Thera Agri Capital No 2 Pty Ltd v BCC Trade Credit Pty Ltd t/as the Bond & Credit Co

[2022] NSWSC 669

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:

Thera Agri Capital No 2 Pty Ltd v BCC Trade Credit Pty Ltd t/as The Bond & Credit Co [2022] NSWSC 669

Hearing dates:

21-23 March 2022

Date of orders:

31 May 2022

Decision date:

31 May 2022

Jurisdiction:

Equity - Commercial List

Before:

Rees J

Decision:

Judgment for the plaintiff in the amount of $7,224,043.04.

Catchwords:

INSURANCE – trade credit insurance, description at [2] – financier insured for default of customer’s guarantor – construction of insurance policy, principles at [135]-[144] – construction of defined terms, principles at [145]-[147] – relevance of post-contractual conduct at [149].

SHIPPING – bills of lading – “to order” – negotiable bills – principles at [78]-[79] – significance of “notify party” at [80].

FINANCE – supply chain finance to commodities trader – Sharia-compliant Murabaha facility, description at [21] – trader submits sham commodity contracts in support of drawdown requests – financier and trader did not strictly comply with finance documents when advancing funds – transactions not Sharia-compliant – trader goes into liquidation – guarantor defaults – insurer denied indemnity on basis of non-compliance with Sharia principles and finance documents.

PRIVATE INTERNATIONAL LAW – choice of law clause in favour of New South Wales (NSW) law – non-exclusive jurisdiction clause in favour of the Dubai International Financial Centre (DIFC) in United Arab Emirates (UAE) – policy required insured to comply with “applicable material laws” – DIFC would apply chosen law – arguable in DIFC that NSW law displaced by public policy of UAE – where public policy of UAE based on Sharia principles of Islamic law – UAE public policy not “applicable material law” within the meaning of the policy.

WORDS AND PHRASES – “material”, “material default”, “applicable material laws” at [186]-[188], [209].

Legislation Cited:

Civil Code (UAE)

DIFC Law No 3 of 2004 on the Application of Civil and Commercial Laws of the DIFC (UAE)

Federal Law No 8 of 2004 regarding the Financial Free Zones (UAE)

Insurance Contracts Act 1984 (Cth)

Cases Cited:

Agricultural & Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570

AIG Australia Ltd v Kaboko Mining Ltd [2019] FCAFC 96

Androvitsenas v Members First Broker Network [2013] VSCA 212

Australian Broadcasting Commission v Australian Performing Right Association Ltd (1973) 129 CLR 99

Black Box Control Pty Ltd v Terravision Pty Ltd [2016] WASCA 219

Bond v Chief Executive, Department of Environment and Heritage Protection [2018] 2 Qd R 112; [2017] QCA 180

Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153; [2001] NSWCA 61

Cargill Australia Ltd v Viterra Malt Pty Ltd (No 28) [2022] VSC 13

Celtech International Ltd v Dalkia Utility Services plc [2004] EWHC 193 (Ch)

Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337; [1982] HCA 24

Commissioner of Taxation v Douglas (2020) 282 FCR 204; [2020] FCAFC 220

CRO Travel Pty Ltd v Australia Capital Financial Management Pty Ltd [2018] NSWCA 153

Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500

Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544; [2017] HCA 12

Elders Ltd v EJ Knight Co Pty Ltd [2009] NSWSC 1462

Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7

Fal Oil Co v Sharjah Electricity and Water Authority [2019] DIFC ENF 221

General Reinsurance Australia Ltd v HIH Casualty & General Insurance Ltd (in liq) [2009] NSWCA 22

Gibb v Federal Commissioner of Taxation (1966) 118 CLR 628

Gold Coast City Council v Sunland Group Ltd (2019) 1 QR 304; [2019] QCA 118

HDI Global Specialty SE v Wonkana No 3 Pty Ltd (2020) 104 NSWLR 634; [2020] NSWCA 296

Horsell International Pty Ltd v Divetwo [2013] NSWCA 368

Impact Funding Solutions Ltd v AIG Europe Insurance Ltd [2017] AC 73; [2016] UKSC 57

Kelly v R (2004) 218 CLR 216; [2004] HCA 12

Liberty Mutual Insurance Company Australian Branch (t/as Liberty Specialty Markets) v Icon Co (NSW) Pty Ltd [2021] FCAFC 126; (2021) 154 ACSR 126

Loralia Group LLC v Landen Saudi Co [2018] DIFC ARB 004

McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579; [2000] HCA 65

MGICA Ltd v United City Merchants (Australia) Limited (1986) 4 ANZ Ins Cas 60-729

Minister for Immigration, Local Government and Ethnic Affairs v Dela Cruz (1992) 34 FCR 348

Mobileciti Pty Ltd v Vodafone Pty Ltd [2009] NSWSC 899

Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37

Onley v Catlin Syndicate Ltd (as the underwriting member of Lloyd’s Syndicate 2003) (2018) 360 ALR 92; [2018] FCAFC 119

Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; [2004] HCA 35

Red Hill Iron Ltd v API Management Pty Ltd [2012] WASC 323

San v Rumble(No 2) [2007] NSWCA 259

Segelov v Ernst & Young Services Pty Ltd (2015) 89 NSWLR 431; [2015] NSWCA 156

Shamil Bank of Bahrain v Beximco Pharmaceuticals Ltd [2004] 4 All ER 1072; [2004] 1 WLR 1784

Star Entertainment Group Limited v Chubb Insurance Australia Ltd [2022] FCAFC 16

The Luna [2022] 1 Lloyd’s Rep 216; [2021] SGHC 84

The Rafaela S [2005] 2 AC 423; [2005] UKHL 11

The Starsin [2003] 1 Lloyd’s Rep 571; [2004] 1 AC 715

Vincent Nominees Pty Ltd v Western Australian Planning Commission [2012] WASC 28; (2012) 187 LEGRA 303

Waters Lane v Sweeney [2007] NSWCA 200

Watson v Scott [2016] 2 Qd R 484; [2015] QCA 267

Whitworth Street Estates v Miller [1970] AC 583

Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522; [2005] HCA 17

YYY Ltd v ZZZ Ltd [2017] DIFC ARB 005

Texts Cited:

Accounting and Auditing Organisation for Islamic Financial Institutions, Sharia Standard No 8 on Murabaha (issued 16 May 2002)

Bernard Eder, et al, Scrutton on Charterparties and Bills of Lading (25th ed, 2015, Sweet and Maxwell)

Dicey and Morris on the Conflict of Laws (10th ed, 1980, Stevens & Sons Limited) vol 2

Greg Pynt, Australian Insurance Law: A First Reference (4th ed, 2018, LexisNexis)

Martin Davies and Anthony Dickey, Shipping Law (4th ed, 2016, Thomson Reuters)

Carole Murray, et al, Schmitthoff’s Export Trade: The Law and Practice of International Trade (12th ed, 2012, Sweet and Maxwell)

Category:

Principal judgment

Parties:

Thera Agri Capital No 2 Pty Ltd (Plaintiff)
BCC Trade Credit Pty Ltd t/as The Bond & Credit Co (Defendant)

Representation:

Counsel:
Mr J Giles SC / Mr J Byrnes (Plaintiff)
Mr R Scruby SC / Mr B Smith (Defendant)

Solicitors:
Corrs Chambers Westgarth (Plaintiff)
Polcyznski Robinson (Defendant)

File Number(s):

2020/283415

Judgment

1. HER HONOUR: This case concerns whether the plaintiff insured, Thera Agri Capital No 2 Pty Ltd, is entitled to indemnity under a “Trade Credit Insurance Policy” issued by the defendant insurer, BCC Trade Credit Pty Ltd trading as “The Bond & Credit Co”.

2. As explained by the insurer’s underwriting guidelines, trade credit insurance is a business insurance product that indemnifies a seller against losses from non-payment of a commercial trade debt. The insurer pays an agreed percentage of an invoice or receivable that remains unpaid because of protracted default, insolvency or bankruptcy. Trade credit insurance provides cover for all contracts entered into or goods and services supplied in the policy period. Trade credit insurers normally establish credit limits and terms of business on the supplier’s buyers. Trade credit insurance may also be used in the finance sector: for example, see General Reinsurance Australia Ltd v HIH Casualty & General Insurance Ltd (in liq) [2009] NSWCA 22 at [23]-[26].

3. Here, the policy insured performance of a guarantee given in respect of ‘supply chain finance’ provided by the insured to United Arab Emirates (UAE) company, Phoenix Global DMCC, and its wholly owned Australian subsidiary, Phoenix Agrifoods Pty Ltd, to fund the shipment of grains and pulses from Australia for sale in the Indian subcontinent and South-East Asia. The facility was guaranteed by British Virgin Islands parent company, Phoenix Commodities Pvt Ltd. The finance was to be Sharia-compliant, using a “Murabahah” facility where, rather than charging interest (or Riba, which is prohibited under Islamic law), finance is provided by a “profit-disclosed sale” where the seller discloses its original purchase cost and the profit it will be charging to the buyer.

