Quadra Commodities S.A v XL Insurance Company SE & Ors

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DMC/INS/25/01

England

Quadra Commodities S.A v XL Insurance Company SE & Ors

English Court of Appeal: Sir Julian Flaux, Popplewell and Snowden LJJ: [2023] EWCA Civ 432: 21 April 2023

Judgment available on BAILII @ https://www.bailii.org/ew/cases/EWCA/Civ/2023/432.html

Peter MacDonald Eggers KC and Sandra Healy (instructed by Clyde & Co LLP) for the Insurers

Jawdat Khurshid KC and Anna Gotts (instructed by Reed Smith LLP) for the Insured

MARINE CARGO INSURANCE: WHETHER INSURED HAD AN INSURABLE INTEREST IN UNASCERTAINED GOODS WHICH IT HAD PURCHASED AT LEAST IN PART BUT OF WHICH IT HAD BEEN DEFRAUDED BY THE SELLER

Summary

Quadra Commodities SA (‘Insured’) was defrauded of grains that it had purchased from companies in the Agroinvest Group (‘Agroinvest’). The fraud was a pyramid scheme in which multiple warehouse receipts were issued for the same consignment of goods. In practice, Agroinvest pledged or sold grains, which the Insured had purchased, repeatedly to different buyers.

The Insured brought a claim for the loss of those goods under its insurance policy with XL Insurance Company SE and other insurers (‘Insurers’). The key issue was whether the Insured had an insurable interest over goods that were unascertained, i.e. the Insurers challenged whether those goods existed and, if they did, whether ownership of any portion of the bulk of the goods could be identified to found an insurable interest.

In its judgment, the Court of Appeal upheld the decision of the High Court (Butcher J)  that the Insured had an insurable interest over the grains on the grounds that a party was able to have such an interest over goods even though they were unascertainable, so long as payment or a part-payment had been made for those goods by the Insured.

Note: In November 2023, the Insurers were given leave to appeal to the UK Supreme Court.

Case note contributed by Joshua Hamlet, MCIArb, LLB (Hons), LEC (HWLS), LLM CIDR (QMUL) Dist, Attorney at Law of Trinidad & Tobago and International Contributor to DMC’s CaseNotes

Background

Between 2014 and 2018, the Insured had significant dealings with Agri Finance SA (‘Agri’), which was part of Agroinvest. There was a 24 May 2018 contract (‘Agri Contract’) between the Insured and Agri which provided general terms for the sale and purchase of grains with each sale and purchase to be covered by an Addenda to the Agri Contract

The Insured’s Marine Cargo Open Policy with the Insurers (‘Policy’) had been in force from 1 October 2017 to 30 September 2019.  The Policy terms included clauses defining “interest”, “fraud” and “misappropriation”, amongst others.

The interest clause provided a wide definition of ‘interest’. It referred to ‘goods and/or merchandise and/or cargo of every description and/or interest incidental to the business of the Assured’. It also covered the Insured’s property or property for which it had or had assumed a responsibility to insure or for which it had received instructions to insurance.  The interest clause referred specifically to cereals, grain, soybean, pulses, maize and food products in container, bulk and/or break-bulk. Shipments were automatically covered and the Insured made monthly declarations of shipments. These identified the grain covered by the insurance only by a generic description.

The terms on fraud indicated that the Policy covered physical loss or damage to goods or merchandise that occurred through fraudulent shipping documents.

The misappropriation coverage extended to all physical damage or losses in two  situations involving bad faith: first, the use or disposal of the insured goods by one of the Insured’s contracting parties or their servant contrary to the purpose for which the goods were received or in disregard of the Insured’s instructions; second, physical or legal delivery of the insured goods to any natural or legal person by a contracting party of the Insured or their servant who was aware or should have been aware that the person was not entitled to delivery of the insured goods.

The Agri Contract was governed by English law. Payment was specified in the Addenda in the Agri Contract.

The Insured’s claim arose from three Addenda to the Agri Contract: (i) Addendum 7 dated 17 September 2018; (ii) Addendum 9 dated 30 October 2018; and Addendum 10 dated 29 November 2018.  Each Addenda was for the purchase of significant quantities of corn.  The Insured undertook to pay 80% of the purchase price against originals of the seller’s invoice, the warehouse receipt, and the analysis card issued by the grain warehouse’s laboratory.  

The grains were stored by corporate entities and storage facilities, i.e. warehouses and elevators, of Agroinvest (‘Elevators’).

The sequence of events behind each fraud started with the Insured receiving an invoice for payment against a warehouse receipt.  The Insured would make a payment thereafter, believing that the grain was in the warehouse.  Monthly inspections were made of the documents, together with visual inspections of the stock.  This continued until late January 2019; but, on this occasion, the inspectors who had attended the warehouses to review the documents, conduct visual inspections and take measurements of the goods present, had been refused access.

Subsequent investigations revealed that the fraud involved Agroinvest obtaining grain, corn and sunflower seeds from local farmers, which were then stored in warehouses owned by Agroinvest.  Agroinvest would then pledge or sell the same parcels of grains to multiple traders using fraudulent warehouse receipts.

The Insured sent a notice of loss to its brokers which was transmitted to the Insurers.  A claim was filed for US$5.7M, which was the Insured’s best estimate of the market value of the insured goods of which it had been defrauded, less the applicable deductibles.

