Admiral International Pty Ltd v Insurance Australia Ltd

These are two appeals from a decision of Fagan J (the primary judge) in which his Honour dismissed claims brought by Admiral International Pty Ltd (Admiral) against its insurer, Insurance Australia Ltd trading as CGU Insurance (CGU), following the destruction by fire early in the morning of 16 April 2018 of a warehouse at 1/64–66 Burrows Road, Alexandria (the warehouse), from which Admiral conducted its customs warehousing business: Admiral International Pty Ltd v Insurance Australia Ltd; Brightcity International Trading Pty Ltd v Admiral International Pty Ltd [2021] NSWSC 1440 (the primary judgment or PJ).

Admiral was permitted to receive and store bonded goods at the warehouse pursuant to two licences issued to it conjointly by the Australian Border Force (ABF) and the Australian Taxation Office. The first was a “depot licence”, under s 77G of the Customs Act 1901 (Cth), which permitted Admiral’s short-term storage of bonded goods in order to enable unpacking and consolidation for safe and secure management. The second was a “warehouse licence”, under s 79 of the Customs Act, which generally permitted Admiral’s indefinite storage of bonded goods in a specific section of the warehouse (the bond store) and subject to certain conditions, including that bonded goods were required to be kept intact, ordinarily through the application of wrapped sheet plastic to unloaded pallets of alcohol or tobacco products, until the outstanding duty had been paid on them. [1]

Admiral stored both duty-paid goods (free goods) and those on which customs duties were outstanding (bonded goods) at the warehouse in consideration of a specified sum calculated on a per unit per week basis and payable by a customer (ordinarily an importer of goods into Australia). [2] The majority of the goods held by Admiral were imported alcohol and tobacco products. [3] A significant delivery of tobacco products having a retail value of well over $6 million had been delivered to the warehouse in the business week ending Friday 13 April 2018, although the precise date of delivery was not apparent from the business records.

Neither Denis Fateev (Denis), the then 27-year-old Managing Director of Admiral who had been running the business for five years at the time of the fire, nor his father, Dmitry Fateev (Dmitry), who worked part-time in the business, was in the country at the time of the fire, which occurred in the early hours of 16 April 2018. Because of the frequency with which it will be necessary to refer to them in the balance of these reasons, Denis and Dmitry will be referred to by their first names.

Denis departed for Hong Kong early in the afternoon of Friday, 13 April 2018 and his father departed Sydney for Vladivostok, Russia at 7.45am on the morning of Sunday, 15 April 2018, some 17 hours prior to the fire. He suffered a stroke in June of that year and died in Vladivostok of natural causes on 28 January 2021, prior to the trial. He never returned to Australia following his departure from Sydney on the morning of 15 April 2018. It should be noted that Dmitry’s mother lived in Vladivostok, and there was evidence that she was very ill at the time of Dmitry’s trip (she later died) and that Dmitry had visited her in Vladivostok previously.

The primary judge held that Dmitry was the architect both of a theft of a valuable quantity of goods, including cigarettes, from the warehouse on the evening of Friday, 13 April 2018 and in the course of Saturday, 14 April 2018 as well as of the subsequent arson although, self-evidently due to his departure from Australia prior to the fire, he was not the arsonist. Police inquiries into the arson were still ongoing at the time of the trial and the hearing of the appeals.

The primary judge held that there was: [4]

The central issue before the primary judge, in terms of Admiral’s claim for indemnity by CGU, was whether Admiral, through Denis, knew of and consented to the deliberate theft and subsequent arson of the warehouse and its remaining contents. [5] His Honour held that it did, meaning that Admiral’s claim against CGU for indemnity was precluded by the “fraudulent or dishonest acts” exclusion clause in the relevant insurance policy, reproduced at [20] below. The primary judge held that: [6]

On appeal, Admiral originally challenged the primary judge’s findings as to Dmitry’s role in the theft and arson, of which he held that Denis both knew and approved. Admiral abandoned that challenge in the course of the hearing of the appeal.

The central issue on appeal therefore concerned the primary judge’s findings, based on circumstantial reasoning, as to Denis’ knowledge of, consent to and connivance in the deliberate destruction of the warehouse and its contents by fire, which he held was designed to conceal the earlier theft of valuable goods.

Further issues on appeal concerned an alleged failure by Admiral to take “reasonable precautions” to prevent the destruction of a customer’s goods in the fire, which CGU relied upon to refuse indemnity under Admiral’s liability insurance policy, discussed below, as well as Admiral’s claim for consequential loss beyond policy limits.

As noted above, in relation to the “reasonable precautions” issue, Admiral had brought a separate claim for indemnity against CGU arising from its liability to Brightcity International Trading Pty Ltd (Brightcity), a firm that operated a business importing alcohol and tobacco products from China into Australia, and which was a major (if not the largest) customer of Admiral, with its goods constituting 23% of the total goods in storage at the warehouse at the time of the fire. The entirety of Brightcity’s goods in storage at the warehouse was destroyed in the fire.

It was agreed between the parties that Brightcity’s goods were valued at $2,364,460.20, that Brightcity had incurred $967,393.80 in transport and duty costs on free goods prior to the fire, and that profit in the sum of $246,132.90 could have been earned on the sale of the destroyed goods. [7]

Brightcity sued both CGU and Admiral in relation to goods which had been destroyed in the fire, and those proceedings were heard concurrently with Admiral’s claim for indemnity against CGU (the Brightcity proceedings).

In the Brightcity proceedings, judgment was entered for Brightcity against CGU in the sum of $3,337,854, with CGU to pay one-third of Brightcity’s costs on its claim. In the present appeal, CGU did not challenge this decision.

Brightcity also obtained judgment against Admiral for $246,132.90 in damages for breach of bailment, together with two-thirds of Brightcity’s costs of its proceedings.

Admiral’s separate claim for indemnity from CGU, against its liability to Brightcity, had been brought as a cross-claim in the Brightcity proceedings pursuant to a General & Products Liability Policy issued for the period of 12 months from 30 September 2017 (the Liability Policy).

Admiral was insured by CGU pursuant to an Industrial Special Risks Policy (the ISR Policy) issued for a period of 12 months from 30 September 2017, as well as by the Liability Policy. By the ISR Policy, CGU agreed to indemnify Admiral in accordance with the following insuring clause:

That insuring clause was qualified by a “fire and perils only endorsement”, which was expressed as follows:

Exclusion 7 of the ISR Policy (the fraud exclusion), as modified by an endorsement, relevantly excluded indemnity for:

The ISR Policy also contained an Interests of Other Parties Clause in the memorandum to s 1 of the policy wording (the IOP clause). The IOP clause provided that: [8]

It was in reliance upon this clause that Brightcity successfully brought proceedings against CGU. As already noted, Brightcity also sued Admiral. In circumstances where it was an agreed fact that none of Brightcity’s goods had been stolen from the warehouse prior to the fire, it was also agreed that the ISR Policy responded to Brightcity’s claimed loss. [9]

Admiral sought indemnity from CGU in respect of its liability to Brightcity, pursuant to cl 1.1 of the Liability Policy, which provided that CGU:

The general wording of cl 1.1 was qualified by the definition of “occurrence” in cl 4.15 of the Liability Policy, as follows:

The general obligation of CGU to indemnify Admiral under the Liability Policy was further qualified by cl 8.16, titled “reasonable care”, which relevantly provided that Admiral must:

The object of the reasonable care requirement in cl 8.16, namely “You, Your, Yours”, was relevantly defined in cl 4.29 of the Liability Policy to mean:

As of 16 April 2018, all nine issued shares in Admiral were held by Admiral Corporate Group Pty Ltd, of which Svetlana Fateev (Svetlana) was the sole shareholder and director. Svetlana (who was Dmitry’s wife and Denis’ mother) had also managed Admiral’s bookkeeping since it commenced operating. Dmitry had operated a predecessor freight carrying and courier business through Admiral Management Group Pty Ltd until 2013, when it went into liquidation. He thereafter worked part-time at Admiral assisting with the receipt, despatch and delivery of customers’ goods.

At all relevant times, Denis was the de facto Managing Director of Admiral. He was 27 years old, married and had a young family when the warehouse was destroyed by fire. His unchallenged evidence was that he was:

Denis’ younger brother, Nickita, worked part-time at Admiral in a similar capacity to Dmitry and lived with his parents. [10] Admiral also employed a number of persons who were not members of the Fateev family, including Mr Artur Russkikh (Mr Russkikh), who served as Admiral’s Operations Manager throughout 2018.

Admiral had occupied the warehouse for almost four years as at the date of the fire, having commenced occupation under a four-year lease on 1 May 2014, which was due to expire on 30 April 2018. An extension of three months had been negotiated as at the time of the fire.

On 9 March 2018, Denis had signed heads of agreement to lease a warehouse at Birnie Street, Lidcombe, with a floor area of over 2,000m2 for a term of five years commencing on 1 April 2018, with an option for a further five years. At about the same time a bond of $104,500, representing three months’ rent, was paid by Svetlana.

On 9 April 2018, the landlord of the Alexandria warehouse foreshadowed giving Admiral notice under its current lease, to which Denis replied “we will need to relocate to a cheaper facility. 90 days will be more than enough time for us to vacate this unit”. The landlord subsequently confirmed a handover date of 9 July 2018. The lease of the Lidcombe premises was executed on 9 April 2018 with a commencement date of 16 April 2018 (the Lidcombe lease).

There was evidence that, on 9 April 2018, Denis told Mr Stanislav Kozinets (Mr Kozinets), a sub-tenant at the Alexandria warehouse, that “it would be two to three months while [Admiral] moved all the stock over” to the Lidcombe premises. As shall be seen, this evidence is significant in view of one aspect of the primary judge’s analysis.

Also of significance was that Denis was the guarantor under the Lidcombe lease, personally guaranteeing payment of annual rent of $380,000 plus GST in monthly instalments over the five-year term of the lease.

On Thursday 12 April at 12.43pm, Admiral received an email from Mr Maurizio Gazzara (Mr Gazzara) of Morris Automotive Pty Ltd, which read as follows:

Mr Russkikh (of Admiral) replied to this inquiry at 1.26pm on the same day, indicating that the storage cost was $15 per pallet per week. Mr Gazzara responded at 2.14pm, acknowledging this reply and inquiring whether it would be possible to drop some pallets off “in the next few days”. Further communication ensued with Mr Gazzara emailing Mr Russkikh at 1.19pm on Friday, 13 April 2018, asking whether he could start to drop pallets at the warehouse on Saturday morning, indicating that he had 20–30 pallets, and seeking confirmation that someone would be present at the warehouse to receive them. Mr Russkikh responded shortly thereafter as follows:

The evidence, in the form not only of an Affidavit of Mr Gazzara but also CCTV footage, disclosed that the deliveries in fact commenced on the Friday evening and continued on the Saturday morning.

