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

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

1. 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.
2. 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

1. 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.
2. 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.
3. 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

1. 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."
2. 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.
3. 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

1. 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]).
2. 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.
3. 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.

Master Murabaha Agreement

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.

Purchase Agency Agreement

1. 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.
2. 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.
3. 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.
4. 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 …

Guarantee and indemnity

1. 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. …
2. "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".
3. 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

1. 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.
2. 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.
3. 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.)
4. 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).
5. 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.)
6. 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.)
7. 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).

Bills of lading

1. 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.
2. 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 (25th 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.
3. The learned authors of Schmitthoff's Export Trade: The Law and Practice of International Trade (12th 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).

First drawdown request

1. 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.
2. 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.
3. 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.
4. 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.

Shipments continue

1. On 23 and 24 February 2020, 10 containers of Australian nugget lentils were loaded in Adelaide onto APL DANUBE for Jebel Ali, UAE. ANL issued a bill of lading ending 9169 (only a draft bill is in evidence). The identity of the shipper is obscured but the address is visible and is that of Phoenix Global DMCC. (This became part of the ninth Murabaha Request.)
2. Also on 23 and 24 February 2020, 20 containers of Australian nipper lentils were also loaded onto APL DANUBE bound for Chittagong, Bangladesh. ANL issued a bill of lading ending 907A (the first pages of the bill are missing and the shipper and consignee, if any, are not known). A further 20 containers were loaded, for which ANL issued a bill of lading ending 907B (while tracking information for the bill of lading was obtained, a copy of the bill was not in evidence.) (This became part of the tenth Murabaha Request.)
3. On 26 and 27 February 2020, 10 containers of nugget lentils were loaded onto CONTI EVEREST in Adelaide bound for Karachi, Pakistan. ANL issued a bill of lading ending 2964, of which only a draft is in evidence. The identity of the shipper is obscured but the address is visible and is that of Phoenix Global DMCC. A further 10 containers of Australian nugget lentils were loaded onto the same vessel and bills of lading issued by Mediterranean Shipping Co SA ending 4538 and 6094. Only draft bills of lading are in evidence. The shipper in each case was noted as Phoenix Global DMCC, and the consignee was marked "To Order". (This became part of the ninth Murabaha Request.)

Second and third drawdown requests

1. On 25 February 2020, Mr Menon submitted a second drawdown request to Mr Mendoca, copied to Mr Sharma. Attached to the email were two Murabaha Requests in the form of Schedule 2 to the Master Murabaha Agreement. Both were dated 20 February 2020. One request was in respect of Australian desi chickpeas (the third Murabaha Request) and the other was in respect of Australian faba beans (the fourth Murabaha Request), to be purchased from Avon for US$1,182,720.15 and US$365,404.32 respectively.
2. Attached to the email was a Purchase Contract between Avon and Phoenix Global DMCC dated 13 January 2020, by which Phoenix Global DMCC agreed to buy 2,000 megatonnes of Australian desi chickpeas and 800 megatonnes of faba beans, on the same terms as the earlier Purchase Contract referred to at [84]. Also attached was a Commercial Invoice issued by Avon to Phoenix Global DMCC dated 18 February 2020 for Australian desi chickpeas (2,093 megatonnes) and Australian faba beans (864 megatonnes) in the amount of US$1,548,124.47.
3. In support of the purchase of chickpeas, the email attached the two bills of lading referred to at [69]-[70] and the six bills of lading referred to at [75]. For the faba beans, five bills of lading were attached, being those described at [65] and [73]. To verify the information contained in the bills of lading, on 25 and 27 February 2020, Mr Mondoca downloaded information from the Ocean Network Express website, Mediterranean Shipping Co website, Cosco Shipping Lines Co Ltd website and CMA CGM website for each of the bills of lading in question. Again, the documents were a little unusual, as described at [86].
4. On 27 February 2020, Mr Sharma sent Mr Mondoca a third drawdown request. Attached to the email were two Murabaha Requests issued by Phoenix Global DMCC dated 25 February 2020: one in respect of Australian hard wheat (the fifth Murabaha Request) and the other for Australian whole red lentils (the sixth Murabaha Request), to be purchased from ACME Summit General Trading LLC for US$428,676.25 and US$655,554.80 respectively. Attached to the email was a Purchase Contract between ACME and Phoenix Global DMCC dated 20 January 2020, by which Phoenix Global DMCC agreed to buy 1,000 megatonnes of Australian hard wheat and 1,000 megatonnes of red lentils. Also attached was a Commercial Invoice issued by ACME to Phoenix Global DMCC dated 24 February 2020, for Australian hard wheat (1,009 megatonnes) and Australian red lentils (978 megatonnes) in the amount of USD$1,084,231.05.