4. After the finance facility was established, the insured advanced some $7.3 million in four drawdowns. Two months’ later, the guarantor went into liquidation after, it would appear, incurring catastrophic losses in ‘hedging’ commodity contracts. Phoenix Global DMCC followed suit two months later. None of the funds advanced by the insured have been repaid. In particular, the guarantor has not paid.

5. During the course of these proceedings, it became apparent as a result of documents and evidence obtained using the compulsory processes of the Court – but unknown to the insured or the insurer at the time of the advances – that some of the documents provided in support of the drawdown requests were a sham, being contracts to buy commodities from Dubai company, ACME Summit General Trading LLC, and Singapore company, Avon International Pte Ltd, both of which have also since gone into liquidation. In short, the insured was the victim of a fraud practised by its customer, perhaps to ‘prop up’ their parlous financial position. It would also appear that the Murabaha facility provided by the insured was not, in fact, Sharia-compliant. The insurer has denied liability on these bases.

FACTS

6. The insured relied on the evidence of chief executive officer and chief compliance officer, Mark Allen, and chief investment officer, Razvan Mondoca. Neither were required for cross-examination.

7. The insurer relied on the expert evidence of Amjad Ali Khan, a lawyer practising in Dubai, UAE. Mr Khan provided two reports concerning Sharia principles and Islamic law, and how the contractual arrangements underlying the insurance policy may be viewed by the courts of the Dubai International Financial Centre (DIFC). Mr Khan was not required for cross-examination. In addition, the insurer relied on the evidence of Muhammad Sufyan Nagaria, the former managing director of ACME, and Khiaw Ping Kelvin Thio, the liquidator of Avon. Both gentlemen were cross-examined. No issues of credit arose.

Proposed finance

8. Mr Allen and Mr Mondoca own and operate Thera TFS Pty Ltd trading as “Thera Capital Management”. Thera is an Australian non-bank structured credit financier specialising in agricultural commodities and products. The insured operates one of three funds managed by Thera; the fund is used to finance Sharia-compliant transactions.

9. In 2019, Phoenix Agrifoods sought approval for funding of $8 million to finance the pre-export operations of grains and pulses from Australia for sale in the Indian subcontinent and South-East Asia. According to an internal report by Mr Mondoca, Phoenix Agrifoods was then financed by Phoenix Global DMCC but “with the tonnage growing and the need for the Australia[n] subsidiary to be financially independent from the Parent for working capital requirements”, finance was sought in Australia. Phoenix Agrifoods, Phoenix Global DMCC and parent company, Phoenix Commodities, were part of the Phoenix Group, which operated out of Dubai and was involved in the production, processing, trading and distribution of agricultural products. The Phoenix Group had 22 regional offices in all major origin and destination hubs and trading centres and a presence in South Asia, Far East Asia, Africa, Europe, Australia, North America and South America.

10. Thera proposed to provide ‘supply chain finance’, where the finance was secured against a trade receivable rather than the underlying product. Mr Mondoca explained that supply chain finance can be structured either as conventional finance or Sharia-compliant finance. It appears to have been initially envisaged that the finance would be structured as conventional finance.

Seeking insurance

11. Thera sought trade credit insurance for the proposed finance. In June 2019, the insured’s Singaporean broker asked the insurer to do a credit limit check on the Phoenix Group, noting “Phoenix is large commodities trader and pretty well established. The facility would be for their Australian Subsidiary with a guarantee from their parent.” The insurer approved the proposed credit limit of US$5 million, “No issue with the $5m limit at all. We know the group well.”

12. In September 2019, the insured commissioned a Know Your Client (KYC) report on the Phoenix Group. In October 2019, Mr Mondoca prepared an Information Memorandum on the proposed transaction, noting that the clients are “established agri-food global player[s] with 2 decades history”. Thera proposed to advance the loan by prepayment of Australian farmers for up to 30 days prior to delivery of goods to a warehouse leased by Phoenix Agrifoods, “The prepayment is done against a Pro-forma Invoice and sometimes accompanied by a Supply & Purchase Contract”. The goods would then be shipped “on various Incoterms and the cargo is being paid against D/P or CAD presentation to Buyers (mainly CIF/CFR and DAB named place at destination)”. Upon delivery “Phoenix AU is provided with a commercial invoice covering the tonnage delivered.” Phoenix Agrifoods would then pay back the loan from Thera. This trade cycle was expected to take 120 days.

13. On 24 November 2019, Mr Mondoca updated the broker on negotiations with the Phoenix Group, noting that the deal would now be financed “from the Sharia vehicle – [the insured]; no changes in terms of structure, just documentation would be under Islamic finance/i.e. Murabaha Contract with the Client.” The insurer was so advised and amended the proposed policy wording accordingly; “I’ve had [to] make a couple of small amendments as we cannot have the word ‘loan’ incorporated into the document. The word loan has been changed to ‘funds’.” This amendment was made in three places.

The proposal

14. On 16 December 2019, the broker submitted a revised and final proposal to the insurer, entitled “Application for Trade Credit Insurance Policy (Single Obligor)”. The broker also passed on Mr Mondoca’s instructions: “Same risk profile and structure, but we’ll finance [Phoenix now] from our Sharia Investment Vehicle” with the financing mechanism to be a “master murabaha facility”. The proposal included a description of the activities of “the Obligor” (the Phoenix Group) as detailed in Mr Mondoca’s Information Memorandum (extracted at [12]).

15. The proposal form called for a detailed description of “the structure of the payment obligation for which insurance is required”. The insured stated: (emphasis added)

1.   TAC [Thera Agri Capital] proposed financing will cover End to End trade cycle, from Prepayment to Collection from Buyers, for up to max 120 days tenor.

2.   An over-arching credit limit is put in place and supported by “Master Murabaha Facility Agreement”.

3.   Customer selects pulses and grain to be purchased from a third-party Vendor and arrange for the invoice and “Offer and Acceptance” to TAC to settle the purchase.

4.   TAC agrees to purchase the product subject to “Offer and Acceptance” request and has received duly executed set of Murabaha contracts by the Customer.

5.   At this point TAC will disburse the loan proceeds to Customer for settlement. The Customer will settle the payment to Vendor as Agent for TAC and undisclosed to the Vendor.

6.   At maturity as indicated in the “Offer and Acceptance” Customer pays for the product financed and the loan cycle is liquidated.

16. The maximum exposure that the insured would have to the payment obligation was stated to be $8 million, with the tenor and repayment terms of the obligation being 120 days. The proposal form called for a description of “the primary purpose of the obligation that is being created”, to which the insured responded: “Working capital financing”. As to the primary source of repayment of the obligation, the proposal described a “Loan Repayment waterfall”:

1)   First from the sale proceeds of product financed collected from the pre-export operations of pulses and grains financed by TAC. …

2)   Second from the general cash-flow of the Jointly Borrowers, as the financing is with full recourse to Customers.

3)   Third – first demand guarantee from the Guarantor / parent company.

4)   Fourth – claim lodged to Underwriter under Non payment Insurance policy covering payment risk of the Guarantor.

17. The proposal stated that three documents would be executed between the insured and its customers in respect of the obligation, being a Master Murabaha Facility, a General Security Agreement and a guarantee from Phoenix Commodities. On 13 January 2020, the insured’s broker provided the insurer with a draft of these documents, together with a draft Purchase Agency Agreement; the insurer was asked to review the documents. On 20 January 2020, the insurer issued an invoice for the premium. On 11 February 2020, the Trade Credit Insurance Policy was issued. I will return to the terms of the policy at [163].

18. On 13 February 2020, the insured and the Phoenix Group executed the Master Murabaha Agreement, Purchase Agency Agreement, Guarantee and Indemnity and General Security Deed. On 16 February 2020, Mr Mondoca provided the broker with the executed documents. The broker sought confirmation that the executed documents were materially the same as the drafts earlier provided. Mr Mondoca confirmed that this was the case. The broker provided the insurer with marked-up copies of the documents so that changes from the drafts previously submitted could be identified. The insurer replied, “Looks to be fine to me.” On 18 February 2020, the insurance premium was paid.

Master Murabaha Agreement

19. The finance documents were complex and imperfect. As the insurer placed weight on the precise workings of these documents, it is necessary to understand their provisions.

