9 March 2022. Quadra Commodities S.A. v. XL Insurance & Co: the English High Court ordered insurers to indemnify a commodity trader for the misappropriation of commodities following “fraud” and bankruptcy.

A. Introduction

Those involved in commodity trading and finance will be familiar with the unique challenges and risks associated with managing commodity inventories and the particular issues relating to insuring them, financing them, creating security interests in them, protecting them against competing claims by third parties and/or ring-fencing them from bankruptcy.

Some of these risks materialised in early 2019 following the collapse of the Agroinvest Group, a substantial agri-commodities business set up in 2008 in Ukraine. The occurrence of the risks led to litigation soon afterwards, including the English High Court claim by Quadra Commodities S.A. (“Quadra”) against its insurers.

The bankruptcy of the Agroinvest Group followed what appears to have been a wholesale fraudulent scheme involving the alleged multiple financing and sales of the self-same commodities in storage in Ukraine and the misappropriation of those commodities. Those involved in the fraud included several Agroinvest Group entities, including companies that sold the commodities and companies that owned and/or controlled the warehouses in which the goods were stored. A number of market participants were affected and several claims against insurers were either settled or are still pending.

In the case of Quadra Commodities S.A. v. XL Insurance & Co [2022] EWHC 431 (Comm), the Court was asked to consider whether the Claimant was entitled to an indemnity under its marine cargo policy in circumstances where the goods it had purchased went missing from the Ukrainian warehouses in which they were supposed to have been stored prior to delivery at ports and then export.

The Defendant insurers raised numerous defences to the Claimant’s claim, likening the facts to the facts in the case of Engelhart CTP (US) LLC v. Lloyd’s Syndicate 1221 [2018] EWHC 9000 (Comm), [2018] Lloyd’s Rep IR 368 where:

• goods that were intended to be insured were assumed never to have existed; and

• the loss (based on the factual assumptions made) was held to have been a financial (rather than a “physical” loss) and therefore one which was outside the scope of cover of a fraudulent documents clause that covered physical loss caused by the issuance of fraudulent documents.

In response to the Claimant’s claims, the insurers not only challenged the existence of the goods insured, but also argued that the Claimant did not have a sufficient interest in any goods that did exist on the basis that the Claimant had no proprietary, security or other interest in the goods.

The High Court’s decision may be of interest to those involved in aggregating, financing, storing and trading commodities. The Court’s judgment provided helpful clarity as to what constitutes an insurable interest and a recap of the relevant lines of judicial authority. It also answered issues concerning the Claimant’s title to and its pro-rata share of commingled goods under section 20A the Sale of Goods Act 1979 (the SGA).[1]

The decision also considered, for the first time, the application of section 13A of the Insurance Act 2015 (a relatively recent piece of legislation) to the Defendants’ conduct, and whether on the facts of the case, the insurers had failed to process and deal with the Claimant’s claim within a reasonable time.

B. The facts in brief

The Claimant, a trader of agricultural commodities, purchased goods between September 2018 and January 2019 from Agroinvest Group entities under a series of purchase contracts (the Purchase Contracts). Some of those Purchase Contracts involved asset or ownership-based financing, with the intention that the Claimant would buy goods from one Agroinvest Group company and sell the same goods to another Agroinvest Group company, to assist those entities with the financing of the goods. Some of the Purchase Contracts involved the Claimant buying goods from an Agroinvest Group company with the intention of eventually selling them to third parties. By January 2019, the Claimant had entered into Purchase Contracts under which it had paid 80 per cent of the price towards a number of the cargoes stored at various elevators inland in Ukraine.

In February 2019, the ‘Agroinvest Group fraud’ came to light. It affected multiple market participants. The goods acquired by the Claimant had all but disappeared and were lost. The precise details of the fraud remain unclear, but at some point the quantities in the warehouses became insufficient to cover the claims for delivery made not only by the Claimant but also by other traders with goods notionally stored in the elevators.

The Claimant was insured under a marine cargo open cover insurance policy (the Policy). The Claimant notified the underwriters of the Policy of its loss on 14 February 2019. After various discussions, meetings and investigations, the Claimant commenced High Court proceedings on 20 May 2020 against the Defendant underwriters, claiming (i) an indemnity in respect of the lost goods, (ii) an amount by way of costs incurred in seeking to safeguard and/or recover the goods (i.e., its sue and labour costs), and (iii) damages for breach by the Defendants of their obligations under section 13A of the Insurance Act 2015 (namely to pay insurance sums due under the Policy “within a reasonable time”).

