Englehart CTP US LLC v Lloyd's Syndicate 1221 & Ors

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DMC/Ins/21/01

England

Englehart CTP (US) LLC v Lloyd’s Syndicate 1221 and others

English Commercial Court: Sir Ross Cranston: [2018] EWHC 900 (Comm): 23 April 2018

Judgment Available on BAILII @ https://www.bailii.org/ew/cases/EWHC/Comm/2018/900.html

Dominic Kendrick QC (instructed by Reed Smith) for the Claimant ("Engelhart")

Luke Parsons QC and Ben Gardner (instructed by Kennedys) for the Defendants ("Insurers")

ALL-RISK MARINE CARGO INSURANCE: OWNERS' CLAIM FOR LOSS OF SHIPMENT OF NON-EXISTENT COPPER INGOTS: WHETHER POLICY COVERED ECONOMIC LOSS OF THIS TYPE

Summary

In this case, the insured brought a claim under an “All Risks” cargo insurance policy, with additional clauses, for the loss it had sustained in accepting fraudulent bills of lading for a cargo of copper ingots to be carried from New York to the People’s Republic of China (“PRC”) in containers, where that cargo was never in fact loaded into the containers.

The judge dismissed the claim on the grounds that:

(i) The starting point of an all-risks marine cargo insurance is to cover loss of or damage to property.

(ii) In order for a policy to cover more than physical losses, such as economic losses as in this case, clear words would be needed to that effect.

The judge held that the insurance policy in this case did not contain such clear words.

Case note contributed by Cindy Ko, LLB (Hons), Advocate & Solicitor of Singapore, International Contributor to DMC’s Case Notes.

Background

In this case, the Court was dealing with a construction summons under Part 8 of the Civil Procedure Rules in regard to a cargo insurance policy of the type described as “Marine Cargo and Storage Insurance” (the “Policy”).

The agreed facts were as follows:-

(i) Engelhart bought 7,000 MT of copper ingots on cif China terms from World Gold International Ltd ("World Gold"), to be on-sold to Shing Fu (HK) Metal Co Ltd ("Shing Fu"). The cargo quantity in both contracts was later increased to 9,000 MT.

(ii) The first shipment on 7,000 MT was shipped and delivered to Shing Fu without incident.

(iii) Between 16 and 24 September 2015, packing lists, quality certificates and bills of lading were issued in respect of a cargo of a further 1,968mt of copper ingots, said to be shipped in 102 containers ("Containers") from New York by the shipper, Asia Global Renewal Energy Corp.

(iv) Between November and December 2015, when the Containers arrived in Hong Kong for transhipment to the final discharge port in the PRC, some of the Containers were found to be leaking.

(v) All the Containers were opened in the presence of cargo surveyors and it was found that no copper ingots had been shipped in the Containers and that no such cargo had ever existed. The Containers contained slag of nominal value. The bills of lading, packing lists and quality certificates were all, therefore, fraudulent.

(vi) Engelhart submitted a claim under its Policy with the Defendant Insurers for loss of the cargo and insured expenses. The insurers rejected the claim.

The Policy referred to the Institute Cargo clauses: "'All Risks' in accordance with the Institute Cargo Clauses (A) CL 382 (1.1.09)… and/or American Institute Cargo Clauses (Sept. 1, 1965) 32B-10 but with Clause No. 3 amended to read as follows: 'Against all risks of physical loss of or damage to the subject-matter insured from any external cause'…"

The Policy then contained sections setting out specific insuring conditions for commodities insured, such as oil products, coffee, sugar, metals and vegetable oils. Amongst others, Engelhart relied on the following particular terms in the Policy:-

(as a supplementary condition) "… it is understood and agreed that in all cases, the most favourable conditions will benefit the Assured notwithstanding what is mentioned on the insurance certificate and/or insurance declaration."

(in the specific commodity conditions) “It is noted and agreed that unless otherwise declared the contrary, the broadest coverage shall apply”.

(in the general conditions)

"Container Clause

It is agreed that this Insurance contract is also to pay for shortage of contents (meaning thereby the difference between the number of packages as per shippers and/or suppliers invoice and/or packing list loaded or alleged to have been laden in the container… and the count of packages removed therefrom by the Assured and/or their agent at time of container emptying) notwithstanding that seals may appear intact, and/or any other loss and/or damage including but not limited to cargo and/or container sweat howsoever arising.