20. The insured (defined as the Financier) entered into a Master Murabaha Agreement with Phoenix Agrifoods and Phoenix Global DMCC (each a Company). The Financier agreed to make available to the Companies an $8 million murabaha facility (the Murabaha Facility): clause 2.1.

21. As to how a murabaha facility may be described more broadly, Mr Khan explained that, through the application of Sharia principles, the Islamic finance industry has developed a number of Sharia-compliant financial contracts, including Murabaha arrangements, which Mr Khan described as follows:

A Murabahah arrangement involves an asset purchase transaction, in which a party (usually an Islamic financial institution) (Party A) purchases an asset from a third party at the request of its counterparty (usually the customer of the Islamic financial institution) (the Counterparty). Once Party A acquires title to the asset it enters into a Murabahah contract to resell the asset to the Counterparty. The sale price payable by the Counterparty equals the original purchase price paid by Party A plus an agreed return (i.e., cost-plus), and is payable on a deferred basis. A Murabahah enables the Counterparty to acquire an identified asset, but pay the purchase price for it over time.

22. As to how this Murabaha Facility could be utilised, clause 2 continued: (emphasis added)

Murabaha Facility utilisation

2.2   Pursuant to the Purchase Agency Agreement, the Financier has appointed each Purchase Agent as its agent to purchase Commodities from time to time.

2.3   The Financier (through a Purchase Agent) will purchase Commodities at Cost Price from the Commodity Seller and then immediately sell those under a Murabaha Contract to the relevant Company at Cost Price plus a profit margin equal to the Profit Amount, payable on the Payment Dates subject to, and in accordance with, the terms and conditions of the Finance Documents and the transactions contemplated thereunder.

23. Purchase Agent meant each Company in its capacity as the Financier’s purchasing agent in connection with the purchase of Commodities from the Commodity Seller. Finance Documents meant the Master Murabaha Agreement, the Guarantee and Indemnity, the Purchase Agency Agreement, General Security Deed and the documents evidencing each Murabaha Contract: clause 1.1. The suggestion that the Financier would “purchase Commodities … and then immediately sell those” to the Company contemplated a quick sequence of transactions, perhaps by an exchange of documents evidencing each Murabaha Contract.

23. To drawdown on the Murabaha Facility, clause 4.1 provided:

A Company may utilise the Murabaha Facility by delivery to the Financier of a duly completed Murabaha Request at least five (5) Business Days before the proposed Value Date …

Value Date meant the date on which a Murabaha Contract was to be entered into.

25. Schedule 2 to the Master Murabaha Agreement contained a Form of Murabaha Request. Using the first Murabaha Request as an example, the request was issued by the Company to the Financier on 20 February 2020 and stated: (emphasis added)

We wish to enter into a Murabaha Contract and hereby request that you purchase the Commodities described below on the Value Date on the terms set out herein and the Agreement:

(a)   Commodities:         Australian Desi Chickpeas

(b)   Value Date:         [24]-Feb-2020

(c)   Cost Price:         USD 726,782.10

(d)   Murabaha Contract Term:   CAD [cash against documents]

(e)   Commodity Seller:      Avon International Pte Ltd

We confirm that each of the representations in clause 13 (Representations) of the Agreement is true and correct on the date of this Murabaha Request and will be correct on the proposed Value Date.

We hereby certify and confirm that each condition specified in 4.3 is satisfied as at the date of this Murabaha Request.

We hereby promise to purchase the Commodities described above from you for the Sale Price in accordance with the Agreement after the Commodities are identified as being in your ownership. We acknowledge that these Commodities will be purchased by you in reliance upon such promise and that you may incur losses, damages and other liabilities if we fail to purchase such Commodities from you in accordance with the Agreement.

This Murabaha Request is irrevocable.

This Murabaha Request, and all non-contractual obligations arising out of or in connection with it, are governed by, and shall be construed in accordance with New South Wales law.

26. The first thing to note is that the Financier was requested to purchase the Commodities (through its agent, the Company) on the same day as entry into a Murabaha Contract, being the Value Date. This is, again, suggestive of the purchase and on-sale of the Commodities in quick succession and perhaps by exchange of documents.

27. Second, by the Murabaha Request, the Company confirmed each of the representations in clause 13 of the Master Murabaha Agreement, including on the date of each Murabaha Request and each Payment Date (clause 13.3). Payment Date meant the Value Date and the Deferred Payment Date, being, in short, the date of entry into a Murabaha Contract and the date on which the monies advanced to the Company were to be repaid. On each of these dates, the Company represented and warranted, inter alia: (emphasis added)

(d)   Each of its obligations under the Finance Documents are … valid and binding obligations enforceable against it in accordance with their terms.

…

(f)   It is not, and will not, by entering into and performing the Finance Documents, and the transactions contemplated by them, breach the terms of … any law applicable to it.

…

(j)   No Event of Default is continuing or might reasonably be expected to result from the making of any Murabaha Contract or the entry into, the performance of, or any transaction contemplated by, any Finance Document.

…

(l)   Any factual information provided by a Company to the Financier in connection with the Finance Documents and the transactions they contemplate was true and accurate in all material respects and not misleading as at the date it was provided or as at the date (if any) at which it is stated.

(m)   It has disclosed in writing to the Financier all matters in connection with the Finance Documents which may affect the nature and extent of the risk undertaken by the Financier in connection with entering into the Finance Documents or doing anything else under the Finance Documents.

28. Events of Default were specified in clause 15. As later became relevant, Events of Default included the winding up of the Parent: clause 15.11. In addition, Events of Default included: (emphasis added)

Misrepresentation

15.3   Any representation, warranty or statement made … by the Company … in the Finance Documents or any other document delivered by or on behalf of a Company … under or in connection with any Finance Document is or proves to have been incorrect or misleading in any material respect when made …

Unlawfulness

15.15   It is or becomes unlawful for a Company … to perform any of its obligations under the Finance Document. …

Fraud

15.18   The Financier reasonably believes that a Company or the Parent or any of its directors, officers or employees have acted fraudulently in connection with any Finance Document or any other agreement between a Company or the Parent and the Financier. …

Vitiation of Finance Documents

15.21   A provision of a Finance Document is or becomes or is claimed by a party other than the Financier to be wholly or partly invalid, void, voidable or unenforceable.

29. On the occurrence of an Event of Default, the Financier was entitled to cancel the Murabaha Facility and accelerate repayment of each Murabaha Contract under clause 15.22, to which I will return at [210]. Thus, to the extent that the Company had engaged in misrepresentation or fraud, or it was or became unlawful for the Company to perform any of its obligations under a Finance Document, or a claim was made by a party other than the Financier that a provision of a Finance Document was unenforceable (say, an insurer), the Financier was entitled to call for a payment of the funds advanced immediately.

30. Third, by the Murabaha Request, Phoenix Agrifoods also confirmed each condition in clause 4.3 of the Master Murabaha Agreement, including:

…

(d)   the purchase of the Commodities is on Approved Purchase Terms.

(e)   no Default has occurred or is continuing or would result from the entry into of a Murabaha Contract; and

(f)   the representatives and warranties of the Companies under the Finance Documents are true in all material respects and not misleading on the proposed Value Date by reference to the facts and circumstances then existing

31. Default meant Events of Default. As to the Approved Purchase Terms, clause 1.1 provided:

Approved Purchase Terms means, in respect of any purchase of Commodities by a Company as Purchase Agent for and on behalf of the Financier, the purchase is from a Commodity Seller … on the following terms:

(a)   delivery of the Commodity is to be within 30 days of the relevant purchase date;

(b)   cash on delivery; or

(c)   other secured purchase terms as approved by the Financier.

It will be recalled that the first Murabaha Request (extracted at [25]) stated that the terms on which the commodities were to be purchased was cash against documents being, for practical purposes, cash on delivery.

32. In short, by a Murabaha Request the Company represented and warranted – at the date of the Murabaha Request, the date of entry into the Murabaha Contract and the date of repayment – that the obligations under the Finance Documents were valid and binding obligations enforceable against the Company and that the Company would not, by performing these obligations, breach the terms of any law applicable to the Company which, by the very nature of the Master Murabaha Agreement, likely included Islamic law. When making a Murabaha Request, the Company represented that the transaction was Sharia-compliant and, if that representation proved untrue, then the Financier was entitled to treat this as an Event of Default and call for a payment of the Murabaha Facility immediately. It follows that, even if the resulting Murabaha Contract was unenforceable as contrary to Sharia principles, the Financier nonetheless had a claim against the Company for breach of warranty, where the Financier’s remedy was to require repayment of the Murabaha Facility in full on demand. Further, the Company represented that proposed transaction was legitimate and the documents supporting that transaction could be relied upon as true and accurate. Unsurprisingly, the obligation to repay the funds advanced did not fall away by reason of the misrepresentation, fraud or illegal conduct on the part of the Phoenix Group.

