover, at the price it sold to its other retailer customers, with a 300% mark-up, to turn a profit. On the Taxation Department information referred to in Mr Paul's report, this was a very high mark-up. That may well explain Trade's poor performance. At those mark-ups Trade was not sufficiently competitive to make a profit. If its competitors were offering similar stock, even if acquired at a higher purchase price, but sold with the lower mark-ups in the industry range of 196% to 158%, that would explain Trade's indifferent results, when it was selling to other retailers before it began selling to Garage.

119. This helps explain, no doubt, why Mr Hozeph changed Trade's business model, in order to acquire the cheaper ready made goods which it later sold to Garage. Even then, in its second year of trading, apart from its sales to Garage, Trade did not significantly increase its sales to its other retail customers or make a profit on that business. The inference is that there were other wholesalers offering Trade's other retail customers similar stock, at lower prices.

120. In 2009, Mr Hozeph regarded the ready made stock that Trade was able to import from Turkey to have a particular value. He had established Garage and its retail business, in order to establish the 'Trade Stone' brand. He believed that as a result of his contacts, he was uniquely placed to bring those goods into Australia, at a price cheaper than other wholesalers could import such goods. Indeed, he considered that the information he had acquired over the years as to the Turkish manufacturers with whom he dealt from 2006 through Trade, to have been 'priceless'. On the evidence that was not information which belonged to Trade, but it was certainly information revealed in its records. That was the basis upon which Mr Hozeph was able to command a considerable price, when he sold Trade's shares in 2010. With that information, the purchaser was put in a position to import goods from the Turkish manufacturers with whom Mr Hozeph had long dealt. He was not thereby precluded from dealing with those manufacturers on behalf of Garage, as he was clearly also free to do in 2009.

121. In all of those circumstances, it seems to me entirely unlikely that in 2009 after the fire, Mr Hozeph would have sought to purchase replacement stock from the Turkish manufacturers with whom he had long dealt, through another wholesaler, even if Trade had not been in a position itself to trade, as was his evidence. Mr Hozeph was not bound to acquire the replacement stock through Trade or any other wholesaler, nor was Garage. They were both entitled to purchase direct. Nor would it seem likely that Mr Hozeph would have wished to replace the stock with stock which Garage could have obtained from other manufacturers, given that his aim was to establish the 'Trade Stone' brand with the stock he had been importing through Trade. Nor is he likely to have introduced his Turkish contacts to other wholesalers, given his view of the value of this information. The reality was that if Mr Hozeph had had the necessary funds, he would have used the information at his disposal, to deal with his Turkish contacts direct, in order to obtain replacement stock for Garage.

122. In those circumstances, it must be concluded that the value of the stock must be approached on the basis urged for NRMA. With such funds, Garage would plainly have been in a position to replace the stock. Any further amount would result in Garage receiving a windfall.

123. Various of the matters dealt with by the experts in their concurrent evidence, must be considered in determining the precise figure to be ordered in Garage's favour.

124. While Trade's financial records suggested that the price Trade charged for the goods was a mark-up of 960% on its acquisition cost, what costs had been included in reaching that figure was not revealed by the accounts. The experts agreed that the better view was a mark-up of 814%, which took into account various costs of acquisition of the goods, such as freight and customs costs, which Mr Russell had been able to identify. That had the result of a cost of acquisition of a maximum of $86,148, which the experts agreed.

125. The experts also agreed that Mr Hozeph's work in travelling to Turkey to acquire the goods, had also involved travel expenses, which also had to be taken into account in determining the cost of the stock Trade had acquired. Whether any such costs were included in the mark-up figure arrived at is uncertain. The experts were unable to conclude positively that they were. The records showed that some $103,095 had been spent in travel in the 2008 and 2009 financial years, when a total of $118,812 had been spent by Trade on purchasing the stock. Not all of that travel related to the stock which Garage had on hand at the time of the fire. What part of those travel and accommodation expenses related to the travel involved in the acquisition of the stock which had to be replaced, could not be ascertained by the experts. Mr Hozeph gave evidence of having undertaken other travel, not related to acquisition of stock, but he gave no evidence from which a figure reflecting travel associated with the destroyed stock could be identified by the experts.