Although the initial inquiry received from Mr Gazzara referred to storage of “car parts and accessories”, it appears that the actual delivery that was made comprised used tyres, which the primary judge found were spread around the warehouse and in effect used to fuel the fire when it was lit early on the Monday morning. The link between the delivery and the presence of used tyres was reinforced after the fire, when Mr Gazzara supplied Mr Russkikh with an invoice that referred to 318 mixed used tyres and 53 used vehicle batteries. This information was only supplied after Mr Gazzara had been chased up by Admiral on many occasions, seeking information relating to the goods delivered to the warehouse for the purposes of formulating an insurance claim. Mr Gazzara’s covering email to Mr Russkikh on 22 June 2018 included the following:

The primary judge noted that, following inspections of the warehouse on 19 April 2018 and then 16, 17, 18 and 20 July 2018, CGU’s expert forensic fire investigator (Mr Pellegrino) issued a report in September 2020 showing that “he had found, spread through the warehouse, 19 pallets or remains of pallets on which there were used motor tyres, in some cases partially burnt or heat damaged, and/or remnants of radial steel tyre reinforcing consistent with tyres having burned away”. [11] The report also noted that in the western half of the northern aisle of the warehouse, there were five pallets of used tyres and, halfway down the middle aisle, there were two more, with a further 12 distributed along the southern aisle. The report concluded that the tyres would have acted as an accelerant “because of their fuel load and high heat release rate”.

Mr Gazzara was cross-examined extensively on an Affidavit he had made which was read on Admiral’s behalf in the proceedings at first instance. That Affidavit purported to give, inter alia, Mr Gazzara’s explanation of why and to whom he was proposing to export a cargo of used tyres, and the circumstances of their delivery. His account was squarely rejected by the primary judge, who described it as containing numerous contradictions and improbabilities. His Honour held that: [12]

Mr Gazzara also gave evidence (which the primary judge also did not accept) [13] that Dmitry told him after the second or third load had been delivered on the Saturday morning that all of the pallets that had been delivered on the Friday night and Saturday morning had to be reloaded and taken away for re-packing, which he says he then did by taking them either to Revesby (18km from the warehouse) or Rossmore (35km away) and then returning them to the warehouse.

His Honour also rejected Mr Gazzara’s denial that goods belonging to Admiral’s customers were removed from the warehouse in the trucks that he and his two associates drove. The primary judge found that “late on Saturday 14 April Mr Gazzara and his two associates delivered to the warehouse more than 300 used motor tyres on approximately 19 pallets, for the purpose of fuelling a fire that was to be ignited early on the Monday morning”. [14]

Later in the primary judgment, his Honour rejected the evidence of Dmitry (who had sworn an Affidavit on 8 December 2020, just over a month prior to his death) and that of Mr Gazzara, to the effect that the three trucks captured on CCTV footage repeatedly attended the warehouse on the evening of 13 April and during the day on 14 April 2018 merely to deliver tyres, finding that this body of evidence had no credibility and provided no material support for any reasonable hypothesis alternative to the inference of a large-scale theft. [15] In other words, the primary judge held that the trucks driven by Mr Gazzara and his associates were used to deliver tyres to the warehouse for the purposes of fuelling the fire and also to convey the stolen goods from the warehouse.

More than a month prior to the fire, on 9 March 2018, Denis travelled to Chongqing, China on business and arranged, on his way back to Australia on the afternoon of 4 April 2018, to meet in Hong Kong with a solicitor acting for Juhao Flavor (Hong Kong) Co Ltd (Juhao) with whom Admiral appeared to have been in discussions about the proposed storage of imported food products at Admiral’s warehouse. The purpose of the proposed meeting was “purely to clarify the warehousing and logistic protocol and to understand Admiral’s standard trading terms and conditions”.

Denis cancelled the meeting shortly after midday on 4 April and returned to Australia shortly thereafter.

The primary judge then recorded that, on Thursday, 12 April 2018, Ms Debbie Fu (Ms Fu), a solicitor acting for Juhao, wrote to Denis requesting a number of documents relating to Admiral’s business, such as insurance policies, audited accounts, a list of major contracts and an organisational chart. The letter included the following:

On Thursday 12 April 2018, Denis booked a flight to Hong Kong departing Sydney at 2.20pm the next day, Friday, 13 April 2018. The booking included a return flight departing at 8.00pm on Tuesday, 17 April 2018, Hong Kong local time, and arriving in Sydney on the morning of 18 April 2018. That trip involved a meeting with Ms Fu in relation to the Juhao transaction. According to the evidence, the meeting occurred on Sunday, 15 April 2018. As shall be seen, the primary judge considered that this trip was designed to provide Denis with an alibi in relation both to the theft of goods and the subsequent arson in order to conceal the theft.

More detail of Denis’ engagements in Hong Kong is considered later in these reasons, in the context of considering Admiral’s attack on the primary judge’s finding of alibi.

According to its inventory schedule entry for Friday, 13 April 2018 (being the last business day before the fire in the early hours of Monday, 16 April 2018), Admiral was storing approximately 609 pallets of goods for its customers (the approximation likely being the result of the presence of “part pallets”). Those 609 pallets included 18 intermediate bulk containers (IBCs), each of which contained 1000 litres of pure alcohol and were recorded by the primary judge as constituting a whole pallet. Of 609 pallets in total, 271 contained cigarettes and 129 contained alcohol.

As noted above at [47], Denis left for Hong Kong at 2.20pm on Friday, 13 April 2018. His evidence was that he thought that Dmitry drove him to the airport.

There was evidence of extensive movement of three trucks to and from the warehouse on the evening of 13 April 2018 and throughout the next day, which was captured on CCTV. There were five individual arrivals and departures by the trucks on Friday, 13 April 2018 between 6.16pm and 10.35pm, and a further 14 arrivals and departures on Saturday, 14 April 2018 between 6.21am and 11.11pm. CCTV footage showed that Dmitry was present at the warehouse at all of the relevant times over the Friday and Saturday, bar three periods totalling approximately three hours on the Saturday. He was also involved in the loading of the trucks by forklift. Dmitry had arrived at the warehouse at 5.52am on Saturday, 14 April 2018. He departed and returned on numerous occasions throughout the remainder of that day before departing for a final time at 11.11pm.

Mr Gazzara's discredited and disbelieved evidence as to what transpired between him and Dmitry to explain the movement of trucks on the Saturday has already been noted: see [40]–[41] above.

It was an agreed fact between the parties that Dmitry was the last person to have access to the warehouse prior to the entry of the anonymous arsonist in the early hours of 16 April 2018.

The warehouse was fitted with an alarm system, including motion sensors and reed switches on certain internal doors, which had been upgraded by Mr Peter Yammine (Mr Yammine) at some time prior to April 2015, from which time he subcontracted Securitas Australia Pty Ltd (Securitas) to provide back-to-base monitoring of the alarm system.

Mr Yammine gave evidence and was cross-examined before the primary judge. He deposed that Admiral’s alarm system was working properly during March and April 2018 and that “if the alarm was in an armed condition early on 16 April 2018 before the fire started a person could not have forced entry into the warehouse without triggering one of the motion sensors” and causing an “alarm event” to be signalled to and recorded by Securitas. [16]

No such event, including the arming of the alarm system, was signalled or recorded following the activation of the internal office-to-warehouse door at 5.59pm on Saturday 14 April 2018, at which time Dmitry was present at the warehouse, until Securitas recorded a “direct wireless complete communications failure” at 12.28am on Monday, 16 April 2018. That final alarm event corresponded with the approximate timing of the fire taking hold of the warehouse.

On the basis of that sequence of events, the primary judge was satisfied that “Admiral’s warehouse alarm was not armed at the time of the fire and had not been since Dmitry Fateev left the premises late on the preceding Saturday night”. [17]

The primary judge described the overall security infrastructure at the warehouse as consisting of: [18]

His Honour observed that “these security devices were all disabled at the time when the fire was deliberately started shortly after 12:24am on Monday, 16 April 2018”. [19] His Honour placed responsibility for these security failures with Dmitry, as the last person to have attended the warehouse prior to the fire, recording that “[o]n his last departure he failed to secure the door between the back of the office and the warehouse, to arm the alarm system, to lock the front door to the office or to lock the front driveway gates”.

Crucially, the NVR was not recording footage from any of the various CCTV cameras mounted throughout the warehouse and at its entrance as at the time of the fire igniting, nor had it recorded footage since around 9.45am on Monday, 9 April 2018. [20] (It should be noted that on 9 April 2018, Denis had arranged for a technician to come to the warehouse to investigate a beeping noise made by the NVR. It transpired that the hard drive in the NVR had failed and, as it was still under warranty, a replacement hard drive was ordered which Mr Yammine expected would arrive in 2–4 days. It does not appear to have been delivered prior to the theft and the fire, although the NVR remained in place and capable of transmitting, though not recording, footage). [21] The difficulty with the NVR did not result in a complete absence of evidence comprising CCTV footage, as: [22]

On the basis of this body of footage, the primary judge found that “[n]either entry was secured by the closing of the double gates at any time from 4:00 pm on Friday 13 April until the time when the arsonist drove in through the north vehicle entry, parked outside Unit 1, entered the warehouse, started the fire, returned to his car and drove away.” [23]

In this context, the primary judge found that Dmitry had left the double doors to Admiral’s office unlocked when the anonymous arsonist arrived, in circumstances where security of those doors “depended upon a heavy, lockable patio bolt on the external surface of the right-hand door”. His Honour recorded that “[i]mmediately after the fire, the patio bolt was found to be unlocked” [24] and reasoned that this was the result of Dmitry’s conduct, as follows: [25]

As the primary judge recorded: [26]

The site of the fire became a crime scene and investigations were commenced not only by the police and the ABF but also CGU. There was no suggestion that Admiral, through Denis, did not give full cooperation to the investigating authorities and CGU. Indeed, there was evidence that he facilitated inquiries as he was no doubt obliged to do under the insurance policies. The warehouse was subsequently demolished, with the process of demolition and debris removal commencing on Monday, 16 July 2018.

As has already been noted, the primary judge accepted Mr Pellegrino’s evidence [27] and held that the fire was fuelled by tyres located within the warehouse which had been brought onto the premises for that purpose, with the tyres acting as an accelerant “because of their fuel load and high heat release rate”. [28] The tyres had been brought onto the premises by Mr Gazzara and two associates, outside of ordinary business hours, and there was no obvious commercial benefit to either party in moving the tyres into the warehouse. As noted at [40]–[41] and [52] above, Mr Gazzara’s evidence that the tyres were intended for export was not accepted as plausible and was undermined by his inability to provide any satisfactory explanation in this respect.

It was also held, based upon the expert report of Mr Pellegrino, who had inspected the remains of the warehouse shortly after the fire in April and July 2018 but whose report was only served in September 2020, that the tyres were located around the floor of the warehouse in a configuration which could not be explained and which made no practical sense because they would have obstructed the ordinary use of the warehouse. It was also noted that other combustible items, including ethanol and toilet paper, were placed around and near the tyres. [29]

Denis arrived back in Sydney on 17 April 2018, having been informed of the fire whilst he was in Hong Kong. As noted above, he was originally scheduled to return home on the morning of the following day.

Following the fire, Admiral’s insurance broker notified CGU of a claim for indemnity under the ISR Policy on 16 April 2018. CGU had not notified Admiral of a decision on indemnity by 8 November 2018, on which date Admiral commenced proceedings in the District Court relevantly seeking a declaration that CGU was bound to indemnify it. These proceedings (the CGU proceedings) were subsequently removed into the Supreme Court and were heard concurrently with the Brightcity proceedings: see [14] above.

On 9 April 2019, CGU’s solicitor wrote to Admiral and advised that, based on the facts and circumstances known to CGU following a professional investigation conducted by, amongst others, Mr Pellegrino, it had determined that Admiral was not entitled to indemnity and that CGU therefore declined its claim.