33. Having submitted a Murabaha Request, clause 5 provided:

5   Purchase and Sale of Commodities

Purchase of Commodities by the Financier

5.1   In reliance on each duly completed Murabaha Request … the Financier shall (acting through the Purchase Agent) (i) on the date falling three Business Days after due delivery of the relevant Murabaha Request purchase Commodities which are the subject of such Murabaha Request from the Commodity Seller; and (ii) obtain from the Commodity Seller all applicable title documents clearly identifying then Commodities purchased on behalf of the Financier.

Completion of Offer Letter

5.2   Having acquired title to the Commodities, the Financier shall on the date falling three Business Days after due delivery of the relevant Murabaha Request, deliver an Offer Letter to the relevant Company.

5.3   Acceptance Notice

(a)   Upon receipt of the Offer Letter, if accepted, the relevant Company must deliver to the Financier an Acceptance Notice …

(b)   The relevant Company acknowledges that the Financier will be purchasing Commodities pursuant to a Murabaha Request in reliance upon the Company’s promise set out therein to purchase such Commodities for the applicable Sale Price from the Financier after it has purchased the same from the relevant Commodity Seller. The relevant Company further acknowledges that the Financier may incur losses, damages and other liabilities if the Company fails to purchase and Commodities from the Financier which have been purchased by the Financier from the Commodity Seller. …

34. Again, purchase of the Commodities was to take place on the same day as delivery of the Offer Letter and the Acceptance Notice (and entry into the Murabaha Contract). Schedule 3 contained a form of Offer Letter and Acceptance. Using the details in the first Offer Letter issued, the insured wrote to Phoenix Global DMCC:

We confirm to you that we have purchased the Commodities specified in the Murabaha Request for the amount of AU$1,092,905.41 (being the equivalent of US$726,782.10) from the Commodity Seller.

This is an Offer Letter.

We hereby offer to sell you the following Commodities on the following terms:

(a)   Value Date:   24 February, 2020

(b)   Quantity, type and location of Commodities: 1,286.34 Metric Tonnes, Australian Desi Chickpeas, Goods in transit per attached Bill of lading

(c)   Murabaha Contract Term:   23 June 2020

(d)   Cost Price (per unit Commodity):   AU$ 849.624 per MT

(e)   Cost Price:   AU$1,092,905.41

(f)   Profit Amount:   AU$ 26,229.73

(g)   Value Date Sale Price Amount: AU$ 109,290.54

(h)   Deferred Sale Price:   AU$ 1,009,844.60

(i)   Deferred Payment Date:   23 June, 2020 …

35. The Acceptance Notice simply stated, “We accept the above Offer Letter”. Having issued an Offer Letter and received an Acceptance Notice, clause 5 continued:

5.4   Upon delivery of an Acceptance Notice by the relevant Company to the Financier pursuant to clause 5.3(a) above:

(a)   the Financier shall sell the Commodities to such Company:

(b)   such Company shall purchase the Commodities from the Financier; and

(c)   a Murabaha Contract shall be made between the Financier and such Company upon the terms of that Offer Letter and incorporating all of the terms and conditions set out in this Agreement.

5.5   Title to the Commodities shall immediately pass to the relevant Company, together with all related rights and obligations, upon the delivery of the Acceptance Notice by the Company in accordance with clause 5.3. The relevant Company shall obtain ownership and such title to the Commodities as the Financier (acting through the Purchase Agent) has received from the Commodity Seller.

36. That is, the Murabaha Contract came into existence on delivery of the Acceptance Notice, being on the Value Date. Clause 5 continued: (emphasis added)

Acceptance of Commodities

5.10   The relevant Company hereby acknowledges that upon delivery or transfer of the Commodities to the Company, the Company shall be deemed and considered to have accepted such Commodities unconditionally and without reservations and shall have no further remedy against the Financier in respect of their quality, condition, quantity, description, title or otherwise.

Waiver of claims

5.11   Without prejudice to clause 5.10 (Acceptance of Commodities), each Company hereby waives any claims which it may have against the Financier in respect of any loss or damage (Loss) which a Company may suffer by reason of, or arising out of or in connection with the Financier having placed an order for purchase of Commodities with a Commodity Seller acting through the Purchase Agent, having taken title or having failed to take title to the Commodities or having sold the Commodities to the relevant Company under this Agreement or any Murabaha Contract.

37. This makes sense where the Company identified the Commodities in respect of which finance was sought. Whilst the Financier proceeded to purchase the Commodities, using the Company as its agent, it was not envisaged that the Financier would have any particular knowledge about the Commodities beyond the information provided by the Company: see also [53]. The Master Murabaha Agreement made plain that, to the extent that there was any defect in title to the Commodities, then the Company had no claim against the Financier. Clause 5 continued: (emphasis added)

Cancellation of Murabaha Contracts

5.12   A Murabaha Contract shall be cancelled without any liability whatsoever on the part of the Financier if for any reason title to the relevant Commodities is not passed to the Financier by the Commodity Seller on the applicable Value Date. …

38. Clause 5.12 is a continuation of the theme in clause 5.10 and 5.11: not only does the Company have no claim against the Financier if there is any defect in the title of the Commodities, the Financier has no liability whatsoever should the Murabaha Contract be cancelled on account of that defect. The clause pre-supposes that a Murabaha Contract had come into existence. As I read it, clause 5.12 prescribed the consequences which would follow in the event that the Financier proceeded to cancel the Murabaha Contract on becoming aware of a defect in title. Clause 5.12 continues to emphasise, as did clause 5.10 and 5.11 before it, that the Financier had no liability in this scenario. Clause 5.12 does not mean, however, that the Company is not obliged to repay the funds advanced by the Financier to purchase the Commodities, being either an obligation under the Murabaha Contract at the time of cancellation or by reason of the Company’s obligations under the Master Murabaha Agreement more broadly, in particular, under clause 7.9 (see [40]) and the indemnities given in clause 11.5 (see [42]). Where it was anticipated that the Company, and not the Financier, would have knowledge about the Commodities, it would be an absurd result that, if the Financier advanced funds at the Company’s request to a Commodity Seller identified by the Company and title to the Commodities failed to pass, then the Company could keep the money.

39. Clause 6 of the Master Murabaha Agreement concerned the Company’s obligation to repay the funds advanced, in the form of the Deferred Sale Price. The defined term Deferred Sale Price is of some significance as the insurer’s primary argument turns on whether there was, in fact, any obligation to pay the Deferred Sale Price in this case. I will return to this at [148].

40. Clause 7 concerned repayment, termination and cancellation, in particular: (emphasis added)

Illegality

7.1   If, in any applicable jurisdiction, it becomes unlawful (or impossible as a result of a change in law or regulation) for the Financier to perform any of its obligations as contemplated by this Agreement or in any Murabaha Contract:

(a)   upon the Financier giving not less than 10 Business Days written notice to the Companies, the Facility Amount will be immediately cancelled; and

(b)   each Company shall pay the outstanding Deferred Sale Price on the Deferred Payment Date for each Murabaha Contract on the date specified by the Financier in the notice delivered to the relevant Company 10 Business Days after giving such notice.

…

Payment obligations unconditional

7.9   The payment and other obligations of each Company under or in respect of a Murabaha Contract and this Agreement shall not be affected, mitigated or released in any way as a result of any defect in title to the relevant Commodities, any deficiency in the Commodities, any loss or damage to the Commodities, any failure by the Commodity Seller to comply with any of its undertakings or obligations or any other reason whatsoever.

41. That is, if it became unlawful for the Financier to perform the Master Murabaha Agreement or any Murabaha Contract, the Financier was entitled to cancel the Murabaha Facility and be repaid in short order. Clause 7.9 makes plain that, if there was any problem with the Commodities (including “any defect in title to the … Commodities … or any other reason whatsoever”), the Company’s obligation to repay the funds advanced remained.

42. Clause 11 contained wide indemnities by which the Company agreed to indemnify the Financier against any cost, loss or liability incurred as a result of inter alia: any Event of Default; misleading or deceptive information produced by the Company in connection with the Finance Documents or the transactions they contemplated; the Financier acting on a request which it reasonably believed to be genuine, correct and appropriately authorised; or, losses incurred in relation to the purchase and sale of the Commodities: clause 11.3(a) and (b); 11.4(b) and 11.5.

43. The Company also gave an undertaking to comply in all respect with all laws to which it may be subject, if failure to so comply had or was reasonably likely to have a Material Adverse Effect on the ability of the Company to perform its obligations under the Finance Documents or the validity or enforceability of the Finance Documents or the rights and remedies of the Financier under any of the Finance Documents: clause 14.3; clause 1.1 (definition of Material Adverse Effect).