126. In the circumstances it was accepted that an amount reflecting he cost of travel must be added. That the costs would be as low as $10,000, as was urged for NRMA, involving only a single simple trip to Turkey, is somewhat difficult to accept. It seems to me that to acquire sufficient stock to restock the entire shop, given the range of goods, would reasonably involve somewhat more expense than was suggested.

127. What the expert's calculations also did not take into account was the cost of Mr Hozeph's labour, if Garage was itself to acquire the goods from Turkish manufacturers. There was a controversy between the parties as to whether what he received from the two companies reflected a payment to him for his labour, or a share of profits. Given his evidence, in my assessment it must be concluded that what was paid to Mr Hozeph reflected a labour cost incurred by each company. He worked considerably longer hours in the two businesses than the payments he received for that work could have fairly recompensed him. I cannot see in the circumstances, that these payments in truth involved any concept of 'profit'.

128. In the case of Garage, if his work was not done by Mr Hozeph, it would have had to have been done by someone else. Given the little spent on wages for other staff, if Mr Hozeph had not done that work, Garage would unquestionably have had to pay other staff to perform that work. In the case of Trade, on the evidence there was no-one else who could have done Mr Hozeph's work. It follows, in my view, that in assessing the cost of acquisition of replacement stock, some account must be taken of Mr Hozeph's labour, in obtaining the replacement stock for Garage, if it was to be acquired by Garage itself, rather than being purchased from Trade or another wholesaler.

129. NRMA's case was that the cost of the goods fell within the range between $53.588 and $73,418, the higher number including an unspecified amount for undisclosed costs, which it would be assumed included travel expenses. The experts finally came to a higher figure, as I have explained.

130. The end result of all of this, doing the best I can on the evidence, is a figure of $121,148. That is calculated on the following basis:

1. Trade's cost of acquisition of the goods, calculated with a mark-up of 814%, the figure which the experts agreed should be used, which resulted in an amount of $86,148. This includes the price paid by Trade to the manufacturers for the goods, freight costs, duty, plus the other relevant expenses which the experts were able to identify, such as customs agent charges.

2. An additional amount for travel costs which I have estimated to be $15,000.

3. An additional amount for the cost of Mr Hozeph's labour which I have estimated to be $20,000, in order to properly reflect the nature and value of work involved.

131. The figure includes no amount for mark-up. That is a cost which Garage would not incur if Mr Hozeph acquired the goods direct from Turkish manufacturers on its behalf. It leaves Garage in a position, however, on the evidence, to sell that stock at retail with mark-ups of over 2000%, absent the interposition of Trade. Even if it were to sell the stock wholesale, on the evidence that would permit mark-ups of up to 300%, when industry averages are in the 196% to 158% range. In all of those circumstances, to assess the replacement cost of the stock on any higher basis would result in an unjustified windfall, so far as Garage is concerned.

Fixtures and Fittings

The policy

132. The policy also provided an indemnity in respect of fixtures and fit out a limit of to $100,000. The experts agreed that the value was $49,967 and the NRMA conceded that figure.

133. For Garage it was argued that all of the evidence pointed to the cost of fit out being in excess of the indemnity. There was some $68,222.00 reflected in invoices. A figure of $153,416 was referred to in the Abacus stock take report, which was supported by the 29 May 2009 Crawford investigation report, in which it was concluded that 'we have no doubt that the cost of replacing the damaged contents items would exceed the sum insured.' In the August Crawford report, note was taken of the schedule provided to Abacus by Garage, where a replacement cost of $153,416 was also claimed, which was accepted 'subject to verification of the replacement cost claimed'. It was also advised that the contents were beyond restoration and could be discarded.

134. It was argued, in the face of this evidence, that the most accurate way of valuing the contents was based on the Abacus stock take report, on the basis of an assumption that there were missing invoices due to the fire, or for other reasons.