Fourth drawdown request

1. On 3 March 2020, Mr Sharma submitted a fourth drawdown request to Mr Mondoca. Attached to the email were Murabaha Requests dated 27 February 2020 in respect of Australian noodle wheat (the seventh Murabaha Request), Australian canola (the eighth Murabaha Request), Australian nugget lentils (the ninth Murabaha Request), Australian nipper lentils (the tenth Murabaha Request) and Australian desi chickpeas (the eleventh Murabaha Request). These commodities were to be purchased from ACME for US$150,098.20, US$220,677, US$470,695.60, US$435,628.70 and US$282,748.60 respectively.
2. Attached to the email was a Purchase Contract between ACME and Phoenix Global DMCC dated 23 January 2020, by which Phoenix Global DMCC agreed to buy 500 megatonnes of noodle wheat, 500 megatonnes of canola, 1,000 megatonnes of nugget lentils, 1,000 megatonnes of nipper lentils and 500 megatonnes of desi chickpeas. Also attached was a Commercial Invoice issued by ACME to Phoenix Global DMCC dated 26 February 2020 in respect of the commodities, totalling US$1,559,848.10.
3. In respect of the proposed purchase of Australian noodle wheat, the bill of lading referred to at [67] was attached. In respect of the purchase of Australian canola, the bill of lading referred to at [68] was attached. In respect of the purchase of Australian nugget lentils, the seven bills of lading referred to at [64], [94] and [96] were attached (it will be recalled that several of these bills were in draft or incomplete). In respect of the purchase of Australian nipper lentils, two bills of lading referred to at [95] were attached, albeit one of the bills of lading does not appear to have been provided. For the purchase of Australian chickpeas, the two bills of lading referred to at [76] were attached. Again, the documents were a little unusual, as described at [86].
4. On 5 March 2020, Mr Mondoca obtained tracking information for the bills of lading accompanying the fourth drawdown request from the websites for Hapag-Lloyd, TS Lines and ANL. (This review presumably revealed that, 25 February 2020, the Australian noodle wheat in the Hapag-Lloyd bill of lading ending 9480 had arrived in Vietnam and, 4 March 2020, the Australian nugget lentils in the ANL bill of lading ending 2915 had arrived in the UAE.) Mr Mondoca said he conducted the same process to obtain tracking information for the bill of lading ending 7700 from the Ocean Network Express website, but did not save the verification information to the insured's files. (The tracking information has, however, been obtained for the purposes of these proceedings.) No tracking information appears to have been obtained in respect of the two draft bills of lading issued by Mediterranean Shipping Co.