44. Further, clause 21 provided:

Partial invalidity

If, at any time, any provision of the Finance Documents is or becomes illegal, invalid or unenforceable in any respect under any law of any jurisdiction, neither the legality, validity or enforceability of the remaining provisions nor the legality, validity or enforceability of such provision under the law of any other jurisdiction will in any way be affected or impaired.

That is, to the extent that Sharia principles had the result that any Murabaha Contract was unenforceable, say, in the UAE, that did not prevent the Murabaha Contract being enforceable in another jurisdiction, say, in New South Wales.

45. As to governing law and jurisdiction, clause 25 provided:

25   Governing law and jurisdiction

25.1   This Agreement document is governed by the laws in force in New South Wales.

25.2   Each party irrevocably and unconditionally submits to the non-exclusive jurisdiction of the courts of the Dubai International Financial Centre and courts of appeal from them.

46. Consistently with this, the standard form Murabaha Request stated that the request “and all non-contractual obligations arising out of or in connection with it” were governed by and to be construed in accordance with New South Wales law. Presumably, the reference to “non-contractual obligations” encompassed obligations arising from Islamic law. Likewise, the standard form Offer Letter Acceptance stated that the offer was subject to clause 25 of the Master Murabaha Agreement.

47. Thus, the Master Murabaha Agreement provided (repeatedly) for the eventuality that any particular transaction was considered void according to Sharia principles and imposed separate contractual obligations on the Company to repay the funds advanced notwithstanding.

Purchase Agency Agreement

48. On 13 February 2020, Phoenix Agrifoods and Phoenix Global DMCC (each a Purchase Agent) and the insured (as Financier) executed a Purchase Agency Agreement, by which the Financier appointed each Purchase Agent as its agent to purchase on the Financier’s behalf Approved Commodities as set out in a Purchase Instruction: clause 2.1. Approved Commodities were the Commodities (as defined in the Master Murabaha Agreement) referred to in a Purchase Instruction, provided that such commodities were Sharia-compliant commodities: clause 1.1.

49. A Purchase Instruction was an instruction substantially in the form set out in Schedule 1, being an instruction issued by the insured to the Purchase Agent as follows (inserting the details from the first Purchase Instruction):

2.   We hereby instruct you as our agent, pursuant to the terms of the Agency Agreement, to purchase on our behalf from the applicable Commodity Seller the following Approved Commodities and on the following basis:

(a)   Description:   Australian Desi Chickpeas

(b)   Quantity:   1,286.34 Metric Tonnes

(c)   Cost Price:    AU$1,092,905.41 being the equivalent of          US$726,782.10

(d)   Value Date:   22 February, 2020

3.   To give effect to this Purchase Instruction, we shall transfer to your account:

Account Name:   Phoenix Agrifoods Pty Ltd (acting as agent [o]n behalf of Phoenix Global DMCC)

… by no later than then 11.00am on the proposed Value Date specified above the Cost Price as set out above.

4.   Please send us your Purchase Confirmation as soon as practicable upon purchase of the Commodities from the Commodity Seller.

5.   The provisions of clause 12 of the Agency Agreement apply to this Purchase Instruction as if set out in full.

50. It is likely – based on the layout of the prescribed forms under the Master Murabaha Agreement – that the reference to clause 12 (Notices) of the Agency Agreement was an error and was intended to be a reference to clause 13 (Law and jurisdiction), being in same terms as clause 25 of the Master Murabaha Agreement and adopting the laws of New South Wales and submitting to the non-exclusive jurisdiction of the courts of the DIFC.

51. As to the funds to enable the Purchase Agent to acquire the Commodities, and the acquisition of the Commodities, clause 2 continued:

2.2   Transfer of funds

The Financier will transfer … not later than 11.00am on the relevant Value Date (as specified in each Purchase Instruction), such funds as may be necessary for the Purchase Agent to complete the agreed purchase on behalf of the Financier and to enable the Purchase Agent to effect payment of the purchase price due to the Commodity Seller on the payment date (as communicated by the Commodity Seller) …

2.3   Confirmation

As soon as reasonably practicable after the relevant Purchase Agent has bought Commodities pursuant to a Purchase Instruction, the Purchase Agent shall confirm such purchase by sending to the Financier a Purchase Confirmation …

52. Again, it was envisaged that the purchase of the Commodities would take place on the same day as entry into the Murabaha Contract, being the Value Date. A Purchase Confirmation was a confirmation substantially in the form set out in Schedule 2, being a confirmation from the Purchase Agent to the Financier as follows: (inserting the details from the first Purchase Confirmation)

2.   We confirm that we have purchased the Approved Commodities from the applicable Commodity Seller on your behalf in accordance with the terms of the above Purchase Instruction and as follows:

(a)   Description:   Australian Desi Chickpeas

(b)   Quantity:   1,286.34 Metric Tonnes

(c)   Location:   Goods in transit per attached Bill of lading

(d)   Cost Price:    AU$1,092,905.41 being the equivalent of          US$726,782.10

(e)   Value Date:   24 February, 2020

Again, the Purchase Confirmation proceeded to apply the provisions of clause 12 of the Purchase Agency Agreement but, likely, was an error and intended to refer to clause 13.

53. The Purchase Agent was also obliged to provide the Financier with information or details requested in relation to the Commodities and the purchase of the Commodities, including the type, quantity and location of the Commodities: clause 2.6. Finally, the Purchase Agency Agreement contained a “Partial Invalidity” clause in the same terms as clause 21 of the Master Murabaha Agreement (clause 6) and a “Law and Jurisdiction” clause in the same terms as clause 21 of the Master Murabaha Agreement (clause 13).

Guarantee and indemnity

54. The recitals to the Guarantee and Indemnity noted that the insured had agreed to provide “commodity financing and/or financial advances … under or in connection with the Transaction Documents (the “Arrangements”)” to Phoenix Agrifoods and Phoenix Global DMCC, each a Counterparty. “Transaction Documents” meant the Master Murabaha Agreement and each Finance Document as defined in that agreement: clause 30(a). The Operative Part of the Guarantee and Indemnity provided: (emphasis added)

1   Each Guarantor hereby guarantees the due and punctual payment by the Counterparty of all moneys from time to time due and payable by the Counterparty to [the insured] (“Guaranteed Moneys”) and the due and punctual performance of all obligations owed or which may become owing by the Counterparty to [the insured] under or in connection with the Transaction Documents (“Guaranteed Obligations”).

2   Each Guarantor hereby undertakes that if any Event of Default occurs and whilst it is continuing, it will forthwith on first written demand by [the insured] pay to [the insured] the amount (or from time to time the amounts) of the Guaranteed Moneys.

…

5   If the obligation of the Counterparty to pay the Guaranteed Moneys to [the insured] is or becomes void or unenforceable for any reason, each Guarantor as a separate undertaking unconditionally and irrevocably indemnifies [the insured] against any loss, damages, costs or expenses incurred by [the insured] in respect of the failure by the Counterparty to pay to [the insured] the Guaranteed Moneys.

…

10   This Guarantee is a continuing security and accordingly is irrevocable and shall remain in full force and effect until all the Guaranteed Moneys have been paid to [the insured] and there are no outstanding Guaranteed Obligations. …

55. “Event of Default” had the same meaning as in the Master Murabaha Agreement: clause 30(b). Clause 5 imposed an obligation on the guarantor to indemnify the insured in the event that the Company’s obligation to repay the funds advanced under the Master Murabaha Agreement became “void or unenforceable for any reason”.

56. Overall, the finance documents provided that, if any particular transaction was considered void according to Sharia principles, the Phoenix Group was nonetheless obliged to repay the funds advanced.

Shipments begin

57. Whilst negotiations were underway between the insured and its customers in respect of the finance facility, and between the insured and insurer in respect of the policy, the shipment of commodities by the Phoenix Group from Australia, which were later financed under the facility, was already underway.

58. On 1 January 2020, 20 containers of red lentils were loaded in Adelaide on APL PHOENIX and departed for Colombo, Sri Lanka for transhipment on the X-PRESS MEGHNA for delivery onto Kolkata, India. Mediterranean Shipping Company SA issued a bill of lading ending 5049, noting the shipper as Phoenix Global DMCC. (These commodities became part of the sixth Murabaha Request). On 26 January 2020, X-PRESS MEGHNA arrived in India and the containers were unloaded.

59. On 15 January 2020, ten containers of Australian faba beans were loaded in Melbourne onto OOCL TEXAS and departed for Egypt via Singapore and Malta. Cosco Shipping Lines Co Ltd issued a bill of lading ending 9350, noting the shipper as Phoenix Global DMCC. (These commodities formed part of the second Murabaha Request.)

