Settlement Wine Co Pty Ltd v National and General Insurance Co Ltd A18/1995 [1995] HCATrans 273 (21 August 1995)

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry No A18 of 1995

Adelaide

B e t w e e n -

SETTLEMENT WINE CO PTY LTD

Applicant

and

NATIONAL AND GENERAL INSURANCE CO LTD

Respondent

Application for special leave to appeal

DEANE J

GAUDRON J

McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT ADELAIDE ON MONDAY, 21 AUGUST 1995, AT 2.57 PM

Copyright in the High Court of Australia

MR T.A. GRAY, QC: May it please the Court, I appear with my learned friends, MR R.A. CAMERON and DR M.A. PERRY, for the applicant. (instructed by Genders & Partners)

MR M.L. ABBOTT, QC: I appear with my learned friend, MR J.E. LUNN, for the respondent. (instructed by Stratford & Co)

MR GRAY: May it please the Court, the circumstances giving rise to this application can be shortly stated. The applicant was a small boutique winery in the McLaren Vale area just south of Adelaide and that area has two distinct attributes to it. One is a deep dark soil, and the other one is a very good climate, and as a result it produces a very good red wine. The applicant was, with other small boutique wineries, in business in that area in the 1980s. In about 1987 the boom in the wine industry took off, and since 1987, the time of the fire, there has been unparalleled growth in regard to the wine industry, and in particular, the McLaren Vale area.

The applicant had prudently taken out an insurance policy called "Business Safe" and when the fire occurred it made claim on that policy. It is very important in this application to put the submission that the whole point of that insurance policy was to provide immediate funds initially and then a flow of funds over a period of time of the next year. In the event the insurer deliberately, and in breach of the obligation of the utmost good faith, did not pay under the policy. Payment finally came pursuant to an order of the court so long after the event that the whole point of immediate funds, of course, was spent. In the interim between the time of the fire and the time of the moneys finally coming some 18 months later, and even then only part of the moneys, the applicant's business had failed.

If the Court pleases, the trial judge made a finding that the applicant's condition pre-fire was parlous to the point where on the balance of probabilities he found the applicant was doomed to fail anyway. The point of special leave is that notwithstanding that finding on the balance of probabilities, the applicant was entitled to damages for the possibility that he could have survived given the infusion of funds. We are talking about the infusion of something like $400,000 into a small boutique winery, the sort of sum of money that you would expect would allow such a business to be well poised to take advantage of the conditions that have followed in the last 10 years. In essence, the trial judge allowed nothing for the loss of that opportunity. So, at the end of the day, the whole point of the insurance giving the plaintiff an opportunity has been frustrated by the deliberate breach of contract by the insurer.

Our case is that given the finding of the trial judge there should still have been an assessment of damages for that loss of opportunity applying the principles laid down in a different context in Amann Aviation and Malec's Case. That is our first special leave point. We say that this Court has not considered the application of those principles in circumstances where there is an insurance policy and a breach of a contract of the utmost good faith.

There is a second aspect to the strict insurance position, and it is this, and this is the point which divided the court below: at the end of the judgment, his Honour the trial judge allowed the applicant interest on a sum of $100,000 for a period of five and a half years, and his Honour the trial judge allowed interest at 10 per cent. As Justice Duggan, the minority in the court - - -

GAUDRON J: He did not say that, did he? That is a calculation that you have done ex post facto.

MR GRAY: It is a calculation that is inevitable. The period is five and a half years, the amount is $100,000, the allowance is $55,000, the integer in the equation is 10 per cent. The judges, in particular Justice Duggan, found that to be the analysis.

The simple evidence was that the commercial interest rates at the time over the period averaged in round terms 15 per cent or more. So, in ordinary parlance, the insurer, in deliberate breach of its contract of good faith, kept the plaintiff out of at least $100,000 for five and a half years, and no doubt earned 15 per cent plus. The wronged party recovered 10 per cent. So one has the case where the insurer, in breach of the policy, makes a profit by the delay of the litigation. If the Court pleases, we say that is fundamentally wrong, and the reason for the error is a failure to recognise that in the process of allowing interest, which is in effect the statutory means of allowing damages for loss of use, one must have regard to commercial interest or the wrongdoer will benefit at the expense of the wrong party. We say behind that lies plainly a point of principle.

If the Court pleases, could I, before coming back to that aspect of the matter, just develop the other special leave point because it is related. The trial judge found that the applicant's business was doomed to fail. That finding was challenged on appeal. Much turned on what was the true worth of the applicant's business pre-fire. We say, if the Court pleases, that the Full Court has committed fundamental errors in regard to that matter. It comes down to this proposition, that the Full Court, and in particular the judgment of Justice Millhouse, with whom Justice Bollen agreed, said that the applicant was stuck with the values to be found in its company's records prepared for tax purposes. So that on the reasoning of Justice Millhouse, if one has company accounts in which you carry assets at the historic cost, you cannot come to court and say to the court, "That's an historic figure, here's the real value". The matter is compounded even further - - -

DEANE J: Even if one does not accept that comment of Justice Millhouse when he said "They're your accounts therefore you're landed with them and you can't challenge values", it does not seem to me to take you very far in this case.

MR GRAY: If the Court pleases, the point is this, that the applicant's case at trial was that this business was negatively geared, deliberately so, and designed to run at break even or loss, and that it was going to take its profit through equity or capital growth, build-up of stock and goodwill. By definition, having conducted a business in that way, it is no surprise to find, as far its books is concerned, it appears to be trading at break even or loss with liquidity problems. It was designed to do that. What the books disguise was the fact that there was a build-up of assets and goodwill. For example, in regard to goodwill, Justice Millhouse reasons because there is an accounting convention that you can only show goodwill when you purchase it, therefore this business had no goodwill.