Judgment

At first instance, Butcher J had decided this claim on the basis that the subject matter of the insurance was the grains themselves. He made this decision based on three categories of evidence: (i) the documentation issued by the Elevators, warehouse receipts and grain analysis cards; (ii) inspection reports from the cargoes; and (iii) the Insured’s physical receipt of some of the grain stored in the Elevators during the relevant period.

He had also held that, under Ukrainian law (the law that applied at the place where the goods were stored in warehouses), the Insured had an immediate right to the possession of the grains, regardless whether or not the warehouse receipts were fraudulent.

On appeal, the Insurers’ primary contentions were (i) that there were no goods corresponding in quantity and quality to the cargoes that were in the Elevators when the warehouse receipts were issued, and (ii) that the Insured lacked an insurable interest in the goods where they did not form part of a bulk which was sufficiently identified.  The remainder of the Insurers’ arguments challenged whether the Insured had an immediate right to possession and, therefore, had no insurable interest in the goods.  Finally, the Insurers argued that the practical consequences of Butcher J’s decision indicate that it is wrong.

Sir Julian Flaux (with whom the other appeal judges agreed) began his judgment by reciting the legal principles related to insurable interest.  He indicated that three characteristics had to be satisfied for there to be an insurable interest: (i) the insured may stand to benefit from the safety or due arrival of the insured property or be prejudiced by its loss or damage or detention, or might incur a liability in respect of it; (ii) the insured may stand in a legal or equitable relation to the adventure or to any insurable interest in such adventure; and (iii) the benefit, prejudice or incurring of such a liability had to arise in consequence of the legal or equitable relation of the insured to the property or adventure.

Sir Julian reiterated that answering the question of insurable interest is one of interpretation.  The starting point was to identify the subject of the insurance from the policy itself.  The nature of the insurable interest is then to be discovered from all the surrounding circumstances.  It is not a requirement of property insurance that the insured has a ‘legal or equitable’ interest in the property.  Insurable interest has a broad scope, and so it covers parties that have a legal or equitable relation to the insured property.  As such, there is a practice in the English courts to lean in favour of finding an insurable interest to exist wherever possible.

The Insurers argued that the goods either did not exist or were not sufficiently identifiable and identified, such that Butcher J should not have reached that conclusion from the documents from the warehouses, inspection reports or the Insured’s receipt of some of the grain.  Part of the reason was that the documents were issued by fraudsters.  The Insurers also argued that there could be no insurable interest unless the goods were identifiable and identified. The same logic that applied to whether a person had title in goods should equally apply to whether a person had an insurable interest in them.

Sir Julian disagreed with each of the Insurers’ attacks on Butcher J’s factual findings.  He accepted that Butcher J’s position was that the fraud required grains to be in the Elevators so that the grains could be inspected by traders and matched against the amounts being purportedly sold.  The inspections were carried out visually but the inspectors also used a laser meter to measure the volume of grain in the Elevators.  Therefore, there was evidence that grains existed in the Elevators even though the warehouse receipts and analysis could not be relied upon to show that the Insured owned the grains in question.  It would have been very risky and likely to lead to early discovery of the fraud if no consignment of the relevant type and quality of grain had been present at the particular Elevator.

The suggestion that the Insured must sufficiently identify its portion of the grain in the bulk was also rejected.  Sir Julian saw that as imposing an additional requirement on insurable interest beyond anything in the authorities concerning insurable interest.  Sir Julian emphasised that insurable interest should not be confused with a proprietary interest.  It was accepted that an insured can have an insurable interest over goods even when it had no proprietary interest in them, and a proprietary interest had never been considered as required for an insurable interest to exist.  Sir Julian, therefore, endorsed the principle that, even if neither property nor risk in the goods had passed to the Insured, payment or, at least, part-payment of the price for the goods, would be sufficient to give the Insured buyer an insurable interest.

As a result, the Court of Appeal upheld the decision at first instance and dismissed the Insurers’ appeal accordingly.

Comment

This decision exemplifies the widening definition of insurable interest in English law.  From its starting point of legal or equitable relationship with the subject matter insured (fn.1), insurable interest has widened to include circumstances where the insured is in possession of the subject matter and, now, to where the insured has a claim to the possession of the goods because they have been, at least in part, paid for by the insured.  As the concept has widened, the Court of Appeal has confirmed that, even for unascertained goods, there is no need for the insured to prove a proprietary interest or title.

Additionally, the Court of Appeal’s reasoning shows that English courts are reluctant to accept that there is a lack of an insurable interest.  In that regard, it is viewed as a technical defence and, where there is a valid insurance contract and a legitimate insured loss suffered in relation to the goods, the English courts will work astutely to find an insurable interest.

Most of the grounds of appeal focused on Butcher J’s findings of fact.  The Court of Appeal’s reasoning demonstrates that appellants need to show strong reasons to overturn findings of fact by a trial judge.  In this case, the trial judge’s decision that the Insured had a legal or equitable relationship to the grains in the warehouses, was supported by contemporaneous documents from the warehouses in question.

For insurers, it is important for them to consider their policy wordings carefully, if they wish to avoid paying out on fraud-related cargo claims under the policy.  This is so, because determining whether an insurable interest exists is a question of the interpretation of the insurance contract in the light of ‘all surrounding circumstances’, against a background of the English courts being reluctant to find that no insurable interest exists.

Footnote 1: Lucena v Craufurd (1806) 2 Bos & Pul (NR) 269