The recent New South Wales Court of Appeal decision in General Reinsurance Australia Ltd v HIH Casualty & General Insurance Ltd (in Liq)  NSWCA 22 highlights the risk of adopting general and 'common industry' language when drafting reinsurance wordings.
The case considered whether payments made under a trade financial facility fell within a class of insurance described in a quota share reinsurance treaty as 'Trade Credit and Export Credit'. The New South Wales Court of Appeal held that it did, and rejected the reinsurer's argument that the common industry usage of such words contemplated a much narrower application. The decision provides another example of the Australian courts' call for greater precision and clarity in the drafting of reinsurance wordings.
From December 1997, Suncorp Metway Ltd (Suncorp) provided Daewoo Australia Pty Ltd (Daewoo Australia) with commercial funding under a trade finance facility. The facility was to be used for the purpose of ordering goods from third party suppliers. In November 1998, the parties agreed to a structure that required Suncorp to obtain 'trade credit' insurance as a form of security for its financial accommodation to Daewoo Australia. This arrangement was put into writing and signed on 29 March 1999 (Trade Finance Agreement).
The Trade Finance Agreement included the following terms:
- When ordering goods from suppliers, Daewoo Australia would request that Suncorp be invoiced. Daewoo Australia would also request that Suncorp issue a letter of credit to the supplier for the purchase price.
- Title in the goods would pass to Suncorp, once Suncorp paid the supplier. When Suncorp received an invoice from a supplier, it would invoice Daewoo Australia for the relevant goods at the amount of 111.12% of the purchase price stated in the supplier's invoice.
- If Daewoo Australia paid each of Suncorp's invoices by their due date, Daewoo Australia was only required to pay the actual price paid by Suncorp to the supplier.
- It was a condition precedent to the provision of facilities under the agreement that Suncorp have appropriate trade credit insurance for which Daewoo Australia would pay the premium.
- Daewoo Australia would pay interest to Suncorp on each amount drawn down under a letter of credit, and all interest was payable in advance.
The price mark up was designed to provide Suncorp with indemnity for the full amount paid by it to the supplier if Daewoo Australia defaulted. Suncorp would derive all its revenue under this arrangement from interest charged and paid 'up front'. The relevant supplier in this case was Daewoo Australia's Hong Kong based subsidiary (Daewoo HK).
HIH Casualty & General Insurance Ltd (in liq) (HIH) undertook to insure Suncorp (Suncorp Policy) in full knowledge of the underlying structure of this arrangement. General Reinsurance Australia Ltd (Gen Re) subsequently provided a quota share reinsurance treaty (Treaty), but did so without an awareness of the underlying arrangement.
HIH made a claim under the Treaty for payments made to Suncorp. Gen Re denied cover on the basis that the claim did not fall within the class of insurance described in the Treaty as 'Trade Credit and Export Credit'.
Justice McDougall concluded that the Treaty responded to the claim as a 'Trade Credit' risk and was required to make payment to HIH under the policy. Gen Re subsequently appealed.
The issues on appeal were:
- Whether the underlying primary insurance written by HIH was a 'Trade Credit' policy within the scope of the Treaty's class of business.
- Whether Suncorp's claims fell within the terms of the policy issued by HIH.
Of particular importance was whether goods were 'delivered' for the purposes of the Suncorp policy whereby Suncorp did in fact take title to the relevant goods which was passed in a second sale transaction to Daewoo Australia. Transfer of legal title was crucial given that the goods were at no time under the physical control of Daewoo HK, Suncorp or Daewoo Australia.
Gen Re contended that:
- The Trade Finance Agreement in reality did not involve a string of transactions from Daewoo HK (as supplier) to Suncorp and from Suncorp to Daewoo Australia. Gen Re submitted that Daewoo HK sold the goods directly to Daewoo Australia and that no title passed through Suncorp.
- Relying on expert evidence, Gen Re argued that the Suncorp transaction should be characterised as involving a financial risk rather than trade credit risk. Gen Re claimed that Suncorp was not involved in the business of trading goods but was acting purely as a financier. The relevant activities therefore did not trigger the 'Trade Credit' risk described in the Treaty.
The Court of Appeal upheld Justice McDougall's decision.
Justice Allsop (with Justices Hodgson and Macfarlan agreeing) accepted HIH's expert evidence that the term 'Trade Credit' insurance was wide enough to cover the risk of non-payment of goods supplied by a financier on credit. His Honour stated:
'It accords with commercial common sense that the concept of "supply" includes delivery of title without the need for a financial institution to take and pass physical control to the buyer.'
Suncorp did not need to be a dealer in goods of the kind acquired by Daewoo Australia under the Trade Finance Agreement, nor did it need to carry on any trade by way of supply of goods generally.
What was crucial in this determination was the language contained in the invoice and Trade Finance Agreement. The invoice, was made out 'on account and at the risk of' Suncorp, and made no mention of the ultimate purchaser, Daewoo Australia, which together implied that Suncorp was the original applicant for the letter of credit. This was held to be persuasive evidence that the invoice was directed to Suncorp as the buyer and not merely as an agent.
The interpretation of the Trade Finance Agreement adopted by the Court reinforced that Suncorp became the purchaser of the goods once it submitted an unconditional letter of credit to Daewoo HK and Daewoo HK had in return invoiced Suncorp for those goods. The Court of Appeal concluded that at the time of payment this amounted to:
'...the creation of the legal relationship, at the request of Daewoo Australia, between what can be taken to be in commercial terms its supplier and its financier, with the clear commercial intention of on-sale to it by the financier.'
This transaction structure was ultimately characterised as falling within a 'Trade Credit' risk such as to bring Gen Re under an obligation to pay sums under the Treaty. The appeal was subsequently dismissed with costs.
The broad definition of 'Trade Credit' insurance adopted by the Court highlights the need for precision in drafting reinsurance policies. Reliance on undefined terminology and common industry usage, particularly where more than one interpretation is available, can be dangerous for both reinsurer and reinsured. In the current case, a protracted and expensive litigated dispute might have been avoided had the parties fleshed out in greater detail the meaning of 'Trade Credit'.
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