Claim on the policy

1. Phoenix Group was then in a parlous financial state. An email from director, Guarav Dhawan, to Phoenix's banks on 16 April 2020 advised that the Phoenix Group had moved into hedging but the trading position had "shot up" during the last week of February and, by 9 March 2020 "had reach[ed] astronomical proportions". On 20 April 2020, Phoenix Commodities Pvt Ltd was placed in liquidation. On 27 April 2020, Mr Dhawan wrote to the Phoenix Group's financiers, including the insured, requesting a continuation of financial support for the subsidiaries "to give management time to stabilise the business and seek new external funding."
2. On 28 April 2020, Mr Mondoca reported this development to Mr Allen and the broker, noting that the funds advanced to Phoenix Agrifoods and Phoenix DMCC were due to be repaid at the end of June or early July 2020. Solicitors were engaged to advise how best to protect the insured's interests; "please share these updates with Underwriters and let us know if they have any suggestions or comments". On 30 April 2020, the broker confirmed that the insurer had been informed.
3. On 1 May 2020, the insured issued a formal demand for payment to Phoenix Agrifoods and Phoenix Global DMCC, in the following terms: 3. An Event of Default has occurred under clause 15.11 of the master murabaha agreement in that a liquidator has been appointed to Phoenix Commodities Pvt Ltd … or its assets. 4. In consequence of the Event of Default, the Financier declares, pursuant to clause 15.22(b) of the master murabaha agreement, that each Murabaha Contract is terminated with immediate effect and that 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, including the master murabaha agreement, is immediately due and payable. 5. The Financier demands immediate payment of the Deferred Sale Price for each outstanding Murabaha Contract as at the date of this letter of AU$7,397,893.58 (which includes a Profit Amount of AU$101,169.79 as at the date of this letter)
4. A formal demand for payment was also made to Phoenix Commodities for immediate payment of the Deferred Sale Price for each outstanding Murabaha Contract. The demands went unanswered and no payment was received. A claim was made on the policy on 6 May 2020. An initial question arose as to whether the insured was entitled to claim on the policy before the Deferred Payment Dates in June or July 2020. On 9 June 2020, Phoenix Global DMCC also went into liquidation. The insured pressed the insurer to determine its claim. On 23 June 2020, the Deferred Payment Date fell due in respect of the first drawdown: see [91(c)]. On 26 June 2020, the Deferred Payment Date arrived in respect of the second and third drawdowns: see [103]. On 3 July 2020, the Deferred Payment Date arrived in respect of the fourth drawdown: see [110].

Sham contracts come to light

1. In October and November 2021, the Court issued a series of subpoenas to Westpac Banking Corporation, Avon and ACME at the insurer's request. The insurer obtained affidavits from Mr Thio, the liquidator of Avon, and Mr Nagaria, the former managing director of ACME. As a consequence, the questionable nature of the Purchase Contracts and Commercial Invoices came to light. In February 2022, the insurer amended its pleading, contending that the commodity purchases from Avon and ACME were fabricated by Phoenix Global DMCC or Phoenix Agrifoods, this being another reason that the transactions did not comply with Sharia principles and the policy did not respond.
2. It will be recalled that the first and second drawdown requests were based upon the purchase of commodities from Avon. Mr Thio has reviewed Avon's books and records, and found no record that Avon traded in or supplied desi chickpeas or faba beans at that time. The Purchase Contract and Commercial Invoice were not found amongst the company's records.
3. As to the comprehensiveness of the search undertaken by Mr Thio, he took possession of Avon's books and records from the company's director on Mr Thio's appointment as liquidator. He was provided with hard and soft copy documents. The hard copy documents included sales invoices, purchase invoices, bank statements and similar documents. Mr Thio understood from the director that he had been provided with all of the company's records. Following an initial review, the hard copy records were sorted by Mr Thio's staff into calendar year and, within each year, into types of records such as bank statements, before being placed into cartons and stored in a warehouse. A list of the documents kept in each carton was prepared and, on receipt of a subpoena in these proceedings, Mr Thio's staff reviewed the relevant cartons and their contents but informed Mr Thio that they were unable to find the Purchase Contracts or Commercial Invoices said to have been issued in respect of Phoenix Global DMCC. Mr Thio then double-checked the records by looking through the records for February and March 2020, especially invoices and purchases, but could not locate the documents either.
4. As to whether any of the funds advanced in the first or second drawdown were used to pay Avon for the commodities, Mr Thio has reviewed Avon's bank statements and found no payment in respect of the Purchase Contract and Commercial Invoice said to have been issued by Avon. Nor could Mr Thio locate any record which indicated that Avon had traded in desi chickpeas or faba beans in February 2020. As to the veracity of Mr Thio's search, he was given a list of Avon's bank accounts by the company's director and worked on the basis of that list; there were no missing bank statements and nothing to suggest that he should write to other banks to see if there were any other bank accounts.