It was CGU’s position that Admiral’s claim was excluded by the ISR Policy Condition 7 (Fraud) (the fraud condition) so as to engage s 56 of the Insurance Contracts Act 1984 (Cth). The fraud condition was expressed as follows:

Also relevant to CGU’s decision to refuse indemnity was the fraud exclusion, the relevant terms of which have been noted above at [20].

According to CGU, the fraud exclusion and condition were both engaged in circumstances where “the fire was deliberately started with the knowledge, consent or authorisation of Admiral and, in any case, Admiral has made fraudulent misrepresentations to CGU for the purposes of pursuing the Claim under the Policy” (emphasis added).

CGU provided the following particulars of its determination that Admiral had committed arson fraud:

CGU also provided the following particulars of its determination that, in bringing the claim for indemnity under the ISR Policy, Admiral had made fraudulent misrepresentations:

Essentially, it was contended that Admiral had knowingly authorised or consented to the extensive theft of some of its customers’ goods from the warehouse and, subsequently, had knowingly authorised or consented to an act of arson in the warehouse, presumably to conceal the earlier theft.

In response to CGU’s refusal of indemnity, Admiral commenced the CGU proceedings by filing a Statement of Claim seeking a declaration that CGU was bound to indemnify it under the ISR Policy, and damages for breach of contract and for breach of the duty of utmost good faith as set out in s 13 of the Insurance Contracts Act.

The CGU proceedings at first instance, together with the Brightcity proceedings, were heard over nine days in September 2021, during which Denis was cross-examined at length and nine other witnesses gave oral evidence. As noted at [43] above, an Affidavit sworn by Dmitry on 8 December 2020, shortly before his death, was also admitted into evidence.

In the proceedings at first instance, it was not in dispute between the parties that the fire had been deliberately lit. Admiral denied any knowledge either of the theft of any goods from its warehouse or the act of arson. It has already been noted that Dmitry had left the country early on the morning of 15 April 2018, prior to the fire having occurred. In addition, Denis was overseas at the time of the fire, having flown to Hong Kong some two-and-a-half days prior to the fire.

As noted above at [8], the primary judge framed the central issue for his determination as being “whether Admiral knew of and consented to the deliberate burning of the warehouse and its contents”, [30] in circumstances where his Honour had found there to be: [31]

The primary judge’s finding that Dmitry orchestrated and participated in the theft of a significant quantity of goods stored at the warehouse by Admiral, during the weekend prior to the fire, was reached by inference from the following circumstances: [32]

The primary judge’s subsequent conclusion that Dmitry intentionally facilitated the lighting of the fire that destroyed the warehouse was established on the balance of probabilities, by inferential reasoning, from the following circumstances: [33]

The primary judge rejected CGU’s argument that Dmitry was relevantly the controlling mind and will of Admiral and that his actions were attributable to the company. [34] His Honour concluded that Dmitry’s “role in the business of Admiral as a part time warehouseman and delivery driver, was far too limited to constitute him the directing mind and will of the company”. [35] There is no cross-appeal from that conclusion.

Accordingly, CGU’s entitlement to decline indemnity turned, in the primary judge’s words, upon its ability to “establish that Denis Fateev, as the controlling mind and will of the insured company, connived at Dmitry Fateev’s procurement and facilitation of the fire”. [36] The primary judge reached a positive conclusion on that proposition, such that CGU was entitled to refuse indemnity, by a process of inferential reasoning, reflecting the fact that “[t]he evidence that the fire was deliberately lit with Admiral’s knowledge and consent is entirely circumstantial”. [37]

On the hearing of the appeal, Mr Sullivan KC, who appeared for Admiral with Mr Olson, focussed upon the primary judge’s analysis leading to his conclusion that Denis knew of and connived in the arson. That analysis was contained in PJ [186]–[207] and is set out in full at [104] below, as it was the subject of close and searching critique in oral submissions and the focus of Admiral’s various grounds of appeal and challenges to factual findings made by the primary judge.

Before turning to consider that critique, and the grounds of appeal by reference to which it was made, it is desirable first to set out the principles and authorities governing various aspects of the present case, namely the standard of proof, proper pleading of allegations of fraud, and the circumstantial reasoning employed by the primary judge in reaching his ultimate conclusion on the central issue, as well as familiar principles relating to appellate review.

First, the nature of the allegations, namely Admiral’s connivance in acts of theft and arson, and a subsequent fraudulent insurance claim in light of its knowledge and connivance, engaged s 140(2) of the Evidence Act 1995 (NSW), which has been equated with the well-known observations in Briginshaw v Briginshaw (1938) 60 CLR 336 at 360–362; [1938] HCA 34 (Briginshaw); see also Clancy v Plaintiff A (2022) 318 IR 31; [2022] NSWCA 119 at [26], citing Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170; [1992] HCA 66 (Neat Holdings); Amalgamated Television Services Pty Ltd v Marsden [2002] NSWCA 419 at [61], where it was said that “[i]t is well accepted that the test to be applied under s 140(2)(c) is the Briginshaw test”; and New South Wales v Hathaway [2010] NSWCA 184 at [263], where it was said that in a case involving allegations of serious misconduct with grave consequences, “clear or cogent or strict proof” is required.

In Briginshaw, a case involving a charge of adultery, Dixon J conceived of the principle that a “court should only make a finding of wrongdoing if satisfied to a standard that recognises the seriousness of what is alleged” (see Jagatramka v Wollongong Coal Ltd [2021] NSWCA 61 at [7]) in the following terms: [38]

Secondly, it is a fundamental requirement of procedural fairness that allegations of fraud are pleaded with strict particularity: ET-China.com International Holdings Ltd v Cheung (2021) 388 ALR 128; [2021] NSWCA 24 at [172]. This principle is explicitly enshrined in r 15.3 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR), titled “allegations of behaviour in the nature of fraud”, which requires that “[a] pleading must give particulars of any fraud, misrepresentation, breach of trust, wilful default or undue influence on which the party relies”. Rule 15.3 operates in conjunction with r 15.4, concerning “allegations as to condition of mind”, which is expressed as follows:

The significance of the requirement that fraud be specified and particularised clearly in pleadings is further indicated by the fact that it is expressly raised in the UCPR’s “general rule as to matters to be pleaded specifically”, in the following r 14.14:

This requirement is well established and of long standing, as was noted by Mason CJ and Gaudron J (with whom Brennan and Toohey JJ respectively agreed) in Banque Commerciale SA (En Liqn) v Akhil Holdings Ltd (1990) 169 CLR 279; [1990] HCA 11 (Akhil), a case in which a party sought to defeat a limitation defence under the now-repealed s 69 of the Trustee Act 1925 (NSW) on the basis of a fraudulent breach of trust. Their Honours observed that: [40]

In Sgro v Australian Associated Motor Insurers Ltd (2015) 91 NSWLR 325; [2015] NSWCA 262 at [55]–[57], a case involving an allegedly fraudulent insurance claim, Beazley P (with whom Meagher JA and McDougall J agreed) cited Akhil at 285 in support of the observation that “[t]he seriousness of raising a question of fraud underlies the express pleading requirement that fraud be clearly pleaded and properly particularised: Uniform Civil Procedure Rules 2005 (NSW), r 14.14. The pleading must allege the acts involved and that they were done in a manner that involves fraud”. [41]

In Nadinic v Drinkwater (2017) 94 NSWLR 518; [2017] NSWCA 114 (Nadinic), this Court considered the propriety of serious findings of fraud following a trial in which there were no pleadings nor any particularisation of dishonesty. At [110], Leeming JA (with whom Beazley P and Sackville AJA agreed) affirmed that, as an aspect of natural justice and procedural fairness (Ghazal v Government Insurance Office of New South Wales (1992) 29 NSWLR 336 at 344), a party is “entitled to be informed of the way in which it was said [he, she or it] had been party to [a] fraud”, which evidently underpins the principle in Akhil and rr 14.14(3), 15.3 and 15.4 of the UCPR. However, his Honour also noted that “[i]n theory, it is possible that a party may forego that right, and may do so by acquiescence rather than express election, but such acquiescence is not easily inferred”.

The necessarily high threshold to be met by the trier of fact before making such an inference of acquiescence was made clear by Leeming JA in concluding that the primary judge in Nadinic was not entitled to make findings of fraud in circumstances where: [42]

The above passage from Nadinic (at [109]) makes clear that even where, as in the present case against Admiral, fraud is pleaded and particularised, it is important that matters of that nature are also put to individual witnesses against whom they are alleged, in the course of cross-examination. Failure to do so may, in certain cases, result in the relevant pleading rising no higher than a “bare and unparticularised assertion” as described in Akhil.

Thirdly, as the primary judge observed at PJ [169], the approach to be taken to circumstantial proof in a civil case was described in Bradshaw v McEwans Pty Ltd as follows: [43]

In Palmer v Dolman [2005] NSWCA 361 at [41], this Court (Ipp JA, Basten and Tobias JJA agreeing) extracted the following principles from the relevant authorities which were said to have “become well-established in determining, in a civil case, whether circumstantial evidence leads to an inference of fraud”:

These principles were applied by this Court in Worth v HDI Global Specialty SE (formerly International Insurance Company of Hannover SE) (2021) 393 ALR 93; [2021] NSWCA 185 at [208]–[210] (Worth), another appellate case in which the primary judge had upheld an insurer’s refusal of indemnity by inferential reasoning to circumstantial proof.

Also to be noted is the decision of McDougall J in Ballard v Multiplex [2012] NSWSC 426 at [119], applying the decision of the Victorian Court of Appeal in Transport Industries Insurance Co Ltd v Longmuir [1997] 1 VR 125. His Honour relevantly said:

Obviously enough, in an appeal by way of rehearing under s 75A of the Supreme Court Act 1970 (NSW), such an approach should similarly be followed.

Finally, in Lee v Lee (2019) 266 CLR 129; [2019] HCA 28 at [55] (citations omitted), it was said by the plurality that:

Lee v Lee made plain that earlier observations by the High Court in Robinson Helicopter Co Inc v McDermott (2016) 90 ALJR 679; [2016] HCA 22 at [43] were not intended to undermine, still less overrule, what had been said by the High Court in Warren v Coombes (1979) 142 CLR 531 at 551; [1979] HCA 9.

It was stressed by Mr Watson SC, who appeared for CGU with Mr Kalyk, that the primary judge had made an adverse credit finding against Denis (see [164] and [205] below) and, in this context, he made reference to the recent judgment of Kirk JA in Mt Pleasant Stud Farm Pty Ltd v McCormick [2022] NSWCA 191 at [58]. His Honour, having referred to a portion of the passage from Lee v Lee extracted above, there said:

So much may readily be accepted, although it is important to note that credibility is a larger concept than demeanour, and the latter is not to be overemphasised in considering the former: see White Constructions Pty Ltd v PBS Holdings Pty Ltd [2020] NSWCA 277 at [106] (White), referring to Goodrich Aerospace Pty Ltd v Arsic (2006) 66 NSWLR 186; [2006] NSWCA 187 at [16]–[27]. In White at [138], Leeming JA observed that “[t]he joint judgment in Fox v Percy (2003) 214 CLR 118; [2003] HCA 22 at [31] noted the limits upon the ability of judges to distinguish truth from falsehood accurately on the basis of the witnesses’ appearance, and the tendency to limit judges’ reliance on the appearances of witnesses and to reason to their conclusions, as far as possible, on the basis of contemporary materials, objectively established facts and the apparent logic of events.”

