When does an insurable interest in part of a bulk quantity arise? – Quadra Commodities S.A v XL Insurance Co SE and Ors [2022] EWHC 431 (4 March 2022)

The English High Court recently considered the circumstances in which an insurable interest can arise in unascertained goods forming part of a bulk quantity.

Although the relevant events occurred in Ukraine, in reaching its decision, the Court had regard to s20A of the English Sale of Goods Act 1979 which is in identical terms to similar provisions in the sale of goods legislation in New South Wales¹, Victoria² and South Australia³. Consequently, the decision provides useful guidance for local cargo insurers considering claims in respect of  unascertained goods forming part of a bulk quantity.

Facts

Quadra was an agricultural commodities trading and logistics company. It obtained a marine cargo open policy underwritten by the defendants. The policy covered declared shipments and storage operations attaching during a 12 month period commencing on 1 October 2016 and was extended on the same terms and conditions for a further two 12 month periods.

Between 2014 and 2018, Quadra had dealings with the Agroinvest Group. From July 2018, Quadra dealt with a company in the Agroinvest Group called Linepuzzle Ltd. The intention of the relationship was that Quadra would purchase grain from Linepuzzle and then sell them to Agri Finance SA (another Agroinvest Group company) to assist those entities in financing the commodities.

Quadra paid for the grain upon receipt of warehouse receipts from warehouses in Ukraine.

Agroinvest collapsed in early 2019. It became apparent that Quadra had been the victim of a fraudulent scheme in which it paid for quantities of grain which had been sold many times over to different purchasers. Consequently, there was insufficient grain to execute physical deliveries against the warehouse receipts.

Quadra sought indemnity from its insurers in respect of the lost goods on the basis that the loss had arisen due to misappropriation or its acceptance of fraudulent warehouse receipts.

The insurers denied indemnity on the following grounds:

• Quadra did not have an insurable interest in any goods which were lost; and
• the cargoes which were the subject of the policy never existed, meaning there was no physical loss (which would have been covered), only financial loss (which was not covered).

The decision

The Court found that Quadra was entitled to indemnity under the policy because:

• on the balance of probabilities, the goods were physically present in the warehouses when the receipts were issued as inspectors had verified the presence of goods in the warehouses at relevant times;
• title to the cargoes had not passed to Quadra as the requirements of s20A of the English Sale of Goods Act 1979 (which is in identical terms to similar provisions in the sale of goods legislation in New South Wales, Victoria and South Australia) had not been met. The Act required that the goods needed to be specifically identified. In this case, the warehouse receipts only referred to a quantity of a particular grain stored at the warehouses. Crucially, the receipts did not identify the particular warehouses or silos at which the relevant goods were stored to satisfy the requirements of the Act. Consequently, title had not passed to Quadra;
• even though title had not passed, Quadra had an insurable interest in the goods as it had paid the purchase price and been prejudiced by loss of the goods. Further, Quadra had a right to possession of the goods under the warehouse receipts; and
• there was a loss caused by the insured peril of misappropriation, resulting in an actual loss of the cargoes. This was covered by the Misappropriation clause of the policy. The Fraudulent Documents clause of the policy did not apply because the physical loss was not caused by Quadra’s acceptance of fraudulent warehouse receipts.

Commentary

Misappropriated cargo would now be the least of any concerns for an insurer covering risks in Ukraine. Closer to home, the decision demonstrates that:

• title to the cargo is not essential for an insured to demonstrate an insurable interest;
• in jurisdictions with sale of goods legislation dealing with commingled items (such as in New South Wales, Victoria and South Australia), insureds should ensure that purchase agreements note that the goods are of a certain type stored in bulk and identify the specific location (eg the particular warehouse or silo in which the goods are stored). These details will support a claim for title and, in turn, an insurable interest; and
• contemporaneous inspection records confirming the presence of the cargo at the specified location will be relevant in substantiating claims for the physical loss of cargo.

This article was written by Anthony Highfield, Partner and James McIntyre, Special Counsel.

¹Section 25A of the Sale of Goods Act 1923 (NSW)
²Section 25A of the Goods Act 1958 (Vic)
³Section 20A of the Sale of Goods Act 1895 (SA)