Sharia compliance

1. Whilst Mr Allen said the financing of the Phoenix entities was intended to be Sharia compliant, the insured did not contest Mr Khan's expert evidence that the transactions were not compliant and I have no reason to find otherwise. Mr Khan explained that the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) has developed Sharia standards for major Islamic financing structures, including the AAOIFI Sharia Standard No 8 on Murabaha issued on 16 May 2002. In addition, jurists have created a checklist of requirements for a valid contract under Sharia law, called the Pillars (Arkan) which must be present in order for a contract to be valid and binding. Amongst these requirements, there must be at least two independent, eligible parties free to enter into a contract. The goods the subject of a contract must be owned by the seller, either directly or in the name of another who acts as trustee and agent on behalf of the seller.
2. According to Mr Khan, the falsity of the underlying Purchase Contracts, unsurprisingly, does not satisfy the requirements for a valid contract under Islamic law. As the vendors of the commodities were not party to the fabricated documents, the Purchase Contracts did not constitute a Sharia-compliant sale contract, such that the insured's subsequent offer to sell the commodities under the offer letters also failed to satisfy Sharia requirements as it would be impossible for the insured to act as the seller as the insured had no actual ownership of the commodities. As such, the insured's offer to sell the commodities under the offer letters constituted a breach of the prohibition on selling a commodity before having actual or constructive ownership under Sharia. The subsequent sale of the commodities under the Murabaha contracts failed to satisfy the Sharia requirement that the parties to a contract consent by clear and unambiguous offer and acceptance. Mr Khan was of the view that the fabricated documents meant that the transactions did not involve any real sale or transfer of commodities, either to Phoenix Global DMCC or to the insured. The fact that no commodities were actually purchased meant that the transactions breached the requirement for a valid Murabaha Agreement. Consequently, all of the transactions, and any benefits claimed by the insured under the transactions in connection with ownership of the commodities which the insured did not acquire, would be invalid and unenforceable from a Sharia perspective.

PARTIES' POSITIONS

1. The insured contended that it was entitled to be indemnified as Phoenix Commodities had failed to honour the guarantee following the insured's demand; the Insured Risk as defined in the policy had eventuated, causing Loss within the meaning of the policy.
2. The insurer denied that the insured was entitled to indemnity on three bases, each following upon the suggested failure of the insured to purchase commodities from vendors and then on-sell the commodities to the Phoenix Group in accordance with the Master Murabaha Agreement and Sharia principles. As a consequence, the insurer contended that: 1. no Deferred Sale Price was payable was under the Master Murabaha Agreement; 2. no obligation to repay an Advanced Payment arose under the policy; and 3. the condition precedent in clause 3.4 of the policy was not satisfied.
3. These issues turn on the construction of the policy and the documents establishing the finance facility. In considering these matters, I have had the benefit of detailed written and oral submissions by learned senior counsel Jeremy Giles SC and Richard Scruby SC but have not repeated these submissions in this already lengthy judgment.

CONSTRUCTION OF POLICIES

1. A policy of insurance is a commercial contract and should be given a businesslike interpretation, paying attention to the language used by the parties, the commercial circumstances that the document addresses and the objects which it was intended to secure: McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579; [2000] HCA 65 at [22] (per Gaudron J); Liberty Mutual Insurance Company Australian Branch (t/as Liberty Specialty Markets) v Icon Co (NSW) Pty Ltd [2021] FCAFC 126; (2021) 154 ACSR 126 at [151]-[152]. The contract is interpreted as at the date on which it was entered into: Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544; [2017] HCA 12 at [16] (per Kiefel, Bell and Gordon JJ), [77] (per Nettle J).
2. The meaning of the policy is determined objectively, by reference to what a reasonable person would have understood the policy to mean having regard not only to the text of the document but to the surrounding circumstances known to the parties and the purpose and object of the transaction: Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; [2004] HCA 35 at [22] (per Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ). The context includes the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract: Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46] (per French CJ, Nettle and Gordon JJ) citing Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7; Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337; [1982] HCA 24.
3. Appreciation of the commercial purpose or objects is facilitated by an understanding of the genesis of the transaction, the background, the context and the market in which the parties are operating. The Court is entitled to approach the task of construction on the assumption that the parties intended to produce a commercial result, construing the contract so as to avoid making commercial nonsense or working commercial inconvenience: Electricity Generation Corporation v Woodside Energy Ltd at [35] (per French CJ, Hayne, Crennan and Kiefel JJ), citing Codelfa at 350 (per Mason J). As observed in Onley v Catlin Syndicate Ltd (as the underwriting member of Lloyd's Syndicate 2003) (2018) 360 ALR 92; [2018] FCAFC 119, "It goes without saying that a construction that avoids capricious, unreasonable, inconvenient or unjust consequences, is to be preferred where the words of the agreement permit": at [33] (per Allsop CJ, Lee and Derrington JJ).