The primary judge’s key findings as to the central issue of Admiral’s knowledge and consent regarding the theft and fire were set out at PJ [186]–[207]. Significantly, his Honour’s ultimate conclusion as to Denis’ (and therefore Admiral’s) knowledge and consent was expressed to have been reached by “[t]aking together all of the circumstances considered above”, [44] namely those discussed at PJ [186]–[206]. In light of this acknowledgment, the nature of the primary judge’s inferential reasoning and the detailed attack on it in this appeal, that section of the primary judgment needs to be set out in full:

Mr Sullivan identified and attacked what he described as a number of often overlapping “strands of reasoning” in the primary judge’s analysis, by reference to particular paragraphs or conclusions at PJ [186]–[207]. In this context, there were numerous grounds of appeal and challenges to findings which were in effect condensed into a critique of these strands of reasoning, and it is convenient to deal with the parties’ contentions on appeal by reference to those strands of reasoning and the attacks thereon. Because of their overlapping nature, some of these strands are addressed together.

It should also be noted that, for the most part, Mr Watson appeared content to rely heavily on the primary judge’s analysis in order to engage directly with Mr Sullivan’s critiques of his Honour’s reasoning.

The first two impugned strands of the primary judge’s reasoning identified by Mr Sullivan are contained in PJ [188]–[189], reproduced at [104] above and, in particular, the primary judge’s observation that: [45]

Having set up the initial premise of a syllogism, the primary judge noted that there was no evidence of family disharmony or divergence of interests, from which his conclusion as to Denis’ knowledge and acquiescence in the criminal activity followed.

The danger of syllogistic reasoning lies in the integrity of the initial premise.

Essentially, his Honour was positing that it was not plausible that Dmitry, who the primary judge had concluded was a serious criminal, viz. one who conceived and/or facilitated the multi-million dollar theft and then arranged for the arson to occur, would act without reference to his eldest son given the close family relationship.

This was not an hypothesis predicated upon or influenced by an assessment of Dmitry’s character or demeanour in the witness box, as Dmitry had died in January 2021 and did not give evidence in the proceedings. His Honour enjoyed no advantage over this Court in that regard.

With great respect to the primary judge, and contrary to his initial premise, there are any number of reasons why a criminal, such as Dmitry was found to be by his Honour, may have acted without his son’s knowledge of and consent to the arson, notwithstanding or even because of their close family relationship. These include:

None of these matters provides an implausible explanation as to why Dmitry may not have told his son of his planned criminality. Mr Watson provided no real answer to this range of possible explanations in the alternative to that adopted by the primary judge, other than to assert that they had not been put to his Honour.

The primary judge used the verb “gamble” in PJ [188] to describe the risk to the Fateev family entailed by the theft and arson of the warehouse. It is notorious that gamblers regularly act without due consideration of the interests of their closest family.

Whilst the primary judge was correct to observe that “the only alternative hypothesis [to the knowledge and complicity of Denis] is that [Dmitry] carried out the theft and arranged the arson without the prior agreement of his son”, [46] the various reasons for keeping Denis in the dark, detailed above, negative the primary judge’s conclusion that “[t]he only circumstance in which that hypothesis could be anything more than fanciful is if there had developed a deep rift between Dmitry Fateev and the other members of the family, in particular, Denis” (emphasis added). [47]

As to the fourth matter noted in [112] above, if the family relationship was harmonious (as it was accepted to be), it is no less plausible that Dmitry would deliberately not expose Denis and his young family to the consequences of involvement in his criminal enterprise in the event of it going wrong.

As to the fifth matter posited in [112] above, there was a host of reasons why Denis would not readily have acquiesced in the criminal enterprise had he known about it in advance.

First, Admiral was Denis’ business, and one which he was evidently planning to grow. As the primary judge observed, “[t]he company was Denis Fateev’s career and his future”. [48] As was submitted on behalf of Admiral, Denis was intent before the fire on continuing to grow its business, as demonstrated by the planned move to new premises in Lidcombe to which Denis had committed, including by way of a personal guarantee, just over a month before the fire (when heads of agreement were signed) and, again, just under a week before the fire (when the Lidcombe lease and guarantee were executed). [49]

Secondly, in addition, Denis had been seeking to develop the business through his negotiations in Asia, including those that had seen him in mainland China as recently as 12 days prior to the fire and in Hong Kong on the weekend prior to the fire, from which he returned on 17 April 2018. In this context, the primary judge accepted that “Admiral had concrete prospects of increasing its business by providing bonded warehouse services to Pegasus Supply Solutions Pty Ltd and by handling food products to be imported from Juhao”. [50]

Thirdly, involvement and/or acquiescence in the theft and arson also carried huge risk for Denis in terms of Admiral’s reputation and an inevitably adverse impact on its custom and prospects of expansion, even if he avoided prosecution and the denial of indemnity. As the primary judge himself said: [51]

Fourthly, and needless to say, there was also the risk of criminal liability, with the offence of “dishonestly destroying or damaging property by means of fire or explosives” attracting a maximum penalty of 14 years’ imprisonment under s 197(1)(b) of the Crimes Act 1900 (NSW), together with the commercial risk of Admiral losing its licence to operate a bonded warehouse, as in fact occurred after the fire.

Admiral called in aid the “conventional perception that members of our society do not ordinarily engage in fraudulent or criminal conduct and a judicial approach that a court should not lightly make a finding that, on the balance of probabilities, a party to civil litigation has been guilty of such conduct”: Neat Holdings at 171 (citation omitted).

In my view, taking into account Neat Holdings, s 140(2) of the Evidence Act and the other authorities referred to at [86]–[103] above, I reject the first two strands of the primary judge’s reasoning. There were multiple “not improbable explanations” as to why Dmitry would not have told Denis of his plans even though the family appeared close knit. It is also significant in this regard that his Honour’s conclusion was not based upon any advantage he had of assessing Dmitry in the witness box.

It was also submitted that another reason why Denis would not have been complicit in the arson was that Admiral would be liable to pay duty in the order of $31,246,030.80, pursuant to s 35A(1) of the Customs Act, if the "missing" cigarettes were stolen, regardless of the thief’s identity or whether Admiral was at fault, that it stood to have its assets applied to that debt and, most significantly for this aspect of the argument, that Denis might be personally liable to pay duty pursuant to the same provision.

Although, as already noted, I consider that the matters rehearsed in [112]–[123] above strongly undermine the first and second strands of the primary judge’s reasoning on the central issue, I do not accept the argument based upon s 35A(1) of the Customs Act and, in particular, the proposition that Denis may have been made personally liable to pay any outstanding duty and would have been cognisant of this risk.

Section 35A(1) of the Customs Act provides:

Although Admiral was the “person” relevantly “entrusted with the possession, custody or control of dutiable goods which are subject to customs control”, Mr Sullivan developed a detailed submission by reference to the decision of the High Court in Comptroller-General of Customs v Zappia (2018) 265 CLR 416; [2018] HCA 54 (Zappia), in which the plurality held that the subject of s 35A(1) is "a person" and that, “[c]onsistent with the section's purpose of protecting the revenue, the operation of s 35A(1) is wider than that of a section dealing with, for example, the ‘holder of a warehouse licence’.” [52] As such, it was held that “[s]everal persons may each possess power or authority to the requisite degree within a chain of command or hierarchy of responsibility.” [53] On the facts of that case, it was held that “the fact that the goods were stolen from the warehouse during a period in which [the Respondent] continued to have [the authority to direct what was to happen to the goods in the warehouse on a day-to-day basis] was sufficient to establish that he failed to keep the goods safely.” [54]

One reason for rejecting the argument based on Zappia is that the decision was not handed down until November 2018 and it reversed the previous state of the law. The majority of the Full Court of the Federal Court had held that an employee of the holder of a warehouse licence could not meet the statutory description of a “person” in s 35A(1). This represented the state of the law at the time of the theft and arson at Admiral’s warehouse and therefore bore upon the likelihood of the risk on which Mr Sullivan relied coming to pass. His argument assumed that Denis not only knew of s 35A of the Customs Act but was also apprised of a potential interpretation of the section which had not yet been given by the High Court. Those assumptions are somewhat far-fetched and, with respect, bear all of the hallmarks of a lawyer’s construct. The argument also assumed that the ABF could demonstrate that there had been a failure to keep the goods safely.

Before leaving the first two strands of the primary judge’s reasoning, something should be said of his Honour’s observation that: [55]

The third strand of reasoning challenged on appeal was the primary judge’s finding that “[i]t was essential to Dmitry Fateev’s own interest of avoiding detection that Denis Fateev should be informed of the scheme and should cooperate.” [56] Admiral attacked this strand of reasoning as “pure speculation”, based on “unconvincing reasoning”. The primary judge’s reasoning was set out as follows: [57]

As to the first matter, which is expressed in terms of the risk of Denis changing his mind and not travelling to Hong Kong or returning home early, in one sense, it is obvious that there would have been a heightened risk of detection by an innocent Denis were he in the country at the time of the theft and arson, but that observation at least equally points to Dmitry capitalising on Denis’ absence overseas to perpetrate the theft and arson without his knowledge or consent. This hypothesis was conceded by Mr Watson during the course of the argument on appeal to have been “a possibility, but it’s barely a possibility”. He submitted that it was only a “bare possibility” because “the timing is just too bad”, pointing to what he characterised as Denis’ unnecessary trip to Hong Kong. That response, in turn, however, depended upon the Hong Kong alibi theory. That is a matter taken up and considered as part of the fourth strand at [136]–[159] below. As will be seen, contrary to the primary judge’s conclusion and Mr Watson’s submission, there appeared to be an entirely legitimate reason for the Hong Kong trip and its timing.

In my view, it may fairly be put as a matter of supposition no less plausible than that accepted by the primary judge that it was the very fact of Denis going to Hong Kong that created the window for the theft and arson to occur. There was no evidence one way or another as to the duration of time over which the theft and arson had been planned, or as to whether the timing was particularly critical in the sense that it may be assumed that the warehouse regularly contained extensive quantities of tobacco that could be stolen and re-sold whenever the opportunity arose. And, as shall be seen below, there was an apparently plausible reason for Denis travelling to Hong Kong which explains the timing of his trip, contrary to Mr Watson’s submission noted above.

If Denis had changed his mind and decided not to travel to Hong Kong, there was no obvious or apparent reason why Dmitry could not call off the theft and arson. Once Denis had gone to Hong Kong, however, the prospect of his returning early on what was only ever planned to be a four-night trip would appear to be remote or at best speculative.

The last two reasons stated by the primary judge at PJ [192], namely the risk of the criminal enterprise being thwarted by Denis either by informing on Dmitry or physically frustrating the planned theft and arson, were reasons not to tell or involve Denis in the criminal enterprise. The analysis at [117]–[121] above applies equally here.

With respect to the learned primary judge, it was no more likely that Dmitry would only have acted with his son’s knowledge and concurrence of the planned theft and arson than that he would not have done so. As with the first two strands of reasoning, the primary judge’s reasoning at PJ [192] did not benefit from any observations of Dmitry in the witness box, and his Honour was in no superior position to this Court in addressing this aspect of the circumstantial case.

