The proceedings against the first defendant were commenced on 23 December 2022. The second defendant was joined on 15 February 2024.
On 13 September 2024 Stevenson J, in the Commercial List, gave a number of directions concerning the progress of the litigation. In respect of expert evidence, he directed at Order 6.1 that each defendant provide a:
"proposal for expert evidence in the proceeding outlining the proposed fields of expertise in which they intend to adduce expert evidence, the number of expert reports in each field that the defendants intend to rely on, and a concise statement of reasons as to the relevance of any such proposed expert evidence to the issues in dispute … ."
The first defendant provided its proposal on 27 September 2024. The proposal identified the range of experts, by subject matter, and the scope of the evidence that their expert evidence might cover.
The second defendant also served its proposal on 27 September 2024. It followed the same structure as that of the first defendant but gave more detail of the relevance associated with the proposed expert evidence.
The plaintiffs were unimpressed by the proposals and told the defendants why this was the case, by a letter dated 25 October 2024. Primarily, the plaintiffs said that the reasons given for the relevance of the experts were inadequate. The plaintiffs suggested that the defendants file notices of motion seeking directions under r 31.19 of the Uniform Civil Procedure Rules 2005 (NSW) if they wished to proceed with their intention to call expert evidence.
The plaintiffs' advice was taken up and respective notices of motion were filed by the defendants on 20 December 2024. All of the parties prepared material for the motions leading to the production of a court book comprising four volumes (Exhibit A).
The purpose of r 31.19 is to give effect to s 56 of the Civil Procedure Act 2005 (NSW), in particular to ensure that expert evidence is not used to defeat the "overriding purpose" of the Act, namely "to facilitate the just, quick and cheap resolution of the real issues in the proceedings".
I will attempt, for present purposes, to give a brief description of the background to the litigation. The plaintiffs are financiers who acquired debts by assignment, from a number of companies falling under the umbrella of a corporate structure called Rhodium (later changed to Antanium).
The Rhodium companies sold assorted commodities to multiple purchasers, some of whom did not pay for the commodities.
The defendants are insurance companies who issued policies of trade credit insurance to the Rhodium companies. The plaintiffs, to whom the Rhodium debts had been assigned, commenced in October 2020 to demand from the defendants sums arising from the indemnity the defendants had provided under the trade credit policies.
The total of the amounts at stake is large, exceeding $100 million (AUD). The plaintiffs' case is that these monies are owing as a simple product of the insurance cover that had been provided by the defendants to the Rhodium companies. There are alleged to be 37 commodity trades where there has been a failure by a purchaser to pay, thereby generating the call on the respective insurance policies.
The apparent simplicity of a claim on an insurance policy dissolves in this matter into complexity arising from the number of trades, the different commodities involved and the diverse facts behind each trade. There are various issues of construction of the policies and questions of fact, for example, whether a particular commodity was actually delivered.
In addition, the trading in the commodities was 'open', meaning that the commodities could be on-sold from one purchaser to another, even while in transit. A further issue concerns the legitimacy of the plaintiffs' reliance on copy Bills of Lading as opposed to original Bills of Lading.
All of these complexities were said to give rise to the need for expert evidence. Thus, the first defendant states that experts are needed in respect of:
1. the customary trading practices in commodity dealing;
2. the rules and customs associated with the shipment of goods by sea, including the use of copy Bills of Lading;
3. the validity of the pleading of breaches of the insurance policies; and
4. forensic accounting relating to financial records that were anticipated to be identified in the discovery process. Discovery is due in March of this year.
The second defendant added the need for expert evidence on foreign maritime law, noting the possibility of international customs and rules attending the commodities as they travelled across the globe.
Although they identified the areas of expertise in which opinions were sought, the defendants suggested a general order giving them "liberty to adduce expert evidence" in the proceeding. The plaintiffs, in case they did not succeed on their overall objection to expert evidence, submitted that any orders made should be more specific; stating nominated categories, guarding against duplication, and imposing time limits.
The plaintiffs maintained the position they had adopted in their letter of 25 October 2024, that the areas of expertise nominated by the defendants were simply not relevant to the issues identified by the pleadings. In addition, the plaintiffs said that there was no allegation of fraud made by the defendants and therefore any expert evidence directed towards the establishment of fraud should not be permitted.