The Defendants denied any liability under the Policy.

C. What were the main issues?

The key issues addressed in the Judgment can be summarised as follows:

• Did goods exist which were the subject matter of the Policy?

• Did the Claimant have a section 20A SGA share of goods which existed in an undivided bulk?

• Did the Claimant have an insurable interest in goods covered by the Policy by virtue of the existence of the Purchase Contracts and its part payment for the goods under the Purchase Contracts?

• Did the Claimant have an insurable interest in goods covered by the Policy through the existence of warehouse receipts notwithstanding certain formalities of Ukrainian law relating to warehouse receipts?

• Was the Claimant’s loss covered under the misappropriation clause or the fraudulent documents clause?

• Did the Defendants breach the implied term set out in section 13A of the Insurance Act 2015 requiring the Defendants to investigate and assess the claim within a reasonable time?

D. A short summary of the Court’s decision and analysis

Did goods exist which were the subject matter of the insurance?

The Defendant insurers argued that the present case was in line with other similar cases in which there had been no physical loss. Their argument was that the Claimant could not discharge the burden of proving that goods in which it had an interest existed, because when the warehouse receipts were issued to the Claimant, other warehouse receipts covering the same goods had been issued to other buyers.

The Claimant meanwhile argued that the present case was distinguishable from cases in which there had been no physical loss of goods, because goods existed even though multiple warehouse receipts may well have been issued to other market participants. The Claimant contended that it could show that there were goods in the warehouses, of the type and quantity referred to in warehouse receipts issued by the warehouses at the relevant time. To support its position, the Claimant adduced contemporaneous evidence in the form of (i) warehouse documents, including receipts, grain analysis cards and quality reports; (ii) inspection reports issued by independent inspectors which verified the apparent existence of goods; and (iii) proof that the Claimant had been able to take partial delivery of at least two parcels of goods from the elevators during the period in which multiple warehouse receipts now appear to have been issued.

The Judge emphasised that an all risks marine cargo insurance policy does not usually cover a situation where no goods ever existed (and therefore no goods can have been lost or damaged).

However, the Judge found that the Claimant had succeeded in showing that, on a balance of probabilities, goods were physically present in the warehouses corresponding to the Claimant’s warehouse receipts at the time those warehouse receipts were issued. The Court’s reasoning was that:

• The warehouse receipts issued to the Claimant were evidence of the existence of the relevant goods in the warehouses. That was the case even though the warehouse operators that issued the receipts appear to have been complicit in the fraud and even though the warehouse receipts were fraudulent in the sense that multiple receipts for the self-same goods were apparently issued to different traders. The fraud that appears to have been committed by the Agroinvest Group involved the same goods being sold several times over to different traders. It was integral to the fraud that there were goods in the warehouses of at least a sufficient quantity to cover the quantity sold to any trader who was the victim of that fraud. Had there not been, the fraud would have been likely to unravel at a much earlier stage when traders sent inspectors to the warehouses to verify the existence of goods.

• The independent inspectors’ reports of their visual inspection on the Claimant’s behalf and their evidence as to the presence of goods were “the most important evidence”. This supported a finding of fact that goods were present at the relevant times and upon inspection.

• The Claimant had taken physical delivery of two parcels of the goods. This corroborated the evidence that goods were physically present and in existence at some time prior to the risks occurring.

Did the Claimant have a section 20A share of goods which existed in an undivided bulk?

The default position under the SGA is that no property in unascertained goods can be transferred to the buyer unless and until the goods are ascertained. Section 20A of the SGA provides the exception to that rule: if (i) the goods form part of a bulk that is identified in the sale and purchase contract or a subsequent agreement between the parties; and (ii) the buyer has paid some or all of the price, then property in a share in the undivided bulk can be transferred to the buyer, at which point the buyer becomes an owner in common of the bulk.

The Claimant accepted that the goods formed part of a commingled bulk stored in the warehouses and were therefore unascertained for the purposes of the SGA. However, the Claimant argued that it had an interest in the goods pursuant to section 20A of the SGA, (i.e., an entitlement to a share in the undivided bulk), which was identified when the warehouse receipts were presented, against which the Claimant paid. Thus, the Claimant contended that it was an owner in common of the bulks of which the goods formed part, with an interest in a pro-rata share in those bulks.