Defined terms

1. The insurer attaches some significance to various defined terms, both in the policy and the finance documents. The principles as to how such terms should be interpreted in statutory instruments are well settled and have been transposed to assist in the construction of commercial contracts: Vincent Nominees Pty Ltd v Western Australian Planning Commission [2012] WASC 28; (2012) 187 LEGRA 303. With respect to statutory instruments, generally "[t]he function of a definition clause in the statute is merely to indicate that when particular words or expressions the subject of definition, are found in the substantive part of the statute under consideration, they are to be understood in the defined sense or are to be taken to include certain things which, but for the definition, they would not include. Such clauses are, therefore, no more than an aid to the construction of the statute and do not operate in any other way": Gibb v Federal Commissioner of Taxation (1966) 118 CLR 628 at 635 (per Barwick CJ, McTiernan and Taylor JJ) (emphasis added). As McHugh J explained in Kelly v R (2004) 218 CLR 216; [2004] HCA 12 at [103]: … the function of a definition is not to enact substantive law. It is to provide aid in construing the statute. Nothing is more likely to defeat the intention of the legislature than to give a definition a narrow, literal meaning and then use that meaning to negate the evident policy or purpose of a substantive enactment. There is, of course, always a question whether the definition is expressly or impliedly excluded. But once it is clear that the definition applies, the better - I think the only proper - course is to read the words of the definition into the substantive enactment and then construe the substantive enactment - in its extended or confined sense - in its context and bearing in mind its purpose and the mischief that it was designed to overcome. To construe the definition before its text has been inserted into the fabric of the substantive enactment invites error as to the meaning of the substantive enactment.
2. In the few cases where definitions have been found to be of substantive effect, it has been said that this is indicative of 'poor drafting practice': Commissioner of Taxation v Douglas (2020) 282 FCR 204; [2020] FCAFC 220 at [98]; San v Rumble (No 2) [2007] NSWCA 259 at [55] (per Campbell JA).
3. As to the application of these principles in the construction of commercial contracts, Beech J observed in Red Hill Iron Ltd v API Management Pty Ltd [2012] WASC 323 at [127]: Definitions do not have substantive effect. They are not to be construed in isolation from the operative provision(s) in which a defined term is used. Rather, the operative provision is to be read by inserting the definition into the provision: Kelly v R [2004] HCA 12 ; (2004) 218 CLR 216 [84], [103]; Epic Energy (Pilbara Pipeline) Pty Ltd v Cmr of State Revenue [2011] WASCA 228 [62], [150], [218]. Those cases dealt with statutory interpretation; the same principle applies in interpreting contracts: Vincent Nominees Pty Ltd v Western Australian Planning Commission [25]. See also Greg Pynt, Australian Insurance Law: A First Reference (4th ed, 2018, LexisNexis) at 225; Watson v Scott [2016] 2 Qd R 484; [2015] QCA 267 (per McMurdo P) at [50]-[51]; Bond v Chief Executive, Department of Environment and Heritage Protection [2018] 2 Qd R 112; [2017] QCA 180 (per Morrison JA) at [11]; AIG Australia Ltd v Kaboko Mining Ltd [2019] FCAFC 96 at [43] (per Allsop CJ, Derrington and Colvin JJ) (application in the context of an insolvency exclusion in a professional indemnity insurance policy); Gold Coast City Council v Sunland Group Ltd (2019) 1 QR 304; [2019] QCA 118 at [33]-[36]; Segelov v Ernst & Young Services Pty Ltd (2015) 89 NSWLR 431; [2015] NSWCA 156 at [88] (per Gleeson JA); Horsell International Pty Ltd v Divetwo [2013] NSWCA 368 at [158] (per McColl JA, Beazley P concurring); Black Box Control Pty Ltd v Terravision Pty Ltd [2016] WASCA 219 at [42] (per Newnes and Murphy JJA, Beech J).