At PJ [192], the primary judge referred to the timing of Denis’ trip to Hong Kong as providing an alibi in respect of the theft and arson. Earlier, the primary judge had said that “[t]here was no pressing need for Denis Fateev to go to Hong Kong for the period 13 to 18 April”. [58] His Honour also observed in the same paragraph that “[f]rom the point of view of Admiral’s business, there were good reasons for Denis Fateev to have remained in Sydney at this time, notably, to advance the arrangements for the company’s impending move to Lidcombe.”

There were two elements of the primary judge’s reasoning in this respect: first, that there was no legitimate or pressing need for Denis to be in Hong Kong at the time; and, secondly, that there were good reasons for him to have been in Sydney. Both of these elements were challenged on appeal.

As to the first matter, namely that the Hong Kong trip was a deliberate alibi, although it was never particularised as an element of the alleged fraud (see [73]–[74] above), it was put to Denis briefly in cross-examination:

A consideration of such evidence as there was in relation to Denis’ trip to Hong Kong on 13 April 2018 suggests that there was an entirely legitimate and indeed a pressing reason for it.

As already noted, Denis travelled to Hong Kong on Friday, 13 April 2018 at 2.20pm, prior to the first delivery of used tyres to the warehouse later that day and the related theft and arson across the following three days. His flight was booked at some unspecified time on 12 April 2018. The evidence disclosed that Denis attended a meeting in Hong Kong on Sunday, 15 April 2018 with a solicitor, Ms Fu, who was a consultant to Cheng & Co, the firm of solicitors acting for Juhao, with whom Admiral was in some commercial negotiations at the time. That was the same person with whom Denis had planned to meet in Hong Kong on 4 April 2018, but that meeting was not able to take place: see [44]–[45] above.

Evidence of the meeting on Sunday, 15 April 2018 was contained in an email of 18 April 2018 set out in full at [155] below. That email referred to the meeting as a “preliminary due diligence exercise” in relation to some apparent commercial proposal between Admiral and Juhao. A letter from Cheng & Co of 12 April 2018 (see [154] below) indicated that the due diligence exercise was to be undertaken “to facilitate the preparation of a due diligence report for consideration by the board” of Juhao no later than 18 April 2018. The date of this letter, namely 12 April 2018, was the very same day that Denis arranged to travel to Hong Kong.

These matters did not support, and indeed tended to contradict, the primary judge’s conclusion that “[t]here was no pressing need for Denis Fateev to go to Hong Kong for the period 13 to 18 April”. There was, and is, no suggestion that the interactions between Denis, Cheng & Co and Juhao, including the proposed commercial transaction, related correspondence and the 15 April 2018 meeting, were a sham or contrived or part of any elaborate and deliberate alibi.

The analysis informing this conclusion is reinforced by a detailed consideration of the course of communications and interactions between Denis, Cheng & Co and Juhao leading up to the fire.

The evidence in relation to Denis’ trip to Hong Kong begins with an email from Ms Fu on 29 March 2018 at 12.52pm, which was as follows:

On 29 March 2018, Denis wrote to Ms Fu, presumably in response to her email set out above, as follows:

At 2.15pm on the same day, Ms Etta Chung (Ms Chung) of Cheng & Co emailed Denis, copying both Mr Jimmy Chow (Mr Chow; the Vice President of Juhao) and Ms Fu, in the following terms:

The email attached a letter dated 29 March 2018, but that letter did not find its way into evidence.

Later that day, Denis replied by email to Ms Chung, copying Mr Chow, Ms Fu and Mr Samuel Cheng (Mr Cheng) of Cheng & Co in the following terms:

From this reply, it may be inferred that the letter of 29 March 2018, which had been attached to Ms Chung’s covering email, contained a request for information in relation to Admiral’s business.

On 2 April 2018, Ms Fu emailed Denis, copying Mr Chow, in the following terms, in response to the email set out at [145] above:

Later on 2 April 2018, Denis emailed Ms Chung to advise that he would be in Hong Kong on “Wednesday afternoon” (4 April 2018) and to ask whether she would be available to meet him. On the following day, Ms Chung responded, advising that “our Ms Debbie Fu will be available to meet you on Wednesday (4 April 2018) between 1pm to 3pm in our office. Please kindly confirm your attendance.”

Soon after, in the early hours of 4 April 2018, Denis emailed Ms Chung, copying Ms Fu and Mr Chow, to confirm that he would “visit your office during this time frame tomorrow”. Ms Chung advised, later in the morning of 4 April, that Ms Fu had “not received the standard terms and conditions and a copy of the bill of lading of Admiral International”. It may readily be inferred that these documents had been requested on behalf of Juhao in the letter of 29 March 2018.

Later still on 4 April 2018, Denis contacted Ms Chung, copying Ms Fu, Mr Chow, Mr Cheng and Ms Anna Yang (of Admiral) and indicating that:

The evidentiary record in relation to Denis’ dealings with Ms Fu and Ms Chung in Hong Kong was then silent until 12 April 2018, on which date an unsigned copy of a letter was addressed to Denis from Cheng & Co under the subheading “Re Juhao Flavor (Hong Kong) Co Limited”. The letter commenced:

On 18 April 2018 at 4.02pm, Ms Chung emailed Denis, copying Mr Chow and Ms Fu, in the following terms:

Although Denis swore a number of affidavits in the CGU proceedings, those affidavits did not explain why he needed to be in Hong Kong from 13 to 18 April 2018. That is probably to be explained by the fact that the particulars of fraud upon which CGU relied (see [73]–[74] above) did not assert that the Hong Kong trip was deliberately undertaken to provide Denis with an alibi, and the case was not opened by Mr Watson at first instance on that basis.

In any event, such documents as found their way into evidence, the authenticity of which was not questioned, established a seemingly legitimate reason for Denis to have been in Hong Kong during that time, namely, to meet with representatives of Juhao to facilitate the “preliminary due diligence exercise”, ahead of the company’s board meeting on Wednesday, 18 April 2018. More generally, there was evidence that in and since 2014, Admiral had expanded its business into the Asia-Pacific region and was importing “building materials, home appliances and everyday accessories from all over China to Australia”.

As to the second element of the primary judge’s observations regarding the timing of Denis’ trip, namely that there were “good reasons for [him] to have remained in Sydney at this time, notably, to advance the arrangements for the company’s impending move to Lidcombe”, this conclusion overlooks the evidence that, although it was technically to expire shortly, the Alexandria lease was to be held over for 90 days following its formal expiry (see [32] above). Further, on 9 April 2018, Denis told Mr Kozinets, a sub-tenant at the Alexandria premises, that “it would be two to three months while [Admiral] moved all the stock over” to the Lidcombe premises. Mr Kozinets was not challenged as to this evidence, which was corroborative of Denis’ unchallenged evidence to the same effect. The primary judge’s conclusion that Denis had a pressing or strong need to be in Sydney over the course of the weekend in question in order to facilitate the move of premises was not supported by the evidence.

It follows that the two bases identified by the primary judge in support of his adverse characterisation of Denis’ trip to Hong Kong as being an alibi were not supported by the facts. It was at least equally possible that, far from providing an alibi for Denis, his Hong Kong trip provided an occasion or opportunity for Dmitry to execute the theft and arson.

The fifth strand of reasoning related in particular to the primary judge’s observations at PJ [193], regarding Denis’ failure to notify Securitas, the alarm monitoring service, “of his impending absence overseas and to nominate a substitute contact” in the event that the alarm was triggered and Securitas needed to contact someone associated with the business.

To put this aspect of the argument in context, the monitoring service had three contacts: Dmitry, Denis and Mr Yammine (the technician who had first installed the monitoring system and subcontracted Securitas).

The primary judge’s central statement at PJ [193], that:

The difficulty with this premise is that the evidence demonstrated that Securitas had the mobile phone numbers of both Denis and Dmitry and indeed rang them, while both men were overseas, following the triggering of the alarm at the time of the fire. Whilst it is true that neither Denis nor Dmitry answered the call (which in Denis’ case was made in the late evening in Hong Kong), this is not relevantly to the point. The point is that Denis did not need to “nominate an alternative contact” in order for the monitoring service to be able to obtain instructions while he was overseas. So much was also plain from the following exchange between the primary judge and Denis:

The primary judge concluded PJ [193] with the forceful observation that Denis’ “failure to nominate an alternative contact was not inadvertent”, a statement which carried a highly adverse character judgment, namely that Denis had engaged in a deliberate strategy to defeat the efficacy of part of Admiral’s security system. For the reasons given above, however, Denis’ absence overseas did not defeat his ability to be contacted by mobile phone, and the highly adverse suggestion of deliberateness (“not inadvertent”) on his part was not warranted once the absence of any need to nominate a substitute was appreciated. Moreover, this highly adverse finding, namely that Denis deliberately put himself out of contact with the alarm monitoring service, was not put to him by CGU’s senior counsel and was contradicted by the evidence.

As well, even though Denis and Dmitry were overseas on 16 April 2018, there was a third nominee, Mr Yammine, who was present in Australia and able to be contacted by the monitoring service. Again, Securitas’ log showed that he had been telephoned following the fire, just as Dmitry and Denis had been.

For the above reasons, this strand of the primary judge’s circumstantial reasoning was, with respect, flawed and did not support the inferential conclusion in PJ [193].

The primary judge found that in August or September 2017, Denis and Dmitry requested that Mr Yammine replace the Digital Video Recorder which was installed in a cabinet in Denis’ office at the warehouse, and which would receive feed from various CCTV cameras around the premises. His Honour found that Mr Yammine duly installed a later model NVR (see [58(7)] above), which had a single hard drive capable of recording up to 30 days of CCTV footage, with the CCTV system operating continuously and not just when the premises were unoccupied. The primary judge also held that, at the same time, Mr Yammine installed the CCTV app on each of Denis and Dmitry’s mobile phones (see [58(8)] above), “by means of which they could view live feed from the premises’ CCTV cameras, remotely, at any time.” [59]

This sixth strand of reasoning relates to the primary judge’s observation at PJ [194], that:

To the extent that the primary judge held that Denis either saw what was taking place in the warehouse “on the Friday evening … and did nothing about it, because he was complicit in the theft, or he did not look at the mobile phone application because he was aware that large quantities of goods would be removed” (emphasis added), this finding overlooks the fact Denis was on an international flight to Hong Kong for that whole period, having left Australia at 2.20pm on the Friday afternoon, which would not have seen him arrive in Hong Kong until approximately midnight on 14 April 2018, Sydney time, with the last of Mr Gazzara’s trucks departing the warehouse at 10.35pm on the Friday night. It was not put to Denis that he could access his mobile device whilst flying and indeed, Denis had answered a question posed by the primary judge by stating that he could receive mobile phone calls when travelling overseas, “apart from being on the plane” (see [163] above).

As to his Honour’s findings that, on the Saturday, Denis either deliberately did not look at the CCTV app on his mobile phone, or alternatively looked and remained silent, because he already knew what was happening, namely the theft of goods, Mr Sullivan submitted that there was a third, non-sinister, possibility, namely that Denis simply (but innocently) did not remotely monitor the warehouse (via the CCTV app) as he knew that both his father and brother were in Sydney, that there were security measures in place in the forms of alarms and locks, and that he was not aware of any untoward activity which would have caused him to check the CCTV footage, on the hypothesis that he had no reason to suspect his father of misconduct. A fourth possibility is that he simply did not check the CCTV app because he was pre-occupied with his meetings in Hong Kong in relation to the Juhao due diligence exercise.