135. That assumption is not one, it seems to me, available to be made on the evidence.

136. In his affidavit, Mr Hozeph said he provided Crawfords with all of Garage's tax invoices in June 2009. In cross-examination, his evidence was:

"Q The invoices that have been put into evidence on your behalf or are to be put on your behalf in relation to this item of claim come very close to matching the figure in the accounts of the company of which you're a director as at 30 June 2009 and they both consistently suggest that the amount spent by you on the contents of the shop were in the order of $58,000 and not 135 or any other larger number?

A. There is no invoices provided to you I suggest we contact the accountant for invoices. I have submitted all the invoices to the accountant your Honour

Q. The answers to these questions are with your accountant?

A. Yes."

137. Mr Hozeph also referred to a letter to the accountants, which was called for and produced, but not tendered. Garage called no evidence from its accountants. The inference is that such evidence would not have assisted its case.

138. NRMA explained the parties' different calculations in relation to the invoices to be reflected in part by an invoice showing over $10,000 paid by Garage for the installation of security cameras, which the experts had not taken into account in their exercise. That invoice also referred to 'monitoring', which had to be taken into account, it was submitted, that being an expense irrelevant to this aspect of the claim. It was submitted that only what the invoices revealed, less an amount to reflect wear and tear, would be ordered on an indemnity basis under the policy.

139. It seems to me that when all of the evidence is considered, Garage's claim cannot be accepted. The Abacus report listed the contents found, identified in almost all cases by photo reference and ascribing a value to each item, totalling $153,416.39. There is no suggestion that the Abucus report was in error as to contents so identified. As the Crawford reports stated, that figure had to be verified. Garage had the onus to establish its claim in these proceedings.

140. The claim is only supported by invoices to the amount of some $68,000, subject to the question of the charge in respect of 'monitoring'. That there may have been missing records, as the result of the fire seems possible, but was not a matter about which evidence was given. To the contrary, Mr Hozeph's evidence in cross-examination was that he gave all of the invoices to his accountants. Apart from the account for the security camera, the invoices in evidence are all reflected in the accounts Garage's accountants prepared. Obviously Mr Hozeph was mistaken in relation to the camera invoice, which seemingly had not been provided to Garage's accountants, but otherwise, its accounts reflect the invoices in evidence. It was not suggested in Mr Hozeph's evidence that any other invoices or records of expenditure on contents had been destroyed in the fire, or were not provided to the accountants.

141. In those circumstances, it cannot be concluded that Garage has met the onus falling on it to establish that it spent more on the contents than the invoices reveal.

142. The shop was in operation for some 14 months. That the cost of replacement should be reduced in the way argued for the NRMA, by reference to the value ascribed in the balance sheet, where depreciation is taken into account, may, however, not be accepted. Even if fully depreciated, the contents would still exist and have a replacement value. Account must also be taken of the security systems monitoring charge, even though the amount referable to that service, was not specified.

143. Doing the best I can, I have concluded that the sum to be awarded is $60,000.

Business Interruption

The policy

144. The policy provided:

" 2.2 Defined Event

If your Certificate of Insurance indicates that you have taken out insurance under Section 2, we insure you against loss resulting from interruption to or interference with the Business due to Damage at the Premises, occurring during the Period of Insurance, but we will not pay for any loss as set out in the Specific Exclusions in Section 2.5 or the General Exclusions in Section 16."

145. 'Indemnity period' is defined as:

"The period beginning with the occurrence of the Damage and ending not later than the number of months stated in the Certificate of Insurance, during which period the business is affected in consequence of the Damage."

146. It follows that while the insurance cover went to 31 January 2009, the indemnity period in question is the 12 month period from May 2009.

The parties' cases

147. The disagreement between the parties turned on Garage's submission that in so far as the experts came to a common view, it would not be accepted and that Mr Paul's view as to the payment made to Mr Hozeph would be accepted.

148. The policy referred to the year before the loss, but there had not been a full year of trading, so it was experts' common view that the 9 months of 2009 in which Garage traded, should be used. In the joint report it was agreed that the appropriate way of determining Garage's gross profit was to utilise its trading results for the 9 months to 31 March 2009, applying a gross profit rate of 72%, after allowing for a corrected closing stock figure of $605,000, which resulted in an estimated gross profit of $141,165 for the period, with expenses resulting in a small loss.