Fraudulent Documents

This insurance contract covers physical loss of or damage to goods and/or merchandise insured hereunder through the acceptance by the Assured and/or Shippers of fraudulent documents of title, including but not limited to Bill(s) of Lading and/or Shipping Receipt(s)… and/or shipping documents and/or Warehouse Receipts and/or other document(s) of title…"

Engelhart argued that the Policy properly construed covered physical loss claims where an insured has been defrauded into taking up documents of title for non-existent goods because the Policy went well beyond what is a standard All Risks policy, so that cover would be provided even if no goods ever existed. Engelhart relied on the following:

(a) The breadth of the provisions in the Policy, including the provision that the insured had the benefit of the most favourable conditions, that the broadest coverage should apply, and the diverse commodities and worldwide sendings and storage insured under the Policy.

(b) The Container clause: this was an additional obligation to "also" cover shortages – Engelhart argued that since the insurer was bound to pay for the difference between what the packing list stated and what was removed on outturn "notwithstanding that the seals may appear intact" meant that paying for a loss where no cargo was shipped was included; namely that shortage in meant both partial and full shortage.

(c) The Fraudulent Docments clause: where the loss to the trader occurred through the acceptance of fraudulent documents, in the absence of any goods, the trader was entitled to claim for their loss and say that the policy covered a physical loss of goods but not economic or other losses (such as failure to deliver on a back to back sale, or under a contract it has entered into for storage). There was a physical loss of goods by acceptance of fraudulent documents of title.

Judgment

The Judge re-affirmed the well-accepted principles of construction of contracts, namely that the court looks to the meaning of the relevant words in their documentary, factual and commercial context and that a term of an insurance contract must be construed in the context of the agreement as a whole and with regard to its overall purpose.

Second, the Court acknowledged the general principle that all risks policies apply only to physical loss of or damage to the goods: Arnould on Marine Insurance, 18th ed (by J. Gilman QC, R. Merkin, C. Blanchard QC & M. Templeman QC, 2013), at §23-72, footnote 490. The policies on property do not extend to paper losses unless they extend to loss of profits or other business interruption losses and do not cover goods which never existed.

The Court acknowledged the exception to the physical loss rule, and that a marine cargo policy could extend to financial losses if clear words were used. But in this case, the Judge held that the Policy did not have the wider scope contended by Engelhart for the following reasons:-

(i) As a starting point, the purpose of all risks marine cargo insurance is to cover loss of or damage to property. There was no physical loss in this case since no copper was ever shipped and no cargo of copper ingots ever existed. There was, therefore, no difference between what was loaded and what was discharged. The loss was, in fact, an economic loss due to the acceptance of fraudulent documents in the expectation that they covered physical goods.

(ii) The wording of the Policy did not contain clear words to indicate a broader intention to cover more than physical loss or damage to goods. The Judge referred to various clauses in the Policy as being suggestive of physical goods and loss.

(iii) On the Container Clause, the Judge did not agree that it supported a claim where no cargo was shipped. The words "notwithstanding that the seals may appear intact" were meant to prevent the Insurers from asserting that there was no insured loss because a loss to cargo was inevitable given the state of a particular container. Those words it did not mean that the Policy would cover a loss where no cargo was shipped. The Judge also disagreed with Engelhart that the word "shortage" could refer to a full shortage – it did not cover a situation where there were no goods in the first place.

(iv) On the Fraudulent Documents Clause, the Judge noted that the wording of the clause referred to "physical loss of or damage to goods" and held that due regard had to be placed on the word "physical".

Comment

The Court appears to have adopted a more textual approach in construing the wording of the Policy, rather than the overall purposive interpretation of the Policy, in the light of scope and breadth of its wording, for which Engelhart had argued.

It appears that the general approach to marine all-risks policies will still be that they are meant to cover physical loss and damage; clear words must be present in order to displace this starting point.

Given the prevalence of fraudulent documents in shipping these days, insurers should be careful when including fraudulent documents clauses in policies. Care should also be taken in specifying whether it is only physical loss and damage that is to be covered, or also pure economic loss.