DEFERRED SALE PRICE

1. As earlier described, rather than the insured and Phoenix Global DMCC taking each of the steps described in the Master Murabaha Agreement and Purchase Agency Agreement in turn - Phoenix Global DMCC purchasing the commodities as the undisclosed agent of the insured followed by the insured offering to sell, and Phoenix Global DMCC agreeing to buy, the commodities - the parties executed documents which stated that each of these steps had been taken in the correct sequence and, having done so, the insured advanced the requested funds. This was not wholly at odds with the finance documents, which envisaged the purchase and on-sale of the Commodities in quick succession and perhaps by the exchange of documents. The insurer argued that, by reason of this - and the resulting non-compliance with Sharia principles - the Phoenix Group was not obliged to repay the funds. More specifically, there was no Cost Price and thus no Deferred Sale Price within the meaning of the Master Murabaha Agreement. As a consequence, it was said that there was no Advanced Payment within the meaning of the policy and no obligation to indemnify the insured.
2. Essentially, the same principles of construction apply to the commercial documents establishing the finance facility, as described at [135]-[147]. How the insured and the Phoenix Group implemented the transactions envisaged under finance documents must be put on one side when construing the documents. Post-contractual conduct does not assist on the question of what a contract means: Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153; [2001] NSWCA 61 at [25]-[26]. Where there is no doubt that a contract has been formed, it is not legitimate to use as an aid in construction of the contract anything the parties said or did after it was made: Agricultural & Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570 at 582 (per Gummow, Hayne and Kiefel JJ), citing Whitworth Street Estates v Miller [1970] AC 583 at 603 (per Lord Reid). Rather, the Court interprets commercial contracts objectively "by what a reasonable businessperson would have understood [the] terms to mean": Electricity Generation Corporation v Woodside Energy at [35].
3. Turning to the terms of this particular commercial contract, clause 6 of the Master Murabaha Agreement concerned the Company's obligation to repay the funds advanced and provided: (emphasis added) 6 Deferred Sale Price Payments Payment of the Deferred Sale Price 6.1 The relevant Company shall, in respect of each Murabaha Contract entered into by it, be absolutely and irrevocably obliged to pay the Value Date Sale Price Amount and the Deferred Sale Price on the relevant Payment Dates as set out in the Offer Letter for the relevant Murabaha Contract. It will be recalled that 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.

THE POLICY

1. This brings us to the critical document. The policy was entitled "Trade Credit Insurance Policy" and comprised the policy wording, a Schedule and an "Information Package" containing the proposal and finance documentation, including the Guarantee and Indemnity, "Trade finance agreement viz Master Murabaha Agreement" and Purchase Agency Agreement.
2. Like the finance documents, the policy was complex and imperfect. The first feature to note is that there is no correlation between the defined terms in the policy and the defined terms in the finance documents. This does give rise to some constructional choices, to be resolved in accordance with the principles outlined at [135]-[141].

Insured Transaction

1. By the insuring clause, the insurer agreed to indemnify the insured for 90% of "Loss(es) caused by an Insured Risk in relation to the Insured Transaction". Clause 4.21 defined the Insured Transaction as: The Insured's interest in a AUD 8,000,000 trade finance agreement, where the Insured disburses funds to the Counterparty with a maximum repayment tenor of 120 days, based on invoices from third-party vendors. The Counter-Party was either Phoenix Agrifoods or Phoenix Global DMCC, "which has entered into the Insured Transaction with the Insured": clause 4.5; Item 7, the Schedule.
2. The definition of Insured Transaction echoed the description of the finance transaction outlined in the proposal, which formed part of the policy, and broadly described the trade finance provided by the insured to the Phoenix Group under the Master Murabaha Agreement and related documents.