Conversely, the Defendant insurers argued that the Claimant had no title to the goods because:

(a)   the bulk of which the cargoes formed part was not adequately identified in any relevant contract or subsequent agreement; and

(b)   on a true construction of the Purchase Contracts, title to two of the cargoes was only intended to pass to the Claimant on delivery at sea ports, DAT or DAP, and not at the warehouses.

The Judge held that, although the warehouse receipts identified that a specific quantity of particular goods was stored at the elevators at a specific address, they failed to identify the particular warehouse(s) or silo(s) within the warehouse complex at which the goods were stored. The Judge held, on the evidence that each of the elevators had several warehouses or buildings, that each warehouse at the elevator facilities stored different types and grades of goods and that the goods were sometimes moved between warehouses or silos. The Judge accepted that guidance as to how specifically a bulk must be identified in order to fall within section 20A of the SGA is provided by the Law Commission report (No. 215 of July 1993) in which section 20A of the SGA was proposed. The Law Commission gave examples of a bulk within the meaning of section 20A, including “a cargo of wheat in a named ship”, “a mass of barley in an identified silo”, “the oil in an identified storage tank” and “ingots of gold (all of the same kind) in an identified vault”. The Judge further accepted that there may be cases in which a site, even an extensive one, might constitute a defined “area” and the parties to a sale and purchase contract might agree that the bulk is all of the goods of a certain type within that area.

However, in the present case the facts relating to the arrangements at each of the elevators and the absence of provisions in the warehouse receipts or any storage agreement specifying the exact warehouse, building or silo in which the goods were stored meant that the goods in bulk were insufficiently identified to give the Claimant a section 20A interest in the goods.

As a result the Court held that the Claimant did not acquire a share in the commingled undivided bulk under section 20A of the SGA.

Did the Claimant have an insurable interest in goods covered by the policy by virtue of having part paid the price under contracts for the purchase of the goods?

The Judgment is a useful reminder that: “if the court finds that an assured has taken out insurance to cover a particular subject matter against risks that have eventuated, it will be reluctant to find that the claim fails for lack of insurable interest.” The Judge emphasised that, usually, the insured must have a “legal or equitable relation” to the goods in order to be treated as having an insurable interest in goods under a marine cargo policy.

The Claimant argued that it had an insurable interest because it had a right in relation to the goods derivable from “a contract about the property” pursuant to which the Claimant had paid the purchase price (or part thereof) for the goods in storage.

The Judge accepted the Claimant’s argument and held that the Claimant had an insurable interest in the unascertained goods of the relevant description. They were in fact in the warehouses and the Claimant had paid for them. This was the case TTT whether or not the Claimant had obtained a proprietary or possessory title to the goods, and irrespective of any potentially competing interests of other traders in the goods. Those goods, or part of them, were treated by all concerned as stored for the Claimant as part of the Claimant’s business. By virtue of the Purchase Contracts and the payments made thereunder, the Claimant stood in a “legal or equitable relation” to the goods. On the facts of this case, the Claimant was prejudiced by the loss of the goods, regardless of whether there were competing claims to the same goods. The Court was guided in part by the case of Cumberland Bone Company v. Andes Insurance Co 64 Me 466 (1874), a decision of the Supreme Judicial Court of Maine which stated:

“If it were essential to the existence of an insurable interest that the assured should have a legal title to the property upon which the insurance is affected, the case would present a different and perhaps more difficult question. But such is not the law. An equitable interest suffices.”

The Judgment therefore confirms that, even where property in goods has not passed, payment or part payment of the price will usually give the buyer an insurable interest, because if the goods were lost or damaged and the seller became insolvent, the buyer would suffer prejudice.

Did the Claimant have an insurable interest in goods covered by the policy through the existence of warehouse receipts?

The Claimant argued it had an insurable interest deriving from an immediate right to possession of the goods. This argument relied principally on the existence and terms of warehouse receipts issued by the warehouse operators. The Judge accepted the Claimant’s expert evidence that, as a matter of Ukrainian law, the warehouse receipts confirmed the conclusion of storage agreements between the Claimant and the relevant warehouses and that the warehouse receipts could be relied upon against the warehouses as confirming the obligations of the warehouses to return the goods to the Claimant (to whom the warehouse receipts had been issued). That was the case even though the warehouse receipts were not so-called ‘double warehouse receipts’ meeting certain formalities of Ukrainian law and even though they were not registrable under Ukrainian law. The Judge accepted that there is no provision of Ukrainian law that would render warehouse receipts that do not meet those formalities unenforceable or invalid. Therefore the Judge found that the Claimant had an immediate right to possession of the goods under the warehouse receipts.