Although the conclusions drawn by the primary judge in relation to the CCTV app are possibilities, they were to my mind no more than that, and were, in any event, only a part of the primary judge’s overall circumstantial analysis which, for reasons already canvassed and for further reasons given below, I would reject.

These strands of reasoning are conveniently dealt with together as they are really the obverse of one another. They relate to PJ [196]–[202] and concern what the primary judge considered to be Denis’ telling failure to ask questions of each of his father, Mr Russkikh and Mr Gazzara about the delivery of tyres and surrounding circumstances following the fire and, in particular, following CGU’s allegation of arson fraud on 9 April 2019. This posited failure was central to the primary judge’s finding, expressed at PJ [195], that Denis “was not a credible witness”. The primary judge said in that paragraph that he “found highly discrediting his evidence that after the fire, and especially in the context of CGU’s refusal of indemnity, he did not make inquiries about inherently suspicious circumstances – circumstances that CGU has explicitly raised in defence of the insurance claim” (emphasis added).

The reasoning from PJ [195] ff culminated in the primary judge’s conclusion at PJ [202] that:

Before turning to Mr Sullivan’s detailed attack on this aspect of the primary judge’s reasoning, two points should be noted. First, neither of the propositions contained at the end of the above passage, namely that Denis “either knew that Mr Gazzara was the operative who deposited the tyres and drove off with the stolen goods or he did not wish to confirm the name of whoever filled that role, or the number of tyres, or any other detail” was ever put to him by Mr Watson.

Secondly, insofar as PJ [202] draws upon PJ [196]–[199], I would respectfully take issue with the primary judge’s description in PJ [197] (see [104] above) of Denis’ answers to the questions set out at PJ [196] as “banal and evasive” and as providing no “legitimate explanation, in Denis Fateev’s understanding, for the after-hours opening” of the warehouse. First, the quoted passage at PJ [196] stopped short of the following question and answer:

Admiral operated a customs warehousing business and made money by making space available for goods to be stored. It had a client that apparently wanted to deliver goods for storage on a Saturday and was prepared to pay a premium for that opportunity (see [35]–[36] above). This evidence supplied a sensible and obvious answer to the question in relation to after-hours opening. It was a source of revenue for the business. I fail to see why the explanation given by Denis was either “banal”, “evasive” or “illegitimate”, especially when one has regard to the fact that the questions being asked of him frequently called for speculative answers in the sense that Denis was being asked to say why the warehouse would have been opened on the weekend in circumstances where he was not there, had not been directly involved in the inquiries for storage and, not knowing that the goods in fact being delivered were used tyres, had no apparent reason for suspicion.

Reference should also be made to the following series of questions and answers in relation to Dmitry’s failure to refer to the events of the evening of 13 April 2018 in his Affidavit. The primary judge included this series of questions and answers in the lengthy extract at PJ [204]:

Denis’ answers to these questions could not, in my opinion, fairly be criticised. For the most part, he was being asked in this series of questions why his late father, in an Affidavit settled by a solicitor, did not address particular topics. As Denis said, “I can’t answer for him”, referring to his father. Similarly, he could not answer questions about what happened on the Friday evening and Saturday as he was not physically at the warehouse or indeed in the country at the time.

The primary judge at PJ [204] described as a “notable weakness” of Dmitry’s Affidavit that it did not refer to the events at the warehouse on the evening of Friday, 13 April 2018, and then was critical of Denis not questioning his father about the omission of details of events of the Friday night in his Affidavit. Apart from the questionable propriety of taking this course had he done so (as to which, see [198] below), CGU’s pleaded case, as Admiral pointed out in its written submissions, restricted the allegations in relation to the delivery of the tyres to the deliveries on 14 April 2018, and the trial appears to have proceeded, at least until final submissions, on that basis. Admiral submitted that “[i]f Denis had been challenged with the proposition that he knew the affidavit to be false because no mention was made of events on Friday 13 April 2018, the matter would have been resolved by reference to the pleadings – it is, after all, a fraud case.”

Turning to other aspects of Mr Sullivan’s attacks on the primary judge’s conclusion reproduced at [173] above, first, he pointed out that, contrary to his Honour’s reasons, it was not the case on the evidence that Denis had not asked his father any questions. Mr Sullivan pointed to the following passage from questions asked of Denis by the primary judge:

Secondly, and again contrary to the primary judge’s conclusion that Denis had not asked his father any pertinent questions after the fire, Denis gave an affirmative answer to Mr Watson’s question as to whether he had asked his father (after the event) “for his notes or what was in his head” as to the amount of goods delivered on 13 and 14 April 2018. The fact that he said, some three and a half years later, that he could not remember “all these details” does not negative the fact that he said that he did make inquiries of his father.

Also to be taken into account is an answer given by Denis to the primary judge when asked why he did not ask his father about the layout of the tyres, according to CGU’s expert report, in the warehouse. That answer was “my father wasn’t well and I tried not to ask him more than required”. In this context, it was common ground that Dmitry had suffered a stroke in Vladivostok in July 2018 and died in January 2021, and that Mr Pellegrino’s expert report, which detailed his evidence about the layout of the tyres in the warehouse, was not served until September 2020.

Thirdly, Mr Sullivan pointed to the following question by the primary judge, and Denis’ answer, with regard to whether he made inquiries of his father and Mr Russkikh as to whether they had had any prior contact with Mr Gazzara before 12 April 2018, when Mr Gazzara contacted Mr Russkikh about storage at the warehouse:

In relation to Mr Gazzara, Mr Sullivan pointed to Denis’ evidence that he had never met or spoken to him. In this context, it is to be recalled that Mr Gazzara’s communications were with Mr Russkikh and not Denis, although Denis was, on Mr Russkikh’s evidence, asked about what price to charge for storage of the automotive parts. Mr Russkikh had not worked for Admiral for around two years prior to the trial.

In relation to Mr Russkikh, and Denis’ interactions with him after the fire, the primary judge’s adverse conclusions about the latter’s failure to make inquiries appear, with respect, to have overlooked some passages of evidence emerging from the cross-examination of Denis, of which the following is an example:

This was not evidence that Denis had never discussed such matters with Mr Russkikh (as the primary judge appears to have concluded), but simply evidence that he did have discussions with him but that he could not remember the exact conversation or discussion.

Fourthly, and perhaps most significantly in light of the primary judge’s adverse conclusion that Denis did not engage with his father as to what had occurred at the warehouse over the weekend preceding the fire, are the following questions by the primary judge and answers by Denis:

These questions and answers appear to have been overlooked by the primary judge in expressing his adverse conclusions about Denis, and the inferential reasoning leading to those conclusions. They are not referred to in his Honour’s reasons and are flatly inconsistent with the primary judge’s statement that Denis did not ask his father important questions following the fire.

Next, when challenged in cross-examination by Mr Watson, Denis maintained that he had “taken a lot of interest into understanding what caused the fire” but said that he did not see any utility in having a conversation with Mr Gazzara, whom he did not know and had never met. In this line of cross-examination in relation to the cause of the fire, he said that he was “assuming that there would be an investigation and we would get some answers from that”.

As to the security at the warehouse following the delivery of what were in fact the tyres over the weekend preceding the fire, Denis gave evidence that, as far as he was aware, “my father said he’d turned on the alarm”, a response that implies an inquiry by Denis, who evidently accepted his father’s explanation at the time. In hindsight he was wrong to do so, but the fact that he accepted the explanation is not necessarily a basis for concluding that he knew or even should have known that the explanation was false.

It may also be noted that the following exchange occurred between Mr Watson and Denis:

As to Denis’ suggested failure to have asked the questions set out at PJ [199] (see [104] above), especially questions in relation to the tyres, Mr Sullivan pointed out, correctly, that “[t]here was no suggestion until, at the earliest, when the particulars were given on 9 April 2019 that the tyres were involved”. The reference to 9 April 2019 — almost a year after the fire — was to CGU’s letter declining cover and particularising the alleged fraud: see [73]–[74] above. As will be recalled, Mr Gazzara’s initial inquiry about storage was in relation to “car parts and accessories” and it was made to Mr Russkikh. The connection between the tyres and the fire was the result of the investigations by CGU’s fire investigator.

Mr Sullivan also submitted that, in addition to CGU’s investigator, the ABF was investigating the fire as were the police. Denis had authorised and apparently given full cooperation to the investigators and full access to Admiral’s records, providing a letter of authority to CGU on 16 May 2018, including for the release of any documentation, information and CCTV footage pertaining to the matter.

By the time indemnity was declined, and indeed before it was, and by no later than October 2018, Admiral had also retained its own solicitors who were taking the lead in the claim and related investigation. Indeed, in a letter of 22 October 2018 to a Detective Sergeant Peebles at Redfern Police Station, Admiral’s solicitors, LMI Legal, wrote that they had “been advised that both Denis and Nickita [Fateev], as well as another solicitor on behalf of Admiral, have sought updates from New South Wales Police since the fire.”

This is not consistent with what the primary judge characterised, adversely to Denis, as a telling lack of curiosity and solicitude about the origins of the fire. And, as was submitted, the solicitors who he retained made inquiries of each of Dmitry, Mr Gazzara and Mr Russkikh, preparing affidavits of all of them. That the primary judge did not believe Dmitry and Mr Gazzara is not relevantly to the point. The relevant point for present purposes is that inquiries were made of them by solicitors that Admiral, through Denis, had retained.

It was also submitted that there was a strong element of hindsight in the primary judge’s critique of Denis’ behaviour. There was no obvious connection between the goods delivered after Denis had left for Hong Kong on Friday, 13 April and the fire on the morning of 16 April 2018 until expert reports were filed more than two years later. Further, there was no obvious connection between the fire and Dmitry, who had left for Russia on the morning of 15 April 2018, prior to the fire having occurred, at least until some point after indemnity had been denied and fraud had been alleged by CGU.

Once lawyers had become involved, there was also the constraint which it may be assumed the lawyers had advised Denis of, namely that he should not have contact with other potential witnesses of fact in any legal proceedings that it may become necessary to bring. In that context, the primary judge said: [60]

With great respect to the primary judge, it would have been improper or at the very least imprudent for Denis to have been given access to the affidavits of other witnesses of fact in the proceedings. That would have been akin to witnesses of fact, in a case where allegations of fraud had been made, conferring before giving evidence — something they would have been rightly criticised for and which, if done with the complicity of Admiral’s solicitors, would have been in breach of the Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015 (NSW), r 25.1 of which provides:

When considering what have been described as the seventh and eighth strands of the primary judge’s inferential reasoning, it is also necessary to consider his Honour’s description of Denis’ responses to the questions set out at PJ [200]–[201] (see [104] above) as providing “no sensible answer” and as “fatuous”.

The question asked at PJ [200] and leading to the ultimate answer by Denis (described as “no sensible answer” by his Honour) was in fact three questions which were as follows:

This was an answer at least to the first question and probably also an attempt to answer the third and non-specific of the rolled up three questions asked of Denis. Denis, by saying that he did not “know if that’s suspicious or not”, was simply making the point he had made earlier in his cross-examination, namely that there was nothing inherently suspicious about a customer making arrangements for a delivery of goods to the warehouse for storage pending export, and being prepared to pay a premium to do so. I would not characterise the answer in the same way as the primary judge did.