149. Mr Russell was of the opinion that utilising Garage's financial accounts for the 9 month period, all costs identified would be saved going forward. Garage did not trade and prior to the fire, its trading was generally at a loss and marginal at best.

150. Mr Paul agreed with this, except that he was of the view that the salary of $31,200 paid to Mr Hozeph for the 9 months should be treated as a profit distribution and not a cost of running the business, with the result that the total costs saved in the quarter would be $109,608 ($140,808 less $31,200), resulting in a gross profit of $31,557.

151. In the concurrent evidence, Mr Paul agreed that he had proceeded on the basis that sometimes what is described as a salary to an owner is really him or her taking out their profit. He explained that this was often prefaced upon tax planning considerations. He took the view that whether the owner was being paid more than the market value of his labour, or less than the market value of his labour, effectively, the payment of salary was a distribution of a business profit.

152. Mr Russell disagreed. On his approach, what Mr Hozeph received was a payment for the provision of his labour, whether it was under market value or not. If Garage had not incurred that cost, which it paid to its owner, it would have incurred such a cost in paying someone else. Accordingly, it was a cost of running the business.

153. In the concurrent evidence, Mr Russell also explained that the experts had taken the view that because Garage had never traded again, it was reasonable to assume that all of its expenses would be saved. The experts also agreed that it was possible that a one off figure reflected in the expenses in question, would possibly not be saved. As to wrapping paper, Mr Russell explained that whether that was a one off expense was not clear. It could have been that more than a year's supply of paper had been purchased. There was no evidence about this. As to printing and stationary, accounts prepared on an accruals basis ought to have reflected expenses reflected in the profit and loss account on a basis matched to the year, although Mr Russell explained that was not always strictly adhered to. An example given was a wages book, which was not completely used up in one year.

154. As to depreciation, Mr Russell was of the view that this was a cost saved, taking account of the replacement cost of the assets that had been depreciated, so that it was a funding cost, that the business would need to meet at some point in the future. He did not agree that it was money that was effectively at the end of the year available to the owner as cash or money in a bank account, from which something would be taken out for profit, and something left for the balance of depreciation. On his explanation, i t reflected a capital purchase already made, which had produced the depreciation charge specified in the accounts. That did not equal cash.

155. Both experts agreed that depreciation was an expense in that year, that Mr Paul agreed 'you get without having to expend any money on'. They also agreed that the accounts did not identify the year in which the assets were actually purchased.

156. Garage, nevertheless, urged that from the total expenses of $175.872, would be deducted some non recurring items, identified to be:

"salary/wages/associates -

$41,600.00

insurance premiums -

$7,243.00

motor vehicle insurance/registration

$1,909.00

wrapping materials

$4,295.00

depreciation -

$8,479.00

total -

$58,923.00

business interruption claim

$116,641.00"

157. It seems to me that Garage's case may not be accepted. On Mr Hozeph's evidence as to the many hours he was working in the business, he was underpaid, as I have accepted. The payments he received did not reflect a profit. On his evidence, if he had not been paid what he received, Garage would have had to incur that expense in paying other staff. I can see no basis on the evidence for rejecting the conclusions which the experts otherwise reached. As to other expenses, what actually resulted, could have been revealed by its 2010 financial records. They were not tendered. Garage has not established that having ceased to trade, it did not save all of these expenses. Accordingly, the conclusion that it earlier made no profit and that it incurred no loss as the result of the interruption of its business, must be accepted.

Interest

158. Section 57 of the Insurance Contracts Act 1984 (Cth) provides:

"57 Interest on claims

(1) Where an insurer is liable to pay to a person an amount under a contract of insurance or under this Act in relation to a contract of insurance, the insurer is also liable to pay interest on the amount to that person in accordance with this section.

(2) The period in respect of which interest is payable is the period commencing on the day as from which it was unreasonable for the insurer to have withheld payment of the amount and ending on whichever is the earlier of the following days:

(a) the day on which the payment is made;

(b) the day on which the payment is sent by post to the person to whom it is payable.

(3) The rate at which interest is payable in respect of a day included in the period referred to in subsection (2) is the rate applicable in respect of that day that is prescribed by, or worked out in a manner prescribed by, the regulations.