60. On 26 January 2020, 15 containers of red lentils were loaded in Adelaide onto ER TOKYO, bound for Turkey. The carrier, CMA CGM SA, issued a bill of lading ending 7421, noting the shipper as Phoenix Global DMCC. (This formed part of the sixth Murabaha Request).

61. On 26 and 27 January 2020, 15 containers with Australian desi chickpeas were loaded in Brisbane onto MSC BANU bound for Karachi, Pakistan via Singapore and Abu Dhabi. Three bills of lading were issued by the Mediterranean Shipping Company SA ending 4869, 7722 and 7730. The shipper in each case was Phoenix Global DMCC. (The cargo the subject of these three bills of lading comprised the first Murabaha Request.)

62. Also on 26 and 27 January 2020, 30 containers of Australian faba beans were loaded in Melbourne onto COSCO ANTWERP bound for Egypt via Singapore and Malta. Cosco Shipping Lines Co Ltd issued four bills of lading ending 9150, 9157, 9158 and 9159, with Phoenix Global DMCC noted as the shipper. (This shipment comprised the second Murabaha Request.)

63. On 30 January 2020, Hamburg Sud issued a bill of lading ending 0192X to shipper Phoenix Global DMCC for five containers of red lentils loaded in Adelaide on the CMA CGM ROSSINI bound for Turkey via Singapore and Beirut. (These commodities formed part of the sixth Murabaha Request).

64. Also on 30 January 2020, carrier ANL issued a bill of lading ending 2915 for ten containers of Australian nugget lentils loaded in Adelaide onto the CMA CGM ROSSINI bound for the UAE. The first page of the bill of lading is not in evidence and thus the shipper (and consignee, if any) is not known. (These commodities became the ninth Murabaha Request.)

65. Also on 30 January 2020, two containers of Australia faba beans were loaded in Adelaide onto OOCL PANAMA bound for Egypt via Singapore and Malta. Cosco Shipping Lines Co Ltd issued a bill of lading ending 0340, noting the shipper as Phoenix Global DMCC.

66. On 2 February 2020, 38 containers of Australian desi chickpeas were loaded in Brisbane onto GH ZONDA bound for Karachi, Pakistan via Singapore and Abu Dhabi. Mediterranean Shipping Company SA issued bills of lading ending 4893, 5577 and 6435, noting Phoenix Global DMCC as the shipper. (These commodities formed part of the first Murabaha Request).

67. On 6 February 2020, Hapag-Lloyd issued a bill of lading ending 9480 in respect of 20 containers of Australian noodle wheat shipped by Phoenix Global DMCC from Fremantle, Western Australia on AL HILAL bound for Vietnam. (This became part of the seventh Murabaha Request).

68. On 6 February 2020, 25 containers of Australian canola were loaded in Melbourne onto NORTHERN PRECISION, bound for Penang, Malaysia. T.S. Lines issued a bill of lading ending 1951, noting the shipper as Phoenix Global Australia Pty Ltd on behalf of Phoenix Global DMCC. (This became part of the eighth Murabaha Request.)

69. On 7 February 2020, 20 containers of Australian desi chickpeas were loaded in Brisbane onto MAERSK STRALSUND bound for Chittagong, Bangladesh. Ocean Network Express issued bill of lading ending 0440, noting the shipper as Phoenix Global DMCC to the order of Butch-Bangla Bank Limited. (This became part of the third Murabaha Request.)

70. On 10 February 2020, five containers of Australian desi chickpeas were loaded in Brisbane on SPHENE bound for Karachi, Pakistan via Singapore and Abu Dhabi. Mediterranean Shipping Co SA issued bill of lading ending 5023, noting the shipper as Phoenix Global DMCC. (These commodities formed part of the third Murabaha Request.)

71. On 10 February 2020, 20 containers of Australian hard wheat were loaded in Melbourne on BEA SCHULTE bound for Port Kelang, Malaysia. Pacific International Lines issued a bill of lading ending 0800, noting the shipper as Phoenix Global Australia Pty Ltd on behalf of Phoenix Global DMCC. (These commodities formed part of the fifth Murabaha Request.) On 24 February 2020, the shipment arrived at its destination in Malaysia.

72. Mr Allen said that, before obtaining the policy or entering into the finance documents, he was not aware of the contracts which Phoenix Global DMCC had entered into in relation to commodity transactions that came to be financed under the Master Murabaha Agreement. Likewise, Mr Mondoca first became aware of these commodity transactions after entering into the Master Murabaha Agreement in the course of receiving information in the context of Murabaha Requests.

73. The shipments continued after execution of the Master Murabaha Agreement. On 14 February 2020, 33 containers of Australian faba beans were loaded in Adelaide on CONTI MAKAUL for shipment to Damietta, Egypt. CMA CGM SA issued four bills of lading ending 871A, 871B, 872A and 872C, noting Phoenix Global DMCC as the shipper. (This became part of the fourth Murabaha Request.)

74. On 15 February 2020, 20 containers of Australian hard wheat were loaded in Melbourne onto KOTA LATIF for delivery to Penang, Malaysia. Orient Overseas Container Line issued a bill of lading ending 6730, noting Phoenix Global Australia Pty Ltd as the shipper on behalf of Phoenix Global DMCC. (This became part of the fifth Murabaha Request.)

75. On 16 February 2020, 60 containers of Australian desi chickpeas were loaded in Brisbane on HAMBURG BAY for shipment to Chittogram, Bangladesh. Ocean Network Express issued six bills of lading ending 2900, 4600, 7500, 7501, 7502 and 7503, noting Phoenix Global DMCC as the shipper. (This became part of the third Murabaha Request.) One of these bills was endorsed to the order of Eastern Bank Limited, and another to the order of Standard Chartered Bank.

76. On 19 February 2020, 20 containers of Australian desi chickpeas were loaded in Brisbane on to NAVIOS UNITE bound for Chittagong, Bangladesh. Ocean Network Express issued a bill of lading ending 7700, noting Phoenix Global DMCC as the shipper and to the order of NRB Commercial Bank Limited. (These commodities formed part of the last Murabaha Request.)

Bills of lading

77. The bills of lading issued by the various shipping lines were substantially similar, in particular:

1. Phoenix Global DMCC was the shipper (in a few cases, Phoenix Global Australia Pty Ltd was recorded as the shipper on behalf of Phoenix Global DMCC).

2. Most recorded the consignee as “To Order”, with some exceptions where the bill of lading was endorsed to the order of a bank.

3. All recorded details in the “Notify Party” part of the bill. The parties to be notified appear to have been mills and processing plants, import and export agents or commodities traders.

78. As observed in CRO Travel Pty Ltd v Australia Capital Financial Management Pty Ltd [2018] NSWCA 153, a bill of lading made out “to order” is “negotiable”; the title and rights in respect of the goods covered by the bill are transferrable simply by the physical transfer of the bill endorsed in favour of the new holder. Transfer of the bill by endorsement and delivery transfers the symbolic possession of the goods and the carrier is entitled to deliver the goods to the party to whom the bill of lading has been transferred: at [25]-[28] (per Ward JA) citing Bernard Eder, et al, Scrutton on Charterparties and Bills of Lading (25^th ed, 2015, Sweet and Maxwell); see also The Rafaela S [2005] 2 AC 423; [2005] UKHL 11 at [38]. As the Singapore Court of Appeal recently observed in The Luna [2022] 1 Lloyd’s Rep 216; [2021] SGHC 84 at [29]:

the modern bill of lading serves three functions: it operates as: (a) a receipt by the carrier acknowledging the shipment of goods on a particular vessel for carriage to a particular destination; (b) a memorandum of the terms of the contract of carriage; and (c) a document of title to the goods.

79. The learned authors of Schmitthoff’s Export Trade: The Law and Practice of International Trade (12^th ed, 2012, Sweet and Maxwell) explain, “Negotiable bills are normally used in the commodity trade, such as trade in grain or oil, where bills of lading relating to goods in transit are purchased and sold in string contracts; under which the intermediaries do not intend to take delivery and only the last purchaser in the string will take physical delivery of the goods from the ship on its arrival”: at [15-026]. (The learned authors also explain that a string contract is a series of contracts of sale under which the same goods or bills of lading relating to them are sold by A to B, by B to C, and so forth, possible through the whole alphabet).

80. The significance of completion of the “Notify Party” part of the bill is explained by Martin Davies and Anthony Dickey, Shipping Law (4^th ed, 2016, Thomson Reuters) at [12.760]:

To be negotiable, and therefore capable of transfer by indorsement, a bill of lading must be made out “To Order”. These words signify that the carrier must deliver the goods to the shipper’s order – that is, to the person to whom the shipper has indorsed the bill of lading. If, as is often the case, the shipper knows the identity of the intended receiver, that person’s name and address is usually put in the box marked “Notify Party”, an appellation that has no legal significance whatever.