The fact of the matter was that this business had operated for 10 years, always at break even or loss, and had built up an increasing market. It had a market for something like quarter of a million dollars worth of stock at the time of the fire, and the evidence of the valuer was that in this business goodwill is assessed as a product of market. Somebody buying this company, albeit running unprofitably, would pay a sum of money for the market share. Justice Millhouse says to ignore that, that is irrelevant. The goodwill figure was $70,000 and just to demonstrate how significant that figure alone is, if the Court turns to the very last page in the application book, there is a document that has been put in by the respondent in its application - page 187. This document allows for all the adjustments and finally shows that on the respondent's case this business had a deficiency of $62,000 given its calculations. If one puts back in the $70,000 goodwill, one immediately has a small surplus with that adjustment alone.

Our case, if the Court pleases, is that if Justice Millhouse had allowed us to develop the real value argument and explain where the tax accounts were showing historical or written down figures as against real value, that there would be a surplus of something approaching a quarter of a million dollars. The goodwill happens to be an easy figure to identify and extract to show that that figure alone would have put this business into a position where its assets exceed its liabilities.

The question of the treatment of goodwill and the exclusion of it has implications far wider than this case. The next plaintiff coming before the South Australian Supreme Court wishing to argue that it had an asset goodwill that it had built up but had not purchased would be told, "Well no, there's a binding authority of the Full Court saying it has to be ignored".

McHUGH J: Not everything in the law reports is law.

MR GRAY: That may be so, but this has the distinct advantage of being contemporaneous and available to the local community and would be binding. If the Court pleases, we say if the Court goes to pages 154 to 156 in the application book that the passage starting at page 154 line 35 through to 156 line 20 is wrong and, for the sake of emphasis, utterly wrong. The applicant was not bound by accounts prepared for one purpose when its task was to produce evidence of what the position really was to the court. The High Court in the taxation area has dealt with this issue and made it quite plain that accounts are there for a purpose and a limited purpose, and they do not address real value; they address accounting value, all designed for a particular purpose. What has gone wrong here - and it goes back to the trial judge because the trial judge did the same thing with goodwill - is that this trial has miscarried. This applicant was not able to present that material.

Could I put one other aspect to the Court in regard to the evidentiary side of it, and it is this, that the applicant wished to say to the court below and called evidence from a number of other neighbouring boutique wineries that all their accounts look like this. This is the way these businesses ran. They all ran at break even or loss, and they all took their profit through equity growth and goodwill. That is the way the business was conducted in the area. The applicant was not allowed to lead that evidence, it was said because it had not been fully opened.

If the Court pleases, in a sense, that is not a special leave point, but this applicant was not able to lead the evidence of his neighbours, how their accounts look the same as its, did not have taken into account the evidence of its real goodwill and its real value. It then suffers a finding that it was doomed to fail, and is then told, "You get nothing for the prospect you might have done something with the infusion of $400,000". If the Court pleases, we would ask the Court to take a step back and look at the common sense of it. The idea that one could not inject $400,000 into a small boutique winery business in that area on the threshold of the growth that has followed and say that it would not be viable offends common sense. The sum of money against the outlays involved is very, very adequate. One could have simply acquired or started again an entire new business and made a success of it.

If the Court pleases, they are our essential points in regard to special leave. It is, we see, as being an essentially a short point and the ultimate result if we are successful would be a remission of the matter back to a trial for an assessment. The interest aspect of the matter has a particular sting to it, and that is that the effect of the increase in interest that we seek would take the plaintiff over rules of court offer, so it does have quite significant implication - - -

DEANE J: I am sorry. Would take the plaintiff over?

MR GRAY: Over a rules of court offer that was filed. The interest award has, we say, three significant features to it. The first is that it would lead to an award that the plaintiff is entitled to some more money. Secondly, it would impact very severely on the order for costs made at trial, and the plaintiff would have a much greater indemnity than in fact it has achieved. Thirdly, it would allow the court, and perhaps most importantly, to deal with this point of principle; namely, in the case of an insurer breaching deliberately a contract of good faith, that it should not be allowed to make a profit by its breach. This is a case where the insurer's manager was called as a witness at the trial and he deposed to the fact that he was well aware that by refusing to pay under the policy that one of the consequences was likely to be the collapse of this business.

The other aspect of the case that does bear mention is that there is no dispute that the plaintiff's business suffered the losses that it did. That is not in issue. In a sense, the issue was one of what caused that, and behind that lies, of course, the reasoning in Amann and the reasoning of, in particular, Justice Brennan, that these contracts deliver two benefits: one is the insurance cover; the other is the opportunity to use that money at a particular time in a particular way. May it please the Court, they are our submissions in regard to special leave.

DEANE J: Thank you, Mr Gray. The Court need not trouble you, Mr Abbott.

In a context where the trial judge's award of interest involved a discretionary element and has been confirmed by a majority of the Full Court, we do not think it would be appropriate in all the circumstances of this case to grant special leave to appeal to consider whether the underlying rate of interest allowed was inadequate. Otherwise, the Court considers that an appeal would not give rise to any question of general principle appropriate to attract a grant of special leave to appeal to this Court. Accordingly the application for special leave is refused.

MR ABBOTT: I make application for costs, if the Court pleases.

MR GRAY: Nothing to put.

DEANE J: The application is refused with costs.

AT 3.14 PM THE MATTER WAS CONCLUDED