Short and sweet: insurers liable for bank’s cocoa product losses

ABN Amro Bank N.V. -v- Royal & Sun Alliance Insurance plc and others [2021] EWCA Civ 1789

The Court of Appeal has given insurers short shrift in their appeal against the finding of the Commercial Court that they were liable to the claimant bank, ABN Amro for losses it incurred following the collapse of two leading players in the cocoa market.

In a judgment notable for its brevity – a mere 26 pages compared to the 263-page first instance judgment – the Court of Appeal took just 5 paragraphs to set out their reasons for dismissing the appeal, finding that it simply did not ‘get off the ground’. It was, however, a sweet victory for the defendant broker, Edge, who, was successful in its appeal from the first instance decision, with an earlier finding of liability against it, arising from an estoppel by convention, being overturned.

The short first appeal

At first instance, the claimant bank, ABN Amro, succeeded in its claim for indemnity under an insurance policy placed in the marine market, relying on a clause the effect of which was to provide the equivalent of trade credit insurance. Such a clause was unusual in that marine policies typically provide an indemnity for physical loss and damage to the cargo, and not for economic loss. However, the court found the wording of the clause to be clear and to extend to the losses incurred by the bank on the sale of the cargo.

The insurers appealed this finding on the basis that the judge ought to have interpreted the clause as providing only for the measure of indemnity where there was physical loss or damage to the cargo.

The Court of Appeal disagreed, finding firstly that add-ons to standard physical loss and damage cover were common in the market and, where there were clear words, could result in wider cover; and secondly, that the wording of the clause was clear and operated to provide cover for economic loss. The wording of the clause was that of coverage, not of measure of indemnity or basis of valuation contingent on physical loss. Therefore, the bank’s losses incurred when selling the cargo, comprising various cocoa products, following the default by its cocoa market playing-customers on their credit policies, were covered by the policy.

The sweet second appeal

At first instance, the broker had been found liable to two of the defendant insurers, Ark and Advent, as a result of a finding of estoppel by convention. Ark and Advent had contended that they had been induced to write the policy following a representation that the policy being renewed was the same as the prior policy. It was, however, not in fact the same but included the clause in question providing trade credit cover. Neither Ark nor Advent read the policy and so were unaware of the inclusion of the clause. The representation that the policy was “as expiry” was found to give rise to an estoppel by convention meaning that the bank could not rely on the clause as against Ark and Advent, which in turn gave rise to a liability for the broker.

In appealing the finding of estoppel by convention, the broker sought to argue that the terms of a non-avoidance clause in the policy, which provided that the insurers would not seek to avoid the policy or reject a claim on the grounds of non-fraudulent misrepresentation, operated to preclude them from doing so. The Court of Appeal agreed, finding that the “as expiry” representations were non-fraudulent misrepresentations and as such, pursuant to the terms of the non-avoidance clause, the insurers could not rely on them to reject the claim. The judge at first instance was found to have erroneously focused on the ‘non-avoidance’ aspect of the clause, overlooking the fact that it also prohibited the rejection of a claim.

In sum

Given what the Court of Appeal described as the “sound and comprehensive” nature of the first instance analysis on the interpretation of the clause, it is perhaps surprising that the insurers sought to appeal, and certainly no surprise that they were not successful. Equally, the first instance finding of liability on the part of the broker was regarded by many as being out of keeping with the rest of the judgment – not least since Ark and Advent were effectively being relieved of their obligations by virtue of their failure to read the terms of the policy. As such, the finding is a welcome one on both counts, making it clear that, for good or ill, parties will be bound by the terms of the contracts they enter into.

Joanna Grant is a partner at Fenchurch Law