Fraud must obviously be specifically pleaded, and it has not been so pleaded. But I do not think the fraud issue is determinative of the motions before me. I think expert evidence should be allowed for two reasons:
1. the plaintiffs themselves have put forward expert evidence to which the defendants should be entitled to respond; and
2. the pleadings do raise issues between the parties which could legitimately be the subject of expert testimony; that is evidence which may assist the court in resolving the issues.
Starting with the first of the above reasons, the plaintiffs, in the principal proceedings, filed an affidavit from Mr Cheam Hing Lee dated 1 July 2024.
Mr Lee is the "Chief Executive Officer and Managing Director of Antanium Resources Pte Ltd". Between paragraphs 5 and 17 of his affidavit Mr Lee sets out his professional background. He is obviously a well-educated and very experienced participant in "trade and trade finance". Mr Lee has worked in the banking industry in very senior positions; he has been a commodity trader, he has headed the financial services arms of large corporations, and he has worked in companies which have participated in open trading, as I have described above.
Mr Lee might well be described as an expert in the type of trading which is at the core of these proceedings. But for his personal involvement in Rhodium, one could well imagine him being retained to provide expert testimony.
In paragraph 37 of his affidavit Mr Lee begins to describe the types of transactions in which Rhodium was involved. He goes on to give a description of six types of transaction, describing each type by its characteristics. Here are two examples:
"40. The third transaction type involves funding and insurance ('Insured & Funded Transactions'). In such a transaction, the funder purchases the receivable due from the buyer to Antanium. After a sale transaction, Antanium will issue an invoice. This invoice (usually referred to as a 'commercial invoice') will have a credit period, which would normally be 90-180 days."
"42. Insured & Funded Transactions may be done on a Documents against Acceptance ('D/A') basis (D/A Transactions) or an Open Account ('OA') basis (OA Transactions). D/A Transactions occur when documents are released to a buyer against a usance bill of exchange under which a credit period is granted to the buyer. That credit period is normally 90-180 days. OA Transactions occur when the sale is done on credit terms, and there is usually no bank intermediary."
Between paragraphs 49 and 52 Mr Lee gives a description about the workings of OA trades:
"49. OA trades represented the largest proportion of Antanium's trades. The claims the subject of these proceedings all relate to OA Transactions being part of the 'Insured and Funded' category above. I describe below the usual process for an OA Transaction, as it applied in the Antanium business. In my experience, which I depose to at paragraphs [14] to [16] above, this form of OA Transaction or OA trade is also consistent with general custom in the trade finance industry.
50. An OA Transaction in international trade involves a sale where the commodity is shipped and delivered before payment is due. This business model is attractive to a buyer who hopes or expects to on-sell the commodity before the purchase price is due to be paid to Antanium, allowing the buyer to leverage the favourable credit terms offered by Antanium to realise profit through the purchase and sale of the same commodity, and otherwise from the liquidity produced by being able to purchase the commodities from Antanium on extended payment terms.
51. OA Transactions typically take place while the commodities are already in the process of being shipped or transported. This is referred to in the industry as purchasing at 'high seas'. The purchase and sale of commodities in OA Transactions involves backto-back trading, usually on the same day, and generally speaking not more than five days apart. This meant that the purchase and sale contracts, and corresponding invoices, would similarly be prepared and dispatched for execution in a short time-span, usually on the same day. For this reason, transaction documents, namely the purchase and sale contracts and invoices, were usually prepared by Antanium and were in a standard form used for all trades. This also helped to avoid any inconsistencies in the terms of the contracts relating to the particular commodities being purchased and sold.
52. As stated above, OA trades involve sales made on credit terms and involve obtaining funding and insurance, and selling and assigning the receivable and certain rights to insurance proceeds to the funder."
In paragraph 56 of his affidavit Mr Lee introduces the topic of "netting agreements". He says:
"56. In some cases, the debts owed by Antanium for commodities that they purchased (i.e. the Antanium 'buy-side') were dealt with under netting agreements, and I understand that most of the goods acquired by Antanium for sale to its buyers that are the subject of this proceeding were settled via netting."