Insured Risk

1. Clause 1.1 of the policy defined Insured Risk as: 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).
2. The definition is embedded with other defined terms, some of significant complexity and also containing embedded definitions. Obviously enough, the Guarantor was Phoenix Commodities and the Guarantee was the Guarantee and Indemnity executed on 13 February 2020. Due Date meant the date a Debt Obligation was required to be paid by the Counter-Party and/or the Guarantor to the insured under the terms of the Insured Transaction and/or the Guarantee: clause 4.9.
3. Clause 1.1 and clause 4.9 suggest that the Debt Obligation(s) of the Counter-Party and the Guarantor were not the same. This is confirmed by the definition of Debt Obligation(s) in clause 4.8, being: Irrevocable obligations of the Counter-Party and/or the Guarantor to repay the unearned portion of the Advanced Payment in accordance with the terms and conditions of the Insured Transaction and/or the Guarantee.
4. The parties agreed that the definition should be read distributively, that is, the irrevocable obligations of the Counter-Party depend upon the terms of the Insured Transaction while the irrevocable obligations of the Guarantor depend upon the terms and conditions of the Guarantee. In addition, it is apparent from the definition of Insured Risk that the Debt Obligation(s) of the Counter-Party and the Guarantor arose sequentially, with the Debt Obligation[s] of the Guarantor "following any failure of the Counter-Party to honour its Debt Obligation(s)".

Advanced Payment

1. "Unearned portion" is not a defined term (either in the policy, the Guarantee and Indemnity or the Master Murabaha Agreement). Advanced Payment is defined in clause 4.1 as: The payment advanced to the Counter-Party by the Insured in accordance with the terms and conditions of the Insured Transaction in consideration for the future delivery of the Insured Goods to the Insured by the Counter-Party. I take "the unearned portion of the Advanced Payment" to be reference to the funds advanced by the insured under the Master Murabaha Agreement and related documents, which the Counter-Party was not entitled to retain.
2. Insured Goods was defined as "financing the purchase of grains and pulses" in accordance with the terms and conditions of the Insured Transaction: clause 4.18; Item 17, the Schedule. Noteworthy, the Insured Goods were "financing the purchase" of commodities, not commodities. The insured suggested the definition "made no sense at all". Certainly, the definition does not sit well with the phrase - "the future delivery of the Insured Goods to the Insured by the Counter-Party" - where the insured was providing finance to the Counterparty and not the other way around.
3. An alternate construction is to read the definition of Insured Goods as a reference to the commodities, which does work with the definition of Advance Payment where - in one of the steps envisaged by the finance documents - the Company bought the commodities for the insured when actioning a Purchase Instruction. This construction, however, does not sit well with the underlying finance transaction, the purpose of which was that the insured would provide finance to the Company. Whilst an interim step in that process was that the Company would buy commodities 'for' the insured, it did so as the insured's agent; it was never envisaged that there would be a "future delivery of [the commodities] to the Insured by the Counter-Party". I am also reluctant to ignore the clear and specific definition of Insured Goods so that another definition makes sense.
4. I prefer to read the words of the definition of Insured Goods into the definition of Advanced Payment and read the resulting definition of Advanced Payment in a manner consistent with the purpose of the policy: Kelly v R. The purpose of the policy was to insure against the risk that the funds advanced by the insured to its customer would not be repaid; it was perfectly clear that the insured was providing finance, not buying commodities. In any event, whether one uses the definition of Insured Goods as "financing the purchase of grains and pulses" or "grains and pulses", the meaning remains tolerably clear: the Advanced Payment were funds advanced by the insured to the Phoenix Group under the Master Murabaha Agreement and related documents.

