Reed Smith In-depth

On 4 March 2022, the English High Court ordered insurers to indemnify a commodity trader for the misappropriation of commodities following the Agroinvest Group “fraud” and bankruptcy.

A. Introduction

Those involved in commodity trading and finance will be familiar with the unique challenges and risks associated with managing commodity inventories and the particular issues relating to insuring them, financing them, creating security interests in them, protecting them against competing claims by third parties and/or ring-fencing them from bankruptcy.

Some of these risks materialised in early 2019 following the collapse of the Agroinvest Group, a substantial agri-commodities business set up in 2008 in Ukraine. The occurrence of the risks led to litigation soon afterwards, including the English High Court claim by Quadra Commodities S.A. (“Quadra”) against its insurers.

The bankruptcy of the Agroinvest Group followed what appears to have been a wholesale fraudulent scheme involving the alleged multiple financing and sales of the self-same commodities in storage in Ukraine and the misappropriation of those commodities. Those involved in the fraud included several Agroinvest Group entities, including companies that sold the commodities and companies that owned and/or controlled the warehouses in which the goods were stored. A number of market participants were affected and several claims against insurers were either settled or are still pending.

In the case of Quadra Commodities S.A. v. XL Insurance & Co [2022] EWHC 431 (Comm), the Court was asked to consider whether the Claimant was entitled to an indemnity under its marine cargo policy in circumstances where the goods it had purchased went missing from the Ukrainian warehouses in which they were supposed to have been stored prior to delivery at ports and then export.

The Defendant insurers raised numerous defences to the Claimant’s claim, likening the facts to the facts in the case of Engelhart CTP (US) LLC v. Lloyd’s Syndicate 1221 [2018] EWHC 9000 (Comm), [2018] Lloyd’s Rep IR 368 where:

  • goods that were intended to be insured were assumed never to have existed; and
  • the loss (based on the factual assumptions made) was held to have been a financial (rather than a “physical” loss) and therefore one which was outside the scope of cover of a fraudulent documents clause that covered physical loss caused by the issuance of fraudulent documents.

In response to the Claimant’s claims, the insurers not only challenged the existence of the goods insured, but also argued that the Claimant did not have a sufficient interest in any goods that did exist on the basis that the Claimant had no proprietary, security or other interest in the goods.

The High Court’s decision may be of interest to those involved in aggregating, financing, storing and trading commodities. The Court’s judgment provided helpful clarity as to what constitutes an insurable interest and a recap of the relevant lines of judicial authority. It also answered issues concerning the Claimant’s title to and its pro-rata share of commingled goods under section 20A the Sale of Goods Act 1979 (the SGA).1

The decision also considered, for the first time, the application of section 13A of the Insurance Act 2015 (a relatively recent piece of legislation) to the Defendants’ conduct, and whether on the facts of the case, the insurers had failed to process and deal with the Claimant’s claim within a reasonable time.