Legal tussles between commodity traders and their insurers are nothing new. But when the validity of a policy is in dispute, where does that leave the broker that arranged cover in the first place? As brokers increasingly find themselves on the receiving end of lawsuits, John Basquill examines two rapidly evolving cases and their wider ramifications for the industry.
Disputes between commodity traders and their insurers have blighted the trade finance industry in the last three years.
Since 2020, a series of defaults and insolvencies, primarily across small and medium-sized traders, has generated a flurry of insurance claims. But in many cases, insurers have refused to pay out, arguing the actual trading activity was outside of the scope of the policy, or in some cases, did not exist at all.
Numerous lawsuits have sprung up, from London and Sydney to Dubai and Singapore.
During the last year, the tale has taken on a fresh twist. Increasingly, the brokers that arranged cover on behalf of the traders are finding themselves dragged into litigation, accused variously of arranging inadequate cover or providing misleading information to relevant parties.
One legal battle, and a useful case study, has emerged out of a dispute between a group of Asia-based commodity traders and their Australia-headquartered insurer, Bond & Credit Company (BCC).
The suit was first filed in 2021 on behalf of three companies – Australia-based Zircon, and Three Alps and Apies Trading in Singapore – all of which share a director, Gernot Kirschner.
One of the trio, Three Alps, had been left out of pocket after its buyer defaulted on payments for cargoes of various soft commodities.
However, BCC refused to honour the claim, which totalled US$7.2mn, arguing that the nature of the underlying trades was not envisaged by the policy it had underwritten.
Initially, the traders only targeted BCC and its parent company, Tokio Marine, but later added Marsh – which had acted as the broker that arranged cover – as an additional respondent.
At that point, the case became more convoluted, as Marsh filed a cross-claim against BCC and BCC submitted a cross-claim of its own against Marsh. The result is a tangled web of arguments and counter-arguments about who should ultimately bear the losses.
The Zircon vs BCC case has its origins in late 2018. Documents from Australia’s Federal Court state that a representative from Marsh Singapore, which provided broking services to Three Alps and Apies, met with counterparts from the trading companies and BCC to arrange a policy providing 90% cover with a maximum liability limit of US$27mn.
By the following July and with that cover in place, Australian financier Marketlend had agreed to provide invoice financing to Three Alps, with Apies and Zircon acting as guarantors.
There are eight back-to-back transactions listed in the lawsuit. Trades would start with Three Alps purchasing soft commodities, including lentils, cocoa beans, rice, seeds and wheat bran, from another trader, Rockshore Trading. Three Alps would then immediately sell the cargoes on to its buyer, Green Trees General Trading.
However, in August 2020 – when a pandemic-induced economic slowdown caused a squeeze on liquidity that resulted in financial difficulties for numerous commodity traders – Green Trees requested more time to pay the invoices that were falling due. The request was rejected, and Green Trees defaulted on all eight.
Marketlend, which as Three Alps’ financier had been assigned interest in the overdue invoices, submitted a claim to BCC in October the same year, arguing that it had taken all reasonable steps to recover the amount due and was now entitled to reimbursement.
But BCC did not pay out, instead arguing the underlying transactions were not covered by the policy it had provided to Three Alps.
In its defence filing, the insurer insists the traders should have taken actual “physical control” of the cargoes being traded, rather than simply passing ownership on by way of documents. It adds that title to the goods cannot be passed by way of copy bills of lading (BLs) – rather than originals – unless specifically provided for in the sales contract.
BCC also argues there is “no evidence” that the trades actually occurred, saying the claimants have not demonstrated how Rockshore obtained or held title to the goods in the first place, nor that Three Alps made payment.
The traders refute that argument, saying there is no reason to expect a commodity trader to take physical control of goods being sold on a back-to-back basis. So-called string trades are a common feature of the market, giving traders the opportunity to generate vital liquidity, and providers of trade credit insurance would be well aware of that fact, they argue.
The traders claim that either the policy is in fact valid for back-to-back commodity trades, or the insurer has knowingly provided cover that was worthless all along.
That is where Marsh, as the broker, has been dragged into the dispute. The traders now argue that Marsh knew, or should have known, the transactions would be string trades and placed cover accordingly – or alternatively, ought to have known the policy was never going to be satisfied.
In its defence filing, Marsh argues the traders did not disclose that they would not obtain original BLs or that they would not take physical possession of the goods. It also alleges they failed to take reasonable care, for instance by seeking sufficient legal advice on whether the policy was appropriate.
Those arguments are rejected by the claimants, who insist effective instructions were given to Marsh, that it was fully aware of the nature of the transactions, and that a “reasonably competent broker” would have recommended external legal advice if necessary.
Marsh’s and BCC’s cross-claims argue that they should be able to recover losses from each other if the court finds in favour of the traders, in effect reducing their overall liability.
As of press time the case continues, with a case management hearing scheduled for late 2023 and mediation arranged for February 2024. Traders, insurers and brokers will be closely watching the outcome.
The case is not an isolated one. In a comparable spat, also in the Australian courts, Marketlend sued BCC in December 2021, seeking reimbursement for losses arising from a supply chain finance programme after the insolvency of Singapore trader Kams. Again, the arguments centred on whether the traders were required to take physical possession of the cargoes.