Nor would I have described as “fatuous” Denis’ answer to the two questions set out at PJ [201] (see [104] above). The answer given by Denis was:

Multiple or compound questions are objectionable in that they have the vice of potentially confusing a witness and/or may be unfair insofar as they are apt to produce what may subsequently appear to be incomplete answers. It was observed in Libke v The Queen (2007) 230 CLR 559; [2007] HCA 30 at [127] that:

Similar observations as to the vices of compound questions were made in Skelton v R [2015] NSWCCA 320 at [38] and [58]; see also J D Heydon, Cross on Evidence (13th Australian ed, LexisNexis Butterworths, 2021) at [17505]. The vices of compound questions are themselves compounded when such questions are put to a witness by the judge, as they were in the present case, in circumstances where counsel may feel coy about raising objections to them.

Mr Watson made the submission that where the primary judge referred to some of Denis’ answers as “banal” or “fatuous”, such characterisation was informed by “the subtle influence of demeanour”. I disagree with this submission. His Honour was describing the content of the answers given. An appellate court is generally as well able to judge whether an answer is in substance responsive to a question as a trial judge.

The seventh and eighth strands of the primary judge’s inferential reasoning were not strong, for the reasons explained above. The arguments advanced on appeal by Admiral were persuasive and, when all of the evidence is considered and allowance is made for the compound nature of some of the questioning, the answers to which the primary judge found wanting, I do not consider that the primary judge’s inferential conclusions at PJ [196]–[203] were justified.

The final strand of reasoning attacked on appeal was that contained in PJ [206], which is convenient to reproduce:

The point has already been made in relation to the previous two strands that it was not the case, on the evidence, that Denis did not make inquiries of his father concerning the fire. That those inquiries did not yield a confession from Dmitry as to his involvement was not to the point. Secondly, it may be that a more diligent or forensically experienced person may have put further questions to his father than did Denis, but a lack of diligence and/or forensic experience does not self-evidently translate to dishonesty and complicity. Moreover, relying on experts and legal representatives to make inquiries may well have been just as, if not more, appropriate as conducting his own inquiries. Much of the reasoning in PJ [206] relates to Dmitry’s Affidavit and its deficiencies, but those deficiencies were apparent to the primary judge after reviewing the whole corpus of the evidence before him and would not necessarily have been apparent to Denis, a 27-year-old with no legal or forensic experience. Insofar as the criticism in PJ [206] relates to the events of Friday, 13 April 2018, it has already been pointed out that the fraud as particularised by CGU made no allegations in relation to what had transpired on the Friday night as opposed to the following two-and-a-bit days. The significance of this in the context of the primary judge’s criticism of Denis has already been pointed out at [179] above.

As the primary judge explained, his conclusion that Denis had knowledge of the theft and arson, and connived in it so as to engage the fraud condition and the fraud exclusion under the ISR Policy was based upon his Honour’s reasoning at PJ [186]–[207] and “[t]aking together all of the circumstances considered” in those paragraphs. His Honour’s conclusion that Denis “agreed to the execution of the plan [to steal from the warehouse and have the remaining contents destroyed by fire] and that he cooperated in it by absenting himself on a trip to Hong Kong for the critical weekend” was based entirely on circumstantial reasoning, with a number of different strands of argument forming part of that reasoning. For the reasons set out in detail above, and in light of the gravity of the allegations made, in my respectful view, the primary judge’s conclusion on the critical question of knowledge and connivance cannot be sustained. This has the consequence that Admiral’s entitlement to indemnity from CGU under the ISR Policy was not excluded.

It also follows that his Honour’s dismissal of Admiral’s cross-claim against CGU in the Brightcity proceedings, on the basis that there was no relevant “occurrence” under cl 4.15 of the Liability Policy as the warehouse fire was both expected and intended from Admiral’s standpoint (see PJ [277]), similarly cannot be sustained.

This conclusion leads to a consideration of whether CGU’s obligation to indemnify Admiral for its liability to Brightcity was nonetheless excluded under cl 8.16 of the Liability Policy, relating to the failure to take reasonable precautions: see [25] above.

The provisions of the Liability Policy relevant to this aspect of the appeal have been set out at [23]ꟷ[26] above.

In respect of the “reasonable precautions” issue raised by Admiral’s appeal in the Brightcity proceedings, PJ [270]–[272] and [280] should be noted, bearing in mind that PJ [270]–[272] were principally directed to Brightcity’s claim against Admiral for breach of bailment, which Admiral did not challenge on appeal:

The primary judge’s reasoning linking PJ [270] and [280] created a considerable overlap between the “reasonable precautions” issue and the “central issue” of knowledge and attribution such that, prima facie, the disposition of the central issue could be determinative of the “reasonable precautions” issue. However, Mr Sullivan candidly conceded that the “reasonable precautions” grounds of the appeal had work to do independent of the central issue. That concession emerged in the following exchange during the appeal hearing: [61]

That exchange was followed by Mr Sullivan clarifying that the “reasonable precautions” issue was introduced by ground 15 of the appeal in the Brightcity proceedings. [62] It was subsequently elaborated upon in grounds 20 and 21. Those grounds were formulated as follows:

As is clear from ground 20 and Mr Sullivan’s submission extracted at [214] above, Admiral advanced its argument on the “reasonable precautions” qualification in cl 8.16 of the Liability Policy in reliance upon the principles set out by Diplock LJ (with whom Willmer and Winn LJJ agreed) in Fraser v B N Furman (Productions) Ltd [1967] 1 WLR 898 (Fraser). That case concerned a provision similar to cl 8.16 of the Liability Policy, albeit that it was contained in a policy of employer’s liability insurance. The specific passage upon which Admiral relied appeared at 905–906, where Diplock LJ wrote:

This summary of principle, regarding the inquiry into whether an insured has taken “reasonable precautions” against liability, made reference to the judgment of McHugh JA (with whom Glass JA agreed) in Legal & General Insurance Australia Ltd v Eather (1986) 6 NSWLR 390 (Eather). The insured in Eather was indemnified, pursuant to a multi-risks policy, against “accidental loss or damage”. According to McHugh JA (at 407), it followed that:

The relevance and application of the Fraser line of authority, as developed in Eather, was not contested by Mr Watson (for CGU). [63] On that basis, it was essentially common ground that this Court’s determination of the “reasonable precautions” issue turned upon whether Admiral (as opposed to Dmitry) had “deliberately courted” the destruction of Brightcity’s goods in the fire, or was reckless as to the risk of such destruction. In this context, “recklessness” involved an actual recognition by Admiral that the risk of arson existed, accompanied by a deliberate or knowing failure to take reasonable steps to protect against that risk, which in turn evinced a lack of care as to whether the risk was managed. It followed that mere negligence on the part of Admiral as to the risk of arson (or, for example, vicarious liability for the negligence of an employee such as Dmitry) would not suffice to found a breach of cl 8.16 of the Liability Policy, lest the commercial purpose of cl 1.1(b) of the Liability Policy, that is, to indemnify Admiral against liability for negligence, be undermined to a significant extent.

The security failures particularised at sub-paragraphs (1)–(6) of PJ [270] and described in the context of Brightcity’s claim in bailment as negligent are not, in and of themselves, capable of sustaining a conclusion that Admiral failed to exercise “reasonable precautions” to protect Brightcity’s goods and was therefore in breach of cl 8.16 of the Liability Policy.

On the application of the Fraser test, Admiral would only be in breach of cl 8.16 if it had “deliberately courted” the risk of fire or was reckless as to that risk. The standard established by that test requires a positive (or actual) recognition (or awareness) of the risk by Admiral, through Denis as its controlling mind and will. [64] That in turn required the attribution of knowledge of Dmitry’s deliberate conduct to Denis or, alternatively, the attribution of Dmitry’s deliberate conduct to Admiral.

In light of the rejection of the primary judge’s inferential conclusion that Denis knew of and consented to the arson, Denis and therefore Admiral cannot be fixed with Dmitry’s deliberate acts and knowledge.

At PJ [49], the primary judge held that:

At PJ [58], the primary judge held that:

Dmitry’s acts, as found by the primary judge, and his Honour’s finding that he was the architect of the theft and arson had the consequence that the security breaches were plainly not acts done within the course of his authority as an employee of Admiral, and indeed would have been wholly contrary to his responsibilities. The point was not that Admiral did not take reasonable precautions or have reasonable means and layers of security but that, on the primary judge’s findings, those measures were deliberately disabled by Dmitry to facilitate the arson in the early hours of Sunday 16 April 2018.

In the course of submissions on this issue, the following exchange occurred:

In his oral reply, Mr Sullivan rebutted Mr Watson’s submission as follows:

In the absence of a basis to attribute knowledge of Dmitry’s acts to Denis and/or Admiral, it was not established that Admiral failed to take reasonable precautions so as to deny it cover under the Liability Policy for the purposes of its cross-claim against CGU.

In its Amended Statement of Claim in the CGU proceedings (ASOC), Admiral brought claims for damages reflecting its alleged consequential losses, in accordance with the terms of the ISR Policy, on two bases. First, it sought damages for breach of contract. Secondly, in the alternative or in addition to the breach of contract claim, it sought damages for breach of CGU’s duty of utmost good faith as set out in s 13 of the Insurance Contracts Act.

That section relevantly provides that:

In the ASOC, Admiral particularised its pleaded consequential losses as follows:

The primary judge addressed the issue of an alleged want of good faith on the part of CGU on a contingent basis as follows: [65]

The relevant grounds of appeal on this issue were as follows:

In Globe Church Incorporated v Allianz Australia Insurance Ltd (2019) 99 NSWLR 470; [2019] NSWCA 27 at [209] (Globe Church), the majority (Bathurst CJ, Beazley P and Ward JA; Meagher and Leeming JJA dissenting) held that an insurer’s promise to indemnify is to be understood as a promise “to hold harmless against loss”, as opposed to a promise to make a payment reflecting loss actually suffered by the insured upon the occurrence of an insured event. On that basis, an insured’s claim on a policy is a claim to unliquidated damages which arises immediately on the occurrence of the insured event, “albeit that the amount necessary to make good the loss is to be calculated in accordance with the basis of settlement clause in the policy”. [66]

The position adopted by the majority in Globe Church corresponds to the English position at common law: see, for example, Sprung v Royal Insurance (UK) Ltd [1999] 1 Lloyd’s Rep IR 111; Versloot Dredging BV v HDI Gerling Industrie Versicherung AG [2017] AC 1; [2016] UKSC 45.

Globe Church was followed in Worth at [189]. In that case, Meagher JA (dissenting in the result, but with whom Macfarlan and McCallum JJA agreed on the damages issue) observed at [180]:

The Court in Worth answered the question posited by Meagher JA at [180] in the affirmative by applying the “indemnity principle” as formulated by the majority in Globe Church, such that the insured could not recover damages for consequential loss said to arise from the insurer’s breach of contract in failing to indemnify the insured.

On the authority of Globe Church and Worth, damages for consequential loss were not “legally available” to Admiral in its claim against CGU for breach of the ISR Policy, lest the principle precluding the award of “damages for non-payment of damages” be offended: see, for example President of India v Lips Maritime Corporation [1988] AC 395 at 425.