Was the Claimant’s loss covered under the misappropriation clause or the fraudulent documents clause?

The Judge found that there was a loss caused by misappropriation within the meaning of the misappropriation clause in the Policy. That misappropriation involved the use or disposal of the insured goods without the Claimant’s involvement or instructions and/or the delivery of the insured goods to a third party, in bad faith, by the Agroinvest Group entity that had contracted to sell the goods to the Claimant.

The Judge held that the loss was not covered under the fraudulent documents clause in the Policy. The fraudulent documents clause referred to “physical loss of or damage to goods … insured hereunder through the acceptance by the Assured … of fraudulent shipping documents, including but not limited to … warehouse receipts”). The Judge read the fraudulent documents clause restrictively. He found that the physical loss of the goods in the warehouses was not caused by the Claimant’s acceptance of fraudulent warehouse receipts. This is because, the Judge reasoned, if there were no relevant goods before the warehouse receipts were issued, then those goods were not lost by acceptance of those receipts; conversely, if there were relevant goods in storage at the time of issuance of the receipts, the acceptance of the receipts cannot be said to have caused their physical loss.

Did the Defendants breach the implied term set out in section 13A of the Insurance Act 2015 requiring the Defendants to investigate and assess the claim within a reasonable time?

The Claimant first notified its claim to the insurers in February 2019. The Claimant argued that it was entitled to claim damages for breach of section 13A of the Insurance Act 2015, which implies a term into “every contract of insurance [concluded after 4 May 2017] that … the insurer must pay any sums due in respect of the claim within a reasonable time”, which “includes a reasonable time to investigate and assess the claim”. The Claimant argued that the insurers took an excessively long time to not only investigate and assess the claim but also pay sums due.

The Defendants argued that a reasonable time to investigate the Claimant’s claim was “a considerable time” which should have extended beyond the time at which the proceedings were commenced (on 20 May 2020,), and in any event, there were, for the purposes of section 13A(4), reasonable grounds entitling them to dispute the claim. Section 13A(4) provides that if the insurer shows that there were reasonable grounds for disputing the claim, the insurer does not breach the implied term merely by failing to pay the claim.

In its Judgment the Court stated that the question of what constitutes a “reasonable time” is not an easy one to decide, while keeping it separate from the question whether there are “reasonable grounds for disputing the claim”. Both questions are largely matters of fact. In this case the Judge concluded that a reasonable time to investigate, evaluate and settle the claim, assuming there were no grounds for disputing it, would have been “not more than about a year”.

E. Conclusions?

The Claimant was successful in its claim for an indemnity for the lost goods.

The Court held that the Claimant had an insurable interest in the lost goods on the basis of the existence of the Purchase Contracts (and the payments made thereunder), which sufficed to give the Claimant an equitable interest notwithstanding that the Claimant did not acquire title to and did not acquire a section 20A interest in the commingled bulk.

The Court held that the warehouse receipts issued to the Claimant conferred possessory rights on the Claimant irrespective of the Defendants’ contentions that these did not satisfy the formal requirements of Ukrainian law and that this too was enough to establish that the Claimant had an insurable interest.

While the Judgment contains criticism with respect to the insurers’ handling of the claim, the question as to whether they had breached section 13A of the Insurance Act 2015 was ultimately answered in the insurers’ favour in light of the complexities of the case.

In cases where goods are commingled, the Judgment serves as a salutary reminder to parties with an interest in such goods, that the terms of section 20A of the SGA require that:

(a)   the sale and purchase contract records the parties’ agreement that the bulk is all goods of a certain type stored within a particular area; and/or

(b)   at a minimum, the undivided bulk in which rights are thought to exist is clearly identifiable by reference to a specific location (e.g., tank(s), silo(s) or warehouse(s)) on the face of a warehouse receipt or other documentation such as storage agreements and the like.

Finally, in order to demonstrate that the goods in which insurance is taken out exist, contemporaneous inspections and reports of inspection are important.