GTR revealed in April 2023 that Marketlend and BCC had agreed to settle the case outside court, but the proceedings are continuing against the broker that placed cover, which in this case is Chief Trade Credit Insurance.
Marketlend argues Chief Trade failed to ensure the policy provided adequate cover for its needs, whereas Chief Trade argues the lender’s losses were caused by its own failure to take reasonable care in assessing whether cover was adequate.
Brokers dragged into Greensill saga
The net has been cast wider still. On the other side of the world, in London’s Commercial Court, the role of the broker has been thrust into the limelight as part of a far larger claim.
This case follows the infamous 2021 collapse of supply chain finance provider Greensill.
A European arm of financier White Oak had invested significant sums in a receivables purchase scheme offered by Greensill, linked to goods sales by Liberty Commodities – the trading arm of the GFG Alliance, a loose network of companies with ties to steel tycoon Sanjeev Gupta.
In court filings seen by GTR, White Oak says the scheme “collapsed, disastrously”.
In March 2021, it emerged that Greensill had failed to renew insurance cover – also, coincidentally, from BCC – for the receivables it was securitising and selling to investors. Credit Suisse funds that had invested billions in the scheme were frozen, and within weeks, Greensill filed for insolvency with unpaid debts running into the billions of dollars.
In White Oak’s case, no payment was received in relation to 29 Liberty Commodities receivables that had been assigned to the lender, carrying a total value of nearly US$162mn.
White Oak notes in its court filings that after Greensill’s collapse, it emerged that several companies supposedly owing money to Liberty Commodities did not actually owe any funds, did not recognise the receivables in question, or had never done business with the trader at all.
The wider legal fallout of the scandal is expected to run for several years, and both Gupta and Greensill’s founder, Lex Greensill, remain under investigation by the UK’s Serious Fraud Office.
In this lawsuit, White Oak argues that Marsh – which acted as broker in obtaining cover from BCC – did not “exercise reasonable skill and care” in those dealings, and so is liable to cover the losses it has suffered.
The financier notes that as early as May 2020, BCC had carried out an internal investigation into the conduct of an employee suspected of underwriting cover well beyond his personal limits. That month, Tokio Marine – which had taken over BCC the year before – instructed that no new exposures or extensions to cover would be granted to Greensill.
Marsh was aware of that situation from at least July 2020 onwards, the filing says, but did not inform White Oak there was “a real risk that the matters that had been brought to its attention… might affect White Oak’s coverage” under the policy.
The relevant receivables were not purchased by White Oak until several months later.
Marsh disputes the charges. It says in a defence filing that it was acting solely on behalf of Greensill as the insured party, and so had a duty of loyalty and confidentiality to the company. Its role was limited and restricted, able only to communicate what it had been instructed to by its principal.
It was not Marsh’s responsibility to provide advice to White Oak as to the validity of a policy or the availability of cover, the broker adds.
Marsh is also facing an overlapping claim in the Australian courts, brought by Insurance Australia Group – the parent company of BCC until it was taken over by Tokio Marine in 2019.
BCC and Marketlend declined to comment when approached by GTR. Representatives for Marsh, Chief Trade Credit Insurance and White Oak did not respond when contacted.
Regardless of whether brokers are deemed liable for losses or not – and each case will turn on the specific facts – signs are starting to emerge that the disputes could have wider significance across the commodity trading market.
The spate of insolvencies among traders in 2020 had a profound effect on trade finance banks’ risk appetites, with lenders preferring to focus their efforts on financing deals for larger trading houses – or in some cases, exiting the market entirely.
The trend was dubbed a “flight to quality” by larger traders, which have since had little difficulty lining up bumper financing deals.
It is possible this trend is being mirrored in the insurance market, with insurers or brokers being more selective about the profile of firms they support.
“That’s certainly the case here, regarding foreign commodity traders,” says a source based in Southeast Asia, speaking on condition of anonymity.
A second source, also speaking on condition of anonymity due to potential legal sensitivities, says they have also seen a decline in the availability of broking services and insurance cover for smaller traders.
“A lot of insurers are not offering trade credit insurance at all any more, or are certainly not offering it to these kinds of commodity traders; they won’t touch them with a barge pole,” says the source, who is involved in the insurance market and specialises in commodity trade and finance.
“You could say the quality of the underlying insured parties has changed,” they say. “In our case, we would not offer trade credit insurance unless the insured gives a personal guarantee. I don’t know whether a lot of those smaller traders would even deal with brokers any more, because the brokers are walking away from that business.”
Brokers are also keen to maintain a good reputation within the industry.
“Brokers need to go before the underwriters several times a month, and they won’t want to be presenting them with weak deals, or deals that are probably going to be rejected, because they’ll lose their credibility,” a third source says, speaking anonymously as they are involved in a similar dispute.
“It’s in their interest to make sure they are putting credible prospects before an underwriter.”
The source adds that the market’s widely publicised reluctance to provide financing to smaller traders does appear to have extended to trade credit limits too, although notes the situation might turn on the nature of the business models themselves. Again, back-to-back trades are often considered beyond their risk appetite.
“Anecdotally, I’ve heard of underwriters saying they’re not going to cover trader-to-trader transactions,” the source says.
“They don’t like this idea of two traders buying and selling between each other, and would rather have a trader buying directly from a producer or selling to an end user, so there is visibility on the chain.”