In paragraph 58 Mr Lee talks about the use of copy Bills of Lading:
"58. Original bills of lading were not required by Antanium when conducting its trades. Based on my experience which I refer to above at paragraphs [14] to [16], including as Managing Director of Trade Structured Finance at Cargill and then as CEO of Antanium, the use of copy bills of lading became an industry norm, widely accepted by commodity bankers/funders and traders as sufficient evidence of a shipment and the purchase of commodities. This practice developed over time, for various reasons, including the proliferation of technology, specialised commodity bankers and lenders, the increased numbers of intermediary traders, and the increasing number and size of trades becoming incapable of operating as a result of delays in needing to obtain original bills of lading. Accordingly, commodity bankers/funders started to provide financing for commodity trades based on a copy of the original bill of lading without requiring the original bill of lading itself."
In paragraph 67 of his affidavit Mr Lee discusses credit risk. He states:
"67. For OA Transactions, the main risk to which Antanium was exposed was credit default risk. Credit default risk arises because a buyer might default on its obligations to pay Antanium for the commodities sold. As explained in more detail below, credit default risk was mitigated by Antanium through a number of measures. By way of summary of what I describe in more detail below, these measures were:
67.1. Know Your Customer (KYC) checks in relation to all counterparties (both sellers and buyers) undertaken prior to the commencement of a new trading relationship, and thereafter annually;
67.2. KYC checks in relation to each vessel carrying commodities purchased and sold;
67.3. financial due diligence in relation to sellers and buyers undertaken, again, prior to the commencement of a new trading relationship, and thereafter annually;
67.4. periodic monitoring of payments due from buyers;
67.5. obtaining trade credit insurance; and
67.6. segregation of key departments within the business, in particular operations, risk and trade."
Mr Lee then goes on to describe the workings of "KYC" checks over a number of paragraphs.
There can be little doubt that Mr Lee is giving expert testimony about a number of topics generally falling under the heads of commodity trading, financial scrutiny and international shipping practices.
The plaintiffs said that Mr Lee's evidence should not necessarily generate a right to expert evidence in reply because there was no guarantee that Mr Lee's 'expert' evidence would be admitted. Presumably Mr Lee gave this evidence because it was thought to be relevant and admissible on the basis of his expertise, including his vast experience. To suggest that the evidence might not ultimately be admitted is a somewhat strained response to the defendants being able to prepare evidence to counter that of Mr Lee.
It was never suggested by the plaintiffs that Mr Lee's evidence would not be pressed. It must be assumed that the evidence was put forward because it was considered to be relevant. Equally, a response to opinions made in the evidence will also be relevant.
I think Mr Lee's evidence is enough to allow the defendants' motions to succeed. However, turning to the second of the reasons I gave above, I do think the pleadings raise issues which give rise to a need for expert evidence. Here are some examples:
1. The question of copy Bills of Lading is specifically raised as an issue by the first defendant in its Commercial List Response filed on 23 April 2024. At 368(ii) the response states:
"Tokio Marine denies that the provision of copy Bills of Lading constitutes or is capable of constituting performance of Contract Number SRITL2204-856."
1. At 369(v) the Response puts in issue the credit checking carried out by Rhodium, which as seen above, is a specific topic covered by Mr Lee.
2. In the Commercial List Response filed by the second defendant on 24 April 2024, the question of missing documents is raised at 36 highlighting the question of what documents usually form part of the types of trading at the centre of the proceedings. It is to be remembered that the defendants are insurance companies not commodity traders.
3. At 43 of its Commercial List Response the second defendant refers to the issue of whether an "Insured Debt" exists. The nature of an insured debt, in the context of these proceedings, could be the valid subject of expert testimony. Similarly, at [71], the second defendant says there is an issue about whether certain goods were "shipped". This is another topic which might benefit from the evidence of a commodity shipping expert.
The above are but a few examples of how the pleadings might give rise to a need for expert testimony.
I am satisfied that the defendants are entitled to a direction in respect of expert evidence. The next question that arises is the nature of the order giving them the necessary leave. The plaintiffs said that there should be specific limitations to combat duplication and to ensure speedy compliance.
I was taken to the decision of Black J in NorthWest Healthcare Australia RE Ltd v Australian Unity Funds Management Ltd [2023] NSWSC 86 where his Honour referred to the specificity that was required in order to justify directions that met with the principles set out in ss 56-58 of the Civil Procedure Act.
