Undefined terms in a reinsurance treaty led to a broad interpretation of the words "Trade Credit" that resulted in the reinsurer, General Reinsurance Australia Ltd (Gen Re) being liable for its share of a claim that it maintained was not intended to be covered by the treaty.
McDougall J in the NSW Supreme Court had found that Gen Re, as reinsurer, was obliged to pay HIH Casualty & General Insurance Ltd (in Liq) (HIH), the reinsured, sums under a quota share reinsurance treaty in respect of a class of insurance described in the slip as "Trade Credit and Export Credit". The NSW Court of Appeal upheld the primary judge's decision and confirmed that the reinsurance treaty responded to HIH's claims.
In December 1998, HIH concluded a quota share treaty with Gen Re and others. The reinsured business was described as "Trade Credit and Export Credit". The treaty provided cover for HIH "in respect of Policies issued or renewed during the Period". The relevant period was the 1999 calendar year. On 13 April 1999, HIH issued a "Domestic Policy of Trade Credit Insurance" (Suncorp policy) to Suncorp Metway Limited (Suncorp).
The Suncorp policy was in force from 23 March 1999 to 31 March 2000. Suncorp made a claim on that policy on 31 January 2000. HIH met the claim. HIH sought indemnity from reinsurers under the treaty. Most reinsurers paid, however Gen Re did not. HIH claimed Gen Re's share of liability under the treaty together with interest and costs.
The claim made by Suncorp involved an agreement known as the "Trade Finance Agreement" entered into by Suncorp and Daewoo Australia Ltd (Daewoo Aust) on or about 29 March 1999, whereby Suncorp agreed to provide Daewoo Aust with commercial funding. Suncorp was referred to as the "Bank" and Daewoo Aust was referred to as the "Borrower", providing for a facility of the lesser of AUD $18 million or US $10 million. Suncorp obtained the Suncorp policy as a form of security for its financial accommodation to Daewoo Aust.
The Trade Finance Agreement essentially provided for Daewoo Aust to enter into contracts with Daewoo Hong Kong to purchase goods from that company, for Daewoo Hong Kong to issue supplier invoices to Suncorp and ask Suncorp to issue letters of credit to Daewoo Hong Kong, and for title to the goods to pass from Suncorp to Daewoo Aust when Suncorp issued its invoice to Daewoo Aust. HIH was aware of the substance of the arrangements between Suncorp and Daewoo Aust, however Gen Re was not.
On or about 15 April 1999, Daewoo Aust applied to Suncorp for the issue of three letters of credit. Each application gave details of the applicant, the beneficiary and the goods, and specified that the letter of credit was payable on sight. On 15 April 1999, Daewoo Hong Kong provided three invoices to Suncorp. The invoices described the goods and stated that they were shipped in good order and condition on a particular vessel on account and risk of Suncorp. Each invoice stated that the goods had been shipped against the relevant letter of credit provided by Suncorp. On 22 April 1999, Suncorp invoiced Daewoo Aust for the goods. Ultimately, Daewoo Aust defaulted on payment.
Suncorp obtained the Suncorp policy to cover itself against direct loss arising from non-payment of "Insured Debt". "Insured Debt" was defined to mean the invoice value of the goods "supplied". "Supplied" was defined to mean goods sold and "Delivered" by Suncorp to its customers. "Delivered" was defined to mean the transfer of legal title from Suncorp to its customers.
The primary judge determined that Daewoo Hong Kong had passed title to Suncorp which in turn passed title to Daewoo Aust by way of a sale on credit. His Honour concluded that the facts and circumstances of the claim fell within the scope of the Suncorp policy, which was "Trade Credit" insurance, which in turn satisfied the requirements of the reinsurance treaty that made Gen Re liable for its share of the claim.
The meaning of "Trade Credit" insurance was undefined in the reinsurance treaty and so it was open to the primary judge tointerpret the term broadly.
Gen Re appealed McDougall J's decision. The critical questions on the appeal were:
- Did Daewoo Hong Kong sell to Suncorp?
- If so, did Suncorp on-sell to Daewoo Aust?
There was no suggestion that the arrangements were a sham, which meant that the legal structure of the terms of the arrangements could be taken to reflect the parties' true intentions.
The proposition put forward by Gen Re on appeal was that whilst the broker's summary of the transaction contemplated sales from a supplier to Suncorp and from Suncorp to Daewoo Aust in a form of a string of contracts, that was not achieved in practice. In reality, the supplier was in fact Daewoo Hong Kong, a Daewoo subsidiary, which sold the goods direct to Daewoo Aust. No title to the goods was ever obtained by Suncorp. Therefore, Gen Re contended that, firstly, the Suncorp policy did not respond to the claim and secondly, even if the Suncorp policy did respond, it would be responding to a class of risk that would reflect "financial risk" rather than "Trade Credit", which was not covered by the reinsurance treaty.
The Court of Appeal considered evidence that had been given by two industry experts, including an insurance broker with over 20 years experience working in the field of trade credit and political risk insurance in London and Hong Kong and an underwriter with significant experience in trade credit insurance, in order to obtain the markets understanding of the term "Trade Credit" used in its commercial context.
The Court of Appeal confirmed the terms "Trade Credit Risk" and "Trade Credit Insurance" were sufficiently broad to encompass the risk of a financial institution for non-payment by a buyer from it in circumstances where the financial institution did not, in the ordinary course of its business, trade in such goods, or trade in goods generally, and in circumstances where it passed title in a sale contract to the buyer.
The invoice from Daewoo Hong Kong to Suncorp was a crucial piece of evidence because it was directed to Suncorp as the buyer and was subsequently paid by Suncorp, which amounted to a contract between two commercial parties. The legal relationship was created at the request of Daewoo Aust and could be described in commercial terms as between a supplier and financier with the clear commercial intention of on-sale by the financier. Allsop P, with whom Hodgson JA and McFarlane JA agreed, stated:
"...Here, the requests in the letters of credit to Daewoo HK to make the invoices out to Suncorp as applicant for the credit, Daewoo HK doing so in the terms "on account and at the risk of Suncorp", and the clear intention of Daewoo Aust and Suncorp at cl4.7 of the Trade Finance Agreement all negate the limitation of any property in Suncorp to that of a pledge or other security interest. Daewoo HK can be taken as offering to sell the goods to Suncorp by directly invoicing it (having been requested to do so by the letter of credit and, one would naturally infer, having been otherwise requested to do so). Daewoo HK was intending to divest itself of title by sale. Given that Daewoo Aust (to whom the bills of lading were sent) and Suncorp had a commercial relationship in which the latter provided the former with financial accommodation, the nature of any title to be held by Suncorp rested on their mutual intention. That intention was to be found in the unequivocal terms in the Trade Finance Agreement, especially cl 4.7".
The Court of Appeal upheld the primary judge's decision and confirmed that the reinsurance treaty responded to HIH's claim for reimbursement of its liability to Suncorp under the Suncorp policy. The appeal was dismissed with costs.
The case is a clear example of how costly it can be when a critical term in a reinsurance treaty is left undefined. Relying upon general industry understanding of a particular term leaves it open to the Court to interpret that term as it sees fit. That may result in a wider interpretation of the term being adopted, which could oblige a reinsurer to indemnify the cedent in relation to its share of a claim that it did not otherwise intend to cover. Clarifying and confirming in writing the intended meaning of critical terms in a reinsurance treaty may assist in limiting the scope of cover and/or avoid years of costly litigation.
General Reinsurance Australia Ltd V HIH Casualty & General Insurance Ltd (in liq)  NSWCA 22
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