Debt Obligation

1. It is necessary to consider the provisions of the Guarantee and Indemnity to identify the Debt Obligation of the Guarantor with precision, being the "irrevocable obligations of … [Phoenix Commodities] to repay the unearned portion of the Advanced Payment in accordance with the terms and conditions of … the Guarantee". Noting the definition of Advanced Payment and the terms of the Guarantee and Indemnity (extracted at [54]), I consider that this meant Phoenix Commodities' obligation to pay on demand funds which the Counterparty was obliged to repay to the insured under the Master Murabaha Agreement and related documents. As the definition of Insured Risk states, the Guarantor's Debt Obligation(s) included (and I interpolate, was not limited to) any obligations for repayments of Advance[d] Payment.
2. What then was the Debt Obligation of the Counter-Party, being "Irrevocable obligations of the Counter-Party … to repay the unearned portion of the Advanced Payment in accordance with the terms and conditions of the Insured Transaction". As mentioned, I take "the unearned portion of the Advanced Payment" to be a reference to the funds advanced by the insured under the Master Murabaha Agreement and related documents, which the Counter-Party was not entitled to retain.
3. The primary route by which the Counter-Party was obliged to repay the funds advanced by the insured was by payment of the Deferred Sale Price on the Deferred Payment Date. I have already concluded that, notwithstanding the manner in which the insured and Phoenix Group completed the Murabaha Contracts, the Phoenix Group was obliged to pay the Deferred Sale Price: see [148]-[162].
4. That was not the Counter-Party's only obligation to repay the funds. The Counter-Party was also obliged to repay the funds on the occurrence of an Event of Default, including if the representations or warranties given by the Counter-Party proved to be false, or to the extent that it was or became unlawful for the Company to perform any of its obligations under a Finance Document. The Counter-Party may also be obliged to repay the funds advanced under clause 7 in the event that it became unlawful for the insured to perform its obligations under the Master Murabaha Agreement or any Murabaha Contract. Similarly, the Counter-Party may also be obliged to repay the funds in the course of complying with its indemnity given in clause 11 of the Master Murabaha Agreement. The insured had a corresponding obligation to "use all reasonable efforts to ensure that all rights in respect of the Insured Transaction and the Guarantee relevant to a Loss or potential Loss are … exercised": clause 7.1(c).

Exclusions

1. Clause 2 of the policy contained exclusions. The burden of proving that an exclusion applies falls on the insurer: clause 7.2(2). In particular, clause 2.3 provided that the insurer was not liable to indemnify the insured for Loss "arising directly or indirectly" from: Material default by the Insured in the performance of its obligations under the Insured Transaction and/or the Guarantee (except such material default which arises as a result of the occurrence of an Insured Risk) or the fraudulent, dishonest or criminal acts of the Insured.
2. Other exclusions list matters which may well cause the Counter-Party or Guarantor not to pay their Debt Obligations - a nuclear event, the insured's financial default or a bona fide dispute - but for which the insurer is not liable, presumably because the event causing loss was outside the risk inherent in the day-to-day operation of the trade finance arrangement or was something for which the insured was responsible. Similarly, in clause 2.3, if the insured was the cause of non-payment by reason of its default, then the insurer was not liable for the resulting Loss.
3. For the exclusion in clause 2.3 to apply, the default must be material. What amounts to a "material default" is not defined. Judicial consideration of these words assists and is consistent. "Material" requires that the matter "must be of moment or of significance, not merely trivial or inconsequential": Minister for Immigration, Local Government and Ethnic Affairs v Dela Cruz (1992) 34 FCR 348 at 352. When considering "material breach" in Celtech International Ltd v Dalkia Utility Services plc [2004] EWHC 193 (Ch), Richards J observed at [25]: The meaning of "material breach" must be derived from its contractual context, including the contractual consequences of such a breach. … the focus is on the materiality of the breach, rather than the materiality of the obligation, and, as Colman J put it in National Power plc v United Gas Co Ltd (3 July 1998, unreported), a breach is material if it is: "serious in the wide sense of having a serious effect on the benefit which the innocent party would otherwise derive from performance of the contract in accordance with its terms." Celtech v Dalkia Utility Services was followed in Elders Ltd v EJ Knight Co Pty Ltd [2009] NSWSC 1462 (per White J) at [48]; Androvitsenas v Members First Broker Network [2013] VSCA 212 at [90]-[91]; Cargill Australia Ltd v Viterra Malt Pty Ltd (No 28) [2022] VSC 13 at [3662] (per Elliott J).

Conditions precedent

1. 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].
2. 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.
3. 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.
4. 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.

CONCLUSION

1. 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.
2. 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.
3. 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)."

ORDERS

1. 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.

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