The defendants responded by referring me to a number of authorities, including Coal Management Operations & Processing Pty Ltd v Resource Pacific Ltd [2009] NSWSC 573, where Brereton J said at [5]-[7]:
"5 It may be, as has been argued by counsel for the cross-defendants, that directors acting reasonably needed to do no more than have regard to the report that was, in fact, provided; however, I do not think that it is open to me to conclude that question at this stage, and effectively to prevent the cross-claimant from proving the case which it wishes to mount.
[2]
6 The course of argument established that proof that an independent report would have provided different advice would be essential, at least to Resource Pacific's claim for damages or compensation against the directors. The absence of such a report would at least arguably be fatal to that claim, on questions of causation of loss. In those circumstances, it seems to me that Resource Pacific has established a reasonable basis for seeking to adduce such evidence. It ought to be apparent, however, from what I have said that, if it is to be of utility, the expert opinion requested should not be a retrospective opinion as to whether the process improvement was in truth an improvement in the coal preparation processes, but it should be a report reflecting what a relevant expert would have given if asked to provide an independent report to the Board on the proposed process improvement as at December 2007.
7 The other category of proposed expert evidence has also been significantly modified so that what Resource Pacific now proposes is, in effect, an opinion as to whether there was any and, if so, what standard practice in the coal industry in or about 2007 so far as due diligence investigations in respect of transactions such as those in question in this case. I readily accept that it would have been of no utility to the Court whatsoever to have an opinion from an expert with so-called 'management expertise' as to whether the cross-defendants had breached their duties as directors as was originally proposed. The content of a director's duty of skill and diligence is very much informed by the context of the particular company, the particular background of the director and the expertise that that director brings to the Board in question, and includes whether the director is an executive or non-executive director. Nonetheless, it seems to me clear that one of the factors which must inform the content of a director's duty, faced with a proposed transaction of this kind, includes whether there is a standard industry practice. It seems to me, therefore, that evidence of such a standard practice would be of relevance and of potential assistance, in resolving whether the directors acted with due care, skill and diligence."
At the very least, submitted the plaintiffs, an order similar to that made by Moshinsky J in Greensill Bank AG v Insurance Australia Ltd (NSD1216/2021) 12 December 2024, would be appropriate. The order made was:
"subject to leave of the Court, parties in the same interest in respect of an issue may not call more than one expert witness in respect of the issue."
I have no difficulty with the intent of the above order but think that a direction to that effect might be premature in the current matter. My preference is that the defendants be able to obtain the expert evidence that they desire but that, once they have served their evidence, the plaintiffs be able to return to court to seek orders limiting the number and scope of the served reports. The defendants informed me that they were cooperating in order to avoid duplication. Hopefully this cooperation will obviate the need for the plaintiffs to return to court.
I am also mindful that a need for expert evidence might arise from the discovery process so that it would be inappropriate to limit the categories of expert evidence at this stage.
I do agree with the plaintiffs that a time limit should be imposed upon the serving of the expert evidence and take up the date suggested by the second defendant of 31 July 2025. I will however include a liberty to seek an extension beyond this date if necessary.
Accordingly, I will make the general order suggested by the defendants but will give the plaintiffs liberty to restore the matter in the Commercial List to seek appropriate limitations on the expert evidence that will be served.
In relation to costs, the defendants have sought the costs of the motions at this stage "because we shouldn't have had to go to this much trouble and Senior Counsel turn up to argue a fairly simple proposition."
I think the defendants are entitled to a costs order at this stage, although obviously not payable until the completion of the proceedings, primarily because the giving of expert evidence by Mr Lee should have immediately signalled to the plaintiffs that expert evidence in response would be justified.
I make the following orders in respect of the defendants' motions filed on 20 December 2024:
1. The defendants have liberty to adduce expert evidence in the proceedings.
2. The expert evidence obtained pursuant to these orders is to be served on or before 31 July 2025.
3. All parties have liberty to restore the matter in respect of the limiting of the scope or duplication of the expert evidence served, or the extension of the date for service of the evidence.
4. The plaintiffs are to pay the defendants' costs of and incidental to the notices of motion filed by the defendants on 20 December 2024.
5. The matter is listed for further directions in the Commercial List on 21 February 2025.
[3]
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 12 February 2025
Parties
Applicant/Plaintiff:
AAFC No 1 Corporation (Company No 102083)
Respondent/Defendant:
Tokio Marine & Nichido Fire Insurance Co Ltd & Anor