(4) This section applies to the exclusion of any other law that would otherwise apply.

(5) In subsection (4):

law means:

(a) a statutory law of the Commonwealth, a State or a Territory; or

(b) a rule of common law or equity.

159. While the parties agreed that an order for interest must be made, they did not agree the time from which interest should be paid. On Garage's approach it was from 28 days of 29 May 2009, when NRMA's inspector advised that a sum in excess of $100,000 was due in respect of contents. On NRMA's approach it was from 8 June 2011.

160. The date must be determined objectively (see Bankstown Football Club v CIC Insurance Ltd (Supreme Court of New South Wales, Cole J, 17 December 1993, unreported)). In Sayseng v Kellogg Superannuation Pty Ltd [2007] NSWSC 857, Nicholas J observed at [7]:

"In my opinion it should now be accepted that the correct approach to be taken by the court on this question is that taken by Cole, J in Bankstown Football Club . In my assessment, the cases to which I have referred establish that the question of reasonableness is to be judged by reference to the true position in respect of the claim with allowance to be made for the insurer to have a reasonable period of time within which to investigate the claim and to consider its position. The discretionary determination is to be made having regard to the particular circumstances of the case, including the probable issues which require investigation. Under the Act the court is not required to evaluate and pronounce upon the opinion or decision-making process of the insurer. It is not relevant that the insurer acted bona fide in denying the claim, or when the judgment of the court established the insurer's liability to pay it. In short, the award will be calculated on the basis of what the court finds is a reasonable time for completion of the insurer's investigation of the claim. Put another way, in my opinion, the insurer is not automatically liable to pay interest from the day on which it became liable to pay to a person an amount under a contract of insurance. Under s 57(2) liability to pay interest is to be calculated with regard to the day on which it was unreasonable for the insurer to withhold payment of the amount after it had become liable to pay it in response to a claim."

161. It was common ground that the arson investigation delayed NRMA's assessment of the claim and that accordingly, before early November 2009, when police advice was received, it could not have completed its own consideration of the claim, even though it then had the stock in its possession. On the evidence, NRMA was not then in a position to assess Garage's claim in relation to the stock. Indeed, in the circumstances that was clearly not possible before the provision of Trade's records, which on his evidence some of which Mr Hozeph used in the Abacus stock take and could have provided when they were first sought. While it was argued for Garage that NRMA should then have assessed the replacement value of the stock by reference to its wholesale value, by having a valuer look at it, and made a payment in accordance with that assessment, in the circumstances, the exercise which NRMA had to undertake was clearly not as simple as that.

162. Trade's records were not provided until after the interlocutory proceedings before McCallum J in March 2011. That Mr Hozeph's refusal earlier to provide those records was on a proper premise, does not accord with McCallum J's conclusions or with what the evidence at the hearing revealed. Those records were then provided by NRMA to Mr Russell. His report was received on 8 June 2011. Before his report was received, NRMA's investigation was clearly not complete.

163. The position was not the same in relation to the contents claim. While Mr Russell also considered Garage's records in relation to the contents of the store, those were records which NRMA had been provided with by Garage much earlier than the Trade records. Garage's accounts accorded with the invoices on which NRMA relied, other than the one invoice produced in these proceedings, which had not been provided to Garage's accountants. Given the advice received by NRMA from Crawfords in 2009, in relation to the destruction of the contents, it must be accepted that the contents claim ought to have been paid long before Mr Russell's report was received. That aspect of the report cannot reasonably be regarded as the time at which the investigation of the contents claim concluded. In my assessment, other than the claim in relation to stock, interest must run from November 2009.

Orders

164. The usual order as to costs is that they follow the event. If the parties wish to be heard on the question of costs, they should approach. Otherwise, for the reasons given the orders should reflect that:

1. The defendant is to pay the plaintiff the sum of $192,498, which comprises:

(a) Stock $121,148

(b) Contents $60,000

(c) Cleaning costs $5,850

(d) Accounting fees $5,500

2. The defendant is to pay the plaintiff interest in respect of stock, from 8 June 2011, and otherwise, from 3 November 2009.

165. The parties should bring in short minutes of the final order.

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