ABN Amro Bank N.V. v. Royal & Sun Alliance Insurance Plc & Ors [2021] EWCA Civ 1789

The Claimant in these proceedings (the Bank) entered into commodity financing transactions, colloquially known as “repo” contracts, under which it provided working capital to trading clients by purchasing their commodities for a defined term, at the end of which term the clients would be obliged to repurchase them.

Following the collapse of two such clients, Transmar and Euromar, no repurchase was realised, and the bank found itself obliged to effect a sale to third parties at a loss in excess of £31 million.

The commodities in question, in this case cocoa products, were insured under a policy of marine cargo and storage. In most respects the policy was a standard cargo insurance, though it contained some unconventional “add-ons”, one of which was entitled the Transaction Premium Clause (TPC). Under the terms of the TPC, underwriters agreed to cover the Transaction Premium that the Bank would otherwise have received or earned in the absence of a Default on the part of its client, where ‘Default’ meant a failure, refusal or non-exercise of an option to repurchase the subject matter at the agreed price. The policy also included a “Non-Avoidance Clause” (NAC), preventing avoidance of the policy for anything other than fraudulent non- disclosure or misrepresentation.

The 14 subscribing underwriters denied liability for the Bank’s claim under the policy, contending that the TPC was never intended to convert the cargo policy into a form of credit insurance, and that a claim on the policy still presupposed that there had been physical loss of or damage to the subject matter. They argued that the TPC was concerned only with the valuation of the indemnifiable loss in the event that such physical loss or damage had occurred.

Alternatively, underwriters variously asserted non-disclosures or misrepresentations by the Bank or its brokers at the time of placement of the risk, including the Bank’s failure to explain its purpose in including the TPC, and failure to draw attention to the presence of the NAC in the policy, which they said was itself a non-disclosure. Given the nature of underwriters’ defences, the Bank also pursued an alternative case against its broker, Edge.

In a judgment handed down in February 2021, the Commercial Court rejected the underwriters’ argument that the insured was under some duty to tell its insurers why it had included certain clauses in the policy, or to explain the purpose and effect of those clauses. Similarly, as regards the NAC, the court held that a party who signs a document is generally bound by its terms, and it is no defence that he did not read it. In any case, the judge found that if underwriters ever had the right to avoid they had lost that right by affirmation, having asserted contractual arguments in their original Defence, as well as seeking rectification of the contract, all of which was predicated on the existence of an enforceable agreement. The avoidance case had only been introduced by way of an amendment to the Defence some 15 months later, by then much too late. Underwriters, moreover, had not previously tendered a return of premium, an omission which is generally considered inconsistent with an election to avoid.

In the case of two of the 14 underwriters, however, the trial judge found in their favour, albeit on a different basis. It was noted that representations had been made to a number of follow market underwriters that the policy wording was “as expiring”, which (unknown to them) was not the case. Whilst the preceding year’s policy had been amended by endorsement to include the TPC and the NAC, this endorsement had not been circulated to the following market. The judge accepted the alternative argument of following market underwriters, Ark and Advent, that the Bank was thereby estopped from asserting that the policy was on terms different to those of the preceding year. The advantage of the estoppel argument was that it circumvented the objections to an avoidance case, more particularly the effect of the NAC and the question of affirmation.

The unsuccessful underwriters appealed against the judgment with regard to the interpretation of the TPC, while Edge appealed against the decision on estoppel as regards Ark and Advent. As to the latter question, Edge pointed to the wide wording of the NAC, which provided that "[t]he underwriters will not …seek to reject a claim for loss on the grounds of… [a non-fraudulent] misrepresentation”. Notwithstanding the title of the clause, they argued that its ambit was not limited to avoidance, but rather that it prohibited any rejection of a claim grounded upon a non-fraudulent misrepresentation. A case based upon estoppel by convention was just such a case, as it was predicated upon a misrepresentation having been made by the Bank or its brokers. In a judgment handed down on 2 December 2021, the Court of Appeal agreed, holding that the NAC prohibited any such defence, including one based on estoppel.

As regards construction of the TPC, it is understood that the dispute in fact settled shortly after the appeal hearing but before judgment. Nevertheless, the Court of Appeal went on to give its view, upholding the decision of the trial judge. Sir Geoffrey Vos MR, endorsed as a “starting point” the assumption that the policy covered only physical loss and damage to cargo, being a marine cargo policy. In light of the factual matrix “clear words” would be required to provide something wider. However, in the present case the court held that the TPC was indeed clear and unambiguous, and so must be given effect. There was no suggestion, said the judge, that there was something unlawful about combining two very different types of cover, namely marine cargo and credit insurance, into a single policy.