Admiral formally submitted that Globe Church and Worth, to the extent that the Court applied the majority’s judgment in Globe Church, were wrongly decided and therefore ought not to be followed by this Court. However, as was properly conceded by Mr Sullivan, Admiral did not advance submissions formally and directly addressing the factors governing whether an appellate authority is “plainly wrong” or “clearly wrong”: see, for example, Gett v Tabet (2009) 254 ALR 504; [2009] NSWCA 76 at [294]; John v Federal Commissioner of Taxation (1989) 166 CLR 417; [1989] HCA 5; Queensland v Commonwealth (1977) 139 CLR 585; [1977] HCA 60.

In the absence of submissions addressing those matters, and where the Court has not convened a bench of five judges specifically to address the correctness of the impugned decisions, Globe Church and Worth should be applied. On that footing, Admiral’s claim for consequential loss must fail insofar as it was based upon a failure to indemnify upon a claim for indemnity being made.

In Worth at [191], Meagher JA observed that “[t]he English authorities recognise that the limitation may be circumvented if the loss can be characterised as consequential on ‘some other and separate breach of contract’: see Sprung v [Royal] Insurance at 116”. Having acknowledged that qualification, Meagher JA referred to the insured’s plea of a claim for breach of the insurer’s duty of utmost good faith in s 13 of the Insurance Contracts Act.

Mr Sullivan sought to argue, by analogy, that Globe Church and Worth did not stand in the way of Admiral’s claim for breach of CGU’s duty of utmost good faith, implied by s 13 of the Insurance Contracts Act, as that claim was “a distinct and separate claim to the claim for wrongful declinature … of indemnity”. [67]

Admiral’s case against CGU alleging breach of the duty of utmost good faith, which was said to have occurred by virtue of CGU’s refusal to indemnify Admiral under the ISR Policy, was only particularised in the ASOC in a very general way (see PJ [281] extracted at [231] above) and, as advanced in written argument, was not articulated with particular clarity. It did not appear to go beyond an allegation that the wrongful refusal to indemnify, accompanied by allegations of fraud, was a breach of the duty of utmost good faith.

A breach of an insurer’s duty of good faith requires rather more than a simple failure to grant indemnity. An insurer may have a reasonable (in the sense of reasonably arguable) basis for denying indemnity, including on grounds of alleged fraud, even if, as in the present case, it may not ultimately be successful.

Nothing advanced on behalf of Admiral sustained the argument that CGU breached its implied duty of good faith so as to permit the recovery of damages for consequential loss. This aspect of the appeal should be dismissed.

The final issue for determination relates to ground 17 of Admiral’s appeal in the CGU proceedings.

By this ground, Admiral appeals from the primary judge’s finding that “on the balance of probabilities there has [not] been established any trend of growth in [Admiral’s] Gross Revenue that should be applied in respect of the indemnity period”: PJ [259].

The primary judge considered the growth trend of Admiral’s gross revenue as an aspect of the contingent inquiry into the quantum of Admiral’s claim for business interruption under s 2 of the ISR Policy, titled “Consequential Loss”, notwithstanding that his Honour had found that “CGU is entitled to refuse indemnity to Admiral under the [ISR] policy”. [68]

The indemnity clause in that section provided that, during the “indemnity period”:

The Basis of Settlement, referred to at the conclusion of the indemnity clause and modified by endorsement GREVNCC4, relevantly provided as follows:

The following definitions of terms applicable to the Basis of Settlement were as follows:

Thus, it was necessary to calculate Admiral’s “standard gross revenue” for the period from 16 April 2017–15 April 2018, being “twelve months immediately before the date of the Damage”. In calculating this figure to ensure that it “corresponds with the Indemnity Period”, it was necessary to account for the growth trend of Admiral’s gross revenue.

Expert forensic accounting reports were tendered by Admiral and CGU respectively. Admiral relied upon three reports of Mr David Bleasdale (Mr Bleasdale), a forensic accountant, dated 1 June 2020, 26 April 2021 and 23 July 2021 respectively. CGU relied upon three reports of Mr Neil McPhee (Mr McPhee), also a forensic accountant, respectively dated 17 September 2020, 13 August 2021 and 16 August 2021. In light of some differences between the experts’ calculations, Messrs Bleasdale and McPhee conferred and prepared a “Joint Statement of Experts” dated 2 September 2021. The joint report “significantly reduced the areas of disagreement” between the experts: PJ [242].

Nonetheless, there remained some variation in the experts’ conclusions as expressed in the joint report, which was summarised by the primary judge as follows, with the material difference as to trend growth emphasised in bold text: [69]

In his first report, under the heading “trend”, Mr Bleasdale opined that, on the basis of Admiral’s monthly profit and loss statements from March 2017–March 2018:

Mr McPhee did not accept Mr Bleasdale’s opinion as to the growth trend of Admiral’s gross revenue, nor his methodology, which calculated the trend “based on the actual growth achieved in the 9 months before the date of the loss”, adjusted to take account of a “one-off unusually large revenue transaction” in the March 2018 quarter, notwithstanding that “Mr Bleasdale acknowledged that for the full 12 months to March 2018 Admiral’s Gross Revenue showed no growth relative to the previous 12 month period”. [71]

Mr Bleasdale adopted this methodology on the basis that a comparison with the 12-month period from March 2017–March 2018 did not provide a holistically accurate account of the improvement in Admiral’s financial performance up to the “indemnity period”, in circumstances where “[t]he historic growth rate in turnover for 6 months before the fire was 12.5% and for the 3 months before the fire was 19%”, which “show a clear trend of significant and rising rate of growth in Admiral’s business”.

The methodology adopted by Mr McPhee to conclude that it was not appropriate to apply a growth trend (i.e. applying a growth trend of 0%) to calculate Admiral’s expected turnover corresponded to that which was eschewed by Mr Bleasdale, namely, “highlighting that the twelve months prior to the loss show a growth percentage close to zero”. The following data informed that conclusion:

Mr McPhee provided further justification for his longer-term methodology in the joint report, stating he considered it “more appropriate to use the actual historical annual turnover achieved by the Plaintiff when considering whether to apply a trend, because the Plaintiff’s historical monthly turnover during the 24 months prior to the Incident fluctuates … from around $193,000 in September 2016 through to $69,000 in June 2017”.

In the joint report, Mr Bleasdale revised his initial calculation of a 6.5% growth trend in Admiral’s gross revenue, increasing the applicable figure to 19.32%, in order to “reflect the growth shown by Admiral in the three months before the fire (38%) and for the six months before the fire (22%) as well as the expectations communicated to me by Mr Denis Fateev of sales growth opportunities” (emphasis added). Mr Bleasdale had previously described those “opportunities for growth in turnover” in his second report, dated 26 April 2021, as follows:

The prospect of opportunities for growth in Admiral’s gross revenue was attributed by Mr Bleasdale to “statements made in the affidavit of Mr Denis Fateev dated 5 June 2020” in the CGU proceedings. It appears that Mr Bleasdale was referring to the following passages of Denis’ evidence:

In the course of oral argument in this Court, Mr Sullivan attempted to identify evidence that better particularised the “two new business opportunities” presented to Admiral by Pegasus and Juhao respectively, with specific reference to the primary judge’s finding that Admiral had a “concrete prospect” of increasing its gross revenue by “handling food products to be imported from Juhao” (emphasis added). [72] To that end, Mr Sullivan drew the Court’s attention to the following matters deposed to by Denis in his Affidavit in the CGU proceedings, dated 28 June 2021:

Two features of this evidence should be noted. First, it fails to provide any detail or basis for assessing the pecuniary value or unit quantum of Admiral’s prospective commercial arrangements with Juhao and/or Pegasus. This is especially relevant in circumstances where Denis had deposed, in his Affidavit of 28 June 2021, to having entered into an agreement with Pegasus which would, presumably, have included terms in the nature of consideration or cost per unit. Secondly, the evidence post-dated Mr Bleasdale’s second report, in which he referred (both expressly and by implication) to Juhao and Pegasus as “two new business opportunities” and which formed the basis of his opinion that annual trend growth of 19.32% should be applied to Admiral’s gross revenue.

Those features were also recognised by Mr McPhee in formulating his response to Mr Bleasdale’s opinion in the joint report, which was as follows:

These criticisms were sound and there was no reasoned basis justifying Mr Bleasdale’s methodology of applying an overall growth trend of 19.3% to his calculation of Admiral’s expected turnover. The primary judge did not err in finding that, on the balance of probabilities, a positive growth trend should not be applied to Admiral’s expected gross revenue during the indemnity period.

His Honour gave concise consideration to the question of whether to apply positive trend growth. In coming to the ultimate finding on this question, the primary judge said:

The emphasised portion in PJ [256], set out above, formed the basis of Admiral’s attack on the primary judge’s finding with respect to the trend in Admiral’s gross revenue.

The argument raised by Admiral on this issue boiled down to the proposition that the primary judge’s finding that “Admiral had concrete prospects of increasing its business by providing bonded warehouse services to Pegasus Supply Solutions Pty Ltd and by handling food products to be imported from Juhao”, [73] in addition to capitalising upon the increased size of the Lidcombe premises, was incompatible with his Honour’s determination that the body of evidence failed to establish a positive trend of growth in Admiral’s gross revenue. [74]

It is important to note, however, that the finding as to “concrete prospects” of increased business was immediately qualified by a material observation that “the volume of such potential new business has not been quantified in the evidence and its potential impact on Gross Revenue can only be the subject of crude estimation. Of themselves, these possibilities of additional business provide no justification for Mr Bleasdale’s adoption of 6.5%”. [75] Of course, the figure of 6.5% was subsequently increased by Mr Bleasdale without justification.

Admiral relied upon the principle that “the Court must do the best it can with the evidence available to assess damages”, [76] and submitted that the primary judge did not do so when assessing damages with respect to the contingent payments under the insurance policy.

In Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd (2003) 77 ALJR 768; [2003] HCA 10 at [38], Hayne J (with whom Gleeson CJ, McHugh and Kirby JJ agreed) said that there is a distinction to be drawn between “cases where a plaintiff cannot adduce evidence of what has been lost (in which ‘estimation, if not guesswork, may be necessary in assessing the damages to be allowed’) and cases where, although apparently able to do so, the plaintiff has not adduced such evidence”. According to Hayne J, references to “mere difficulty in estimating damages not relieving a court from the responsibility of estimating them as best it can” are more applicable to the former class of case, where a plaintiff cannot adduce evidence of its loss, as opposed to the latter, where the plaintiff has (either deliberately or inadvertently) failed to adduce such evidence, which was available to the plaintiff on reasonable inquiry.

The present case is, in my opinion, an example of the latter category in that Admiral did not equip the experts, and ultimately the Court, with sufficiently concrete data that may have made the estimation of a quantum of trend growth possible. It follows that this ground of appeal must also be dismissed.

It follows that the appeal in the CGU proceedings must be allowed in part and the appeal in the Brightcity proceedings should also be allowed in part.

The parties should bring in short minutes of order to reflect these reasons by 27 January 2023, together with any submissions (of not more than three pages) as to costs and any dispute as to orders by that same date, to be determined by the Court on the papers.

WARD P: I agree with Bell CJ.

MACFARLAN JA: I agree with Bell CJ.