BCC Trade Credit Pty Ltd v Thera Agri Capital No 2 Pty Ltd

1. [1]

   MACFARLAN JA: I am grateful to Basten AJA for describing the facts and circumstances of this appeal. This judgment assumes familiarity with his Honour’s judgment. For the reasons that appear below, I consider that the appeal should be dismissed, with costs.

2. [2]

   The first issue is whether the cover provided by the subject insurance policy is dependent upon the Insured’s trade finance transactions being structured as Murabaha transactions in order to comply with Sharia law. I agree with his Honour, and the primary judge, that it is. That is, the contemplated transactions were not ones under which, first, the Insured was to advance money to the Counter-Party to enable the Counter-Party to purchase goods from Third Parties and, secondly, the Counter-Party was to pay interest to the Insured. Instead, to avoid the charging of interest, the transactions were to be structured as purchases by the Insured (through the agency of the Counter-Party) of goods from Third Parties and then the on-sale of the goods by the Insured to the Counter-Party at a higher price.

3. [3]

   Much of the language of the policy suggests that the former, conventional, type of transaction was contemplated. For example, the definition in the Schedule to the Policy, and in clause 4.21, of Insured Transaction is as follows:

4. [4]

   There are however a number of other provisions of the policy that point in the other direction. These persuade me that, read as a whole, the Policy contemplated that the Insured would enter into the latter, Sharia-type transactions.

5. [5]

   It is necessary then to turn to the insuring clause (“the Insuring Clause”), which is in the following terms, to determine whether the Insured is entitled to the indemnity it seeks:

6. [6]

   I note first that the “Information Package” is later defined as Exhibit A to the Policy. It is in the following terms:

7. [7]

   I also note that the “Insured’s Percentage of Loss(es)” is defined elsewhere to be 90%.

8. [8]

   The remaining presently critical elements of the Insuring Clause required to be satisfied are “Loss(es)” caused by an “Insured Risk” in relation to the “Insured Transaction”.

9. [9]

   “Loss” is defined later as follows:

10. [10]

    This is an important definition because it indicates that the type of loss that is the subject of the indemnity is one arising out of contractual arrangements (of a particular type) to be entered into by the Insured. This definition relates to a contractual guarantee but “Guarantee” as in turn defined relates to the debt, and therefore contractual, obligations of the Counter-Party to the Insured.

11. [11]

    The definition of “Loss” set out above uses the expression “Debt Obligation” which is defined as:

12. [12]

    This supports the view that relevant “Loss” results from the Insured’s inability to enforce contractual obligations owed to it by the Counter-Party/Guarantor.

13. [13]

    Returning to the Insuring Clause, the intended meaning of “Insured Risk” is apparent from the definition of “Insured Risks” (plural) which is as follows:

14. [14]

    As with the definition of “Loss” this definition uses the important expression “Debt Obligation”, the definition of which I have set out in [11] above. Indirectly (that is through the definition