In brief - Engelhart shows that to cover financial losses that do not result from physical loss or damage, the open cover cargo policy must contain clear words to that effect
The facts in the English High Court decision in Engelhart v Lloyds Syndicate 1221 (2018)2 Lloyds Rep. 24 should cause concern to anyone involved in the international carriage of goods by sea, whether as traders or insurers. In this case, the cargo claimant was unsuccessful in its claim against its insurers under its open cover cargo policy.
Physical loss claims do not include circumstances where insured is defrauded into taking out documents of title for non-existent goods, Court finds
The claimant had purchased copper ingots from a supplier which it had then on sold to a consignee in China. There were two shipments involved. The first arrived at the ultimate destination but the second had never been shipped, and there was no cargo to be physically lost or damaged. The losses were therefore treated as economic losses due to the cargo owner's acceptance of fraudulent documents in the expectation that they covered physical goods. Unfortunately, there is no explanation in the judgment as to how the fraud was perpetrated and how the documentation was produced and payment made for the goods without the involvement of the original supplier. It was suggested that broader words would be required if the policy was to cover more than losses flowing from physical loss or damage to goods.
The cargo owner was therefore unsuccessful, even though its cargo cover was subject to the Institute Cargo Clauses A and contained the following two provisions:
The argument advanced by the cargo interests that physical loss claims included circumstances where an Assured had been defrauded into taking out documents of title for non-existent goods was not accepted.
In an interesting and thought-provoking article in relation to this case in the November 2018 issue of Lloyds Maritime & Commercial Law Quarterly, John Dunt (visiting Senior Research Fellow at the Institute of Maritime Law, University of Southampton) posed the question "Can marine cargo insurance provide cover for non-existent goods?" He concluded that:
How Engelhart compares with NSW Leather v Vanguard Insurance
This case and Dunt's article is somewhat reminiscent of the decisions of Carruthers J in March 1990 and the New South Wales Court of Appeal in late 1991 in NSW Leather v Vanguard Insurance (1991) 25 NSWLR 699, which involved a cargo claimant who had been unsuccessful at first instance in recovering against its insurer for the loss of goods shipped pursuant to an FOB contract from Brazil to Sydney. It was common ground in the case that the containers had been broken into prior to loading and the bulk of the leather cargo stolen, fresh seals having been fraudulently attached thereafter. At first instance it was held that the importer had no insurable interest at the time the goods had been stolen.
The open policy wording contained the agreement that the insurance was "an Insurance (lost or not lost)...". The first instance judge had also held that the "lost or not lost" clause could not be availed of. The claimant, however, succeeded in the Court of Appeal in reliance on the "lost or not lost" clause.
- The Assured must be interested in the subject-matter insured at the time of the loss though he need not be interested when the insurance is effected: Provided that where the subject-matter is insured "lost or not lost" the Assured may recover although he may have not acquired his interest until after the loss;...
- Where the Assured has no interest at the time of the loss, he cannot acquire interest by any act or election after he is aware of the loss.
Rule 1 in the Second Schedule to the Marine Insurance Act also provides:
Notwithstanding those provisions, Carruthers J, at first instance, had held that the loss had not fallen on the cargo importer because the leather had been stolen from the containers before they had passed over the ship's rail at Rio Grande.
The Court of Appeal held that the cargo owner was entitled to rely on those provisions. Reliance was placed on the case of Sutherland v Pratt (1943) 11 M&W 296, 152 ER 815 where Parke B said:
Reliance was also placed on Reinhart Co v Joshua Hoyle & Sons Limited (1960) 1 Lloyds Rep 483, affirmed (1961) 1 Lloyds Rep 346, which involved a C&F contract for the sale of Mexican cotton to the United Kingdom. Pearson J said:
He also held it applied to partial as well as total losses. On appeal, Sellers LJ agreed with Pearson J and said:
Willmer LJ said that as the cotton had never been in a warehouse, the warehouse to warehouse clause did not apply and he accordingly concluded that the cotton was only insured from the time of shipment. Donovan LJ agreed with Willmer LJ.
The NSW Leather case is clearly distinguishable on its facts for two main reasons:
- the goods had existed but were removed from the containers before they went over the ship's rail
- the policy covered goods "lost or not lost"
If goods are never shipped and do not commence the transit at all it is difficult, as Engelhart demonstrates, to argue that they have been lost. There are, however, similarities: the goods that had been contracted to be sold to the consignee had been paid for by the original buyer to the supplier, were not loaded onto the carrying vessel, and the containers, which were delivered at the port of destination, had no value to the consignee.
Engelhart is also a reminder of the dangers of fraudulent documents in international trade and the need for paperless trade
Whether traders want to insure themselves against such circumstances as those which took place in the Engelhart case (or expect to be insured against such risks) and whether insurers want to take on such risks are matters for them to decide. It would in any event be appropriate for insureds, their brokers who advise them and insurers to look at their policy wordings to ascertain whether they would be covered, given the prevalence of cybercrime and the ease with which it appears to be possible to insinuate fraudulent documents into transactions relating to the international trading and carriage of goods.
In conclusion, the growing appreciation of the need for heightened security and thus for processes such as Blockchain to be availed of are becoming ever more significant. Going hand in hand with the requirement for such processes to be embraced is the need for an international liability regime that permits paperless trade, such as the Rotterdam Rules, to be brought into international usage as a matter of urgency.Stuart Hetherington
Colin Biggers & Paisley
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.