81. As such, the bills of lading were negotiable and the shipper (Phoenix Global DMCC) could determine who was entitled to take delivery of the commodities by indorsing the bill of lading in favour of a named consignee, to whom it transferred the bill. The fact that Phoenix Global DMCC was noted as the shipper on each bill of lading does not necessarily mean, however, that Phoenix Global DMCC had title to the commodities. While a bill of lading is a document of title, it depends on who has possession of the original bill of lading and whether the bill has been indorsed: The Starsin [2003] 1 Lloyd’s Rep 571; [2004] 1 AC 715 at [74] (per Lord Hoffman). The features of the bills of lading in this case become relevant when assessing the evidence of fraud: see [86], [127].

First drawdown request

82. Mr Mondoca said that, for each drawdown request, the insured required the Phoenix entity to submit a copy of the relevant trade and shipping documents, being a purchase contract, commercial invoice and bills of lading underlying the commodity transaction.

83. On 20 February 2020, Aravind Menon, Head of Treasury (South-East Asia) for Phoenix Pte Ltd, emailed a drawdown request to Mr Mondoca, copied to Dev Sharma, Finance Manager. Attached to the email were two Murabaha Requests from Phoenix Global DMCC in the form of Schedule 2 to the Master Murabaha Agreement. One request was in respect of Australian desi chickpeas (the first Murabaha Request) whilst the other was for Australian faba beans (the second Murabaha Request), to be purchased from Avon for US$726,782.10 and US$425,224.98 respectively. It will be recalled that, in making the Murabaha Request, Phoenix Global DMCC confirmed each of the representations in clause 13 of the Master Murabaha Agreement (extracted at [27]) and confirmed that each condition specified in clause 4.3 (extracted at [30]) was satisfied as at the date of the request.

84. In support of the purchase of chickpeas, the email also attached the three bills of lading referred to at [61] and three bills of lading referred to at [66]. For the faba beans, five bills of lading were attached, being those described at [59] and [62]. Also attached to the email was:

1. a Purchase Contract between Avon and Phoenix Global DMCC dated 10 January 2020, by which Phoenix Global DMCC agreed to buy 1,200 megatonnes of Australian desi chickpeas and 1,000 megatonnes of faba beans from Avon (payment terms were “cash against documents”, with title to the goods to pass to the buyer on payment of the invoice in full); and    

2. a Commercial Invoice issued by Avon to Phoenix Global DMCC dated 17 February 2020 for Australian desi chickpeas (1,286 megatonnes) and Australian faba beans (1,005 megatonnes) in the amount of US$1,152,007.08.

85. Following the lifecycle of the ‘supply chain finance’ outlined in Mr Mondoca’s Information Memorandum, the Purchase Contract appeared to have been issued at the commencement of the particular supply, whilst the Commercial Invoice recorded the precise tonnage delivered, either to the ship or on arrival: see [12]. On its face, the Murabaha Request was to obtain funds to complete the purchase of the commodities which Phoenix Global DMCC had agreed to purchase some weeks earlier.

192. Third, the insurer did not suggest that the manner in which the insured advanced funds made a Loss more likely or increased the quantum any Loss, nor is clear how the insured’s suggested deficiencies in undertaking the steps prescribed by the Master Murahaba Agreement made any difference on this score. Whether the Purchase Contract pre-dated or post-dated the Master Murahaba Agreement made no difference to the insurer’s risk, as I far as I can see. Nor did the fact that funds were advanced after the Purchase Instruction or after the Acceptance Notice.

193. What did make a difference to the insurer’s risk was that the commodities did not in fact exist and the documents proffered by the Company in support of the drawdown request were shams. But clause 2.3 does not exclude indemnity in the event of the material default or the fraudulent, dishonest or criminal acts of the Counter-Party or Guarantor. This is consistent with a construction of the policy entitling the insured to indemnity for Loss arising from such an event. Loss caused by the material default or fraudulent, dishonest or criminal acts of the Counter-Party or Guarantor falls within the insuring clause.

Conditions precedent

195. Clause 3 of the policy specified conditions precedent to the insurer’s liability; the burden of proving that all conditions precedent have been met falls upon the insured: clause 7.2(1). First, clause 3.1 provided:

The following conditions are Conditions Precedent to Underwriters’ liability in respect of the Loss.

3.1   Enforceable Debt

The Insured Transaction and/or the Guarantee and their related repayment obligations are legally valid and enforceable repayment obligations of the Counter-Party and/or the Guarantor in accordance with the Transaction Governing Rules in force as at [7 February 2020].

196. Clause 4.27 defined Transaction Governing Rules as “the applicable laws that respectively govern the Insured Transaction and the Guarantee …”. As to the Insured Transaction, the Master Murabaha Agreement and Purchase Agency Agreement provided that the governing law was the law of New South Wales: clause 25.1, Master Murabaha Agreement; clause 13.1, Purchase Agency Agreement. Each Murabaha Request and Offer Letter and Acceptance contained a statement to the same effect and, likely, the Purchase Instruction and Purchase Confirmation also intended to do. As to the Guarantee, the governing law was the law of New South Wales: clause 25.

197. This condition precedent makes sense: why should the insurer pay a claim on the policy where the insured is not be entitled to enforce the insured transaction against the obligors? Were it otherwise, the insured would enjoy a windfall gain on being indemnified in respect of an unenforceable obligation. There was no suggestion that the law of New South Wales rendered the obligations of the Phoenix Group under the finance documents invalid or unenforceable.

198. Clause 3.4 provided an additional condition precedent on which the insurer places some weight: (emphasis added)

3.4   Compliance with Transaction Governing Rules

The Insured shall comply with the applicable material laws and regulations pertaining to the Insured Transaction and/or the Guarantee that were in force at [7 February 2020] … If compliance with any laws or regulations of the Counter-Party’s Country [Australia for Phoenix Agrifoods and Dubai, UAE for Phoenix Global DMCC] and/or the Guarantor’s Country [British Virgin Islands] would put the Insured in breach of the laws of the Insured’s Country [Australia] this obligation will not apply as regards the law or regulation in question.

199. Notably, clause 3.4 is concerned with the insured’s compliance with “applicable material laws”. So far as the Phoenix Group did not comply with such laws, that is no bar to the insured’s entitlement to indemnity under the policy.

200. The insurer submitted, and I agree, that the insured’s satisfaction of this condition precedent makes sense in light of clause 7.3, “Subrogation”, which provided that, in the event of any payment of a Loss under the policy, the insurer was subrogated to the insured’s rights of recovery “against any person or organisation … The Insured shall do nothing to prejudice such rights.” If, by non-compliance with the laws and regulations of Dubai, UAE, the insurer’s ability to recover from Phoenix Global DMCC was compromised, then it makes sense that the insurer should not be obliged to indemnify the insured for a Loss which the insured would not be entitled to recover itself by reason of its own actions.

201. To determine whether the insured has complied with the condition precedent, it is necessary to consider what are the “applicable material laws” pertaining to the Insured Transaction and/or the Guarantee within the meaning of the policy. The insured submitted that “applicable material laws” were the laws of New South Wales, as the insured was in New South Wales and this was the law chosen by the policy and the finance documents. However, I consider that the fact that the clause proceeds to excuse the insured from complying with the laws of the UAE in certain circumstances rather suggests that the laws of the UAE may qualify as “applicable material laws”. However, the finance documents make plain that, if either the insured or the insurer were to seek to enforce the insured’s rights in the UAE, that enforcement action would be taken in “the courts of the Dubai International Financial Centre and courts of appeal from them”: clause 25.2, Master Murabaha Agreement, extracted at [45]. It therefore becomes necessary to consider the laws to be applied by the DIFC.

202. In a case cited by Mr Khan, Fal Oil Co v Sharjah Electricity and Water Authority [2019] DIFC ENF 221, Martin J explained that the DIFC was created under Federal Laws authorising the creation of Financial Free Zones, such zones to be subject to all Federal Laws “with the exception of Federal civil and commercial laws”: Article 3, Federal Law No 8 of 2004 regarding the Financial Free Zones (UAE). The lacuna created by this provision was filled by specific laws concerning the civil and commercial laws to be applied within the DIFC, together with a “waterfall” provision in Article 8(2) of DIFC Law No 3 of 2004 on the Application of Civil and Commercial Laws of the DIFC, which identifies the applicable law in a cascading matter as follows:

(2)   The relevant jurisdiction is to be the one first ascertained under the following paragraphs:

(a)   so far as there is a regulatory content, the DIFC Law or any other law in force in the DIFC; failing which,

(b)   the law of any Jurisdiction other than that of the DIFC expressly chosen by any DIFC Law; failing which,

(c)   the laws of a Jurisdiction as agreed between all the relevant persons concerned in the matter; failing which,

(d)   the laws of any Jurisdiction which appears to the Court or Arbitrator to be the one most closely related to the facts of and the persons concerned in the matter; failing which,

(e)   the laws of England and Wales.

203. In light of these provisions, it is unsurprising that Mr Khan considered that the Courts of the DIFC would likely give effect to the intention of the parties and hold that any substantive questions of law should be determined under the law governing the contract, being the laws of New South Wales. That is, the Courts of the DIFC would consider whether, under the laws of New South Wales, the transactions were void as they did not conform with the requirements of the Master Murabaha Agreement and the Purchase Agency Agreement or AAOIFI Sharia Standard No 8 on Murabaha. As already noted, the insurer did not suggest that the law of New South Wales rendered the obligations of the Phoenix Group under the finance documents invalid or unenforceable.

204. Mr Khan did suggest an argument that could be advanced before the DIFC in support of the invalidity of the transactions under the Master Murabaha Agreement. In YYY Ltd v ZZZ Ltd [2017] DIFC ARB 005, Field J observed, “The conflicts of laws rules applied in DIFC Courts are founded in general on the English conflicts of laws rules which are authoritatively expounded in Dicey, Morris & Collins.” YYY Ltd v ZZZ was cited in Fal Oil v Sharjah Electricity and Water Authority [2019] DIFC ENF 221 at [56]. Mr Khan referred to Dicey and Morris on the Conflict of Laws (10^th ed, 1980, Stevens & Sons Limited) vol 2, ‘rule 149’, which states:

The … validity of the contract is (subject to the Exceptions hereinafter mentioned) governed by the proper law of the contract.

… [As to the Exceptions] The courts of all countries insist … on applying to a case otherwise governed by foreign law those principles of their own law which, in their own view, express basic ideas of public policy. [Citing Fry J in Rousillon v Rousillon [1880] 14 Ch D 351 at 359], “It appears to me, however, plain or in general principles that this court will not enforce a contract against the public policy of this country, wherever it may be made. It seems to me almost absurd to suppose that the courts of this country should enforce a contract which they consider to be against public policy, simply because it happens to have been made somewhere else.”

205. As such, Mr Khan considered that it was possible for a party to argue that the Courts of the DIFC should hold the transactions void by reason of contravention of the public policy of the UAE without reference to the laws of New South Wales. The practical effect of such an approach would be to displace the operation of New South Wales law by the Courts of the DIFC in favour of UAE public policy. Mr Khan said that the public policy of the UAE was not defined under DIFC law and has a broad definition in Article 3 of the UAE Civil Code, which is not directly applicable in the DIFC, and states:

Article 3

Shall be considered of Public Policy, rules relating to personal status such as marriage, inheritance, descent, and rules concerning governance, freedom of commerce, trading in wealth, rules of personal property and provisions and foundations on which the society is based in a way that do not violate final decisions and major principles of Islamic Sharia.

206. Given the comparatively recent establishment of the Courts of the DIFC, Mr Khan noted that such arguments have yet to be considered by the Courts and there are no specific cases on point.

207. In a case referred to by Mr Khan, Loralia Group LLC v Landen Saudi Co [2018] DIFC ARB 004, a party sought to set aside an arbitral award on the basis that it conflicted with the public policy of the UAE against contingency fees, such fees being prohibited by UAE Federal Law. Justice Shamlan Al Sawalehi observed that public policy was uniform across the UAE but allowed for differing outcomes where matters were rightly brought before the DIFC Courts rather than other UAE courts. His Honour explained at [37]:

Public policy of the UAE encompasses the constitutional and legislative creation of the DIFC and thus incorporates the intended differences legally allowed within the DIFC.

208. Although the relevant UAE Federal Law was enacted before the establishment of the DIFC, Justice Shamlan Al Sawalehi held that it could not be said to “apply fully within the DIFC” as the DIFC Courts had a separate and incompatible system for registering legal practitioners and governing their conduct. Although the DIFC Courts’ practice code stated that contingency fees were not considered best practice, nor were such fees prohibited. In short, “while UAE public policy may outlaw contingency fees outside of the DIFC, it does not do so within the DIFC”: at [40].

209. Returning to the policy, the insured’s obligation was to comply with “applicable material laws and regulations pertaining to the Insured Transaction”. Mr Khan’s expert opinion and the case law referred to establish that the law which the DIFC Courts will apply in enforcement proceedings will be determined in accordance with the laws of New South Wales. Having regard to the meaning of “material” as canvassed at [186]-[188], it is the law of New South Wales which is of moment or of significance, having serious or substantial import. Whilst an argument may be advanced that, notwithstanding the applicable law identified by Article 8(2) of DIFC Law No 3 of 2004 on the Application of Civil and Commercial Laws of the DIFC, UAE public policy requires the application of Sharia principles, I do not consider that this elevates UAE public policy to “applicable material laws”. This is not to understate the importance of Islamic law or Sharia principles but simply to say that, under the terms of this policy, such law and principles were not applicable material law. The insurer’s third argument fails.

CONCLUSION

210. Turning to the entitlement of the insured to call for repayment of the funds advanced to the Counterparty in this case, clause 15.11 of the Master Murabaha Agreement provided that an Event of Default included the appointment of a liquidator to the parent company. In that event, clause 15.22 provided:

Acceleration

15.22   On and at any time after the occurrence of an Event of Default the Financier may by notice to the Companies:

…

(b)   declare that each Murabaha Contract shall be determined on the date specified by the Financier (Early Termination Date), whereupon the Deferred Sale Price (determined as though the final Deferred Sale Date is the Early Termination Date) for each outstanding Murabaha Contract and all other amounts accrued or outstanding under the Finance Documents shall become due and payable on such Early Termination Date:

(c)   declare that all or part of any Deferred Sale Price be payable on demand, whereupon they shall immediately become payable on demand by the Financier; and/or

(d)   exercise any or all of its rights, remedies, powers and discretions under the Security Documents.

211. As described at [113]-[115], an Event of Default occurred on 20 April 2020 when Phoenix Commodities was placed in liquidation; on 1 May 2020, the insured declared pursuant to clause 15.22(b) that each Murabaha Contract was terminated with immediate effect such that the Deferred Sale Price and all other amounts accrued or outstanding under the Finance Documents were immediately due and payable. As such, on the appointment of liquidators to the guarantor, the insured was entitled to, and did, call for repayment of the Deferred Sale Price on an Early Termination Date, such that the Deferred Sale Price (determined as though the final Deferred Sale Date was the Early Termination Date) for each Murabaha Contract was due and payable.

212. The Counterparty did not pay the Deferred Sale Price when called upon to do so; in the terms of the policy, the Counter-Party failed to honour its Debt Obligation(s). The insured called upon the Guarantor to pay these amounts and it failed to do so. This falls within the definition of Insured Risk, being “The failure or refusal of the Guarantor for any reason whatsoever to honour its Debt Obligation(s) in accordance with the terms and conditions of the Guarantee on the Due Date (including any obligations for repayments of Advance[d] Payment) following any failure of the Counter-Party to honour its Debt Obligation(s).”

213. The insured has established the conditions precedent in clause 3.4 as the applicable material laws and regulations pertaining to the Insured Transaction are the laws of New South Wales, with which the insured has complied. The insurer has not sought to establish any exclusions. Clause 4.22 of the policy defined Loss as:

Means the Debt Obligation contractually owing to the Insured from the Guarantor in respect of the Guarantee which remains unpaid …

214. The burden of proving that the Loss is covered by the policy falls upon the insured (clause 7.2(1)) and has been discharged. The quantum of Loss was agreed.

ORDERS

215. For these reasons, I made the following orders:

1. DECLARE that the plaintiff is entitled to be indemnified under the Trade Credit Insurance Policy in respect of the claim made on 6 May 2020 together with interest under section 57 of the Insurance Contracts Act 1984 (Cth) from 31 May 2020.

2. Order the defendant to pay the plaintiff $7,224,043.04.

3. Order the defendant to pay the plaintiff’s costs of the proceedings.

4. Direct the parties to notify any errors or omissions within 14 days.

5. In the event that either party seeks to vary Order 3, direct:

1. the party seeking a variation to provide any affidavits and submissions (limited to three pages) within 28 days;

2. the other party to provide any affidavits and submissions in reply (limited to three pages) within 14 days of receipt of the material in Order 5(a);

3. such application to be determined on the papers.

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Amendments

31 May 2022 - 31 May 2022 - Changes to Word file formatting

Decision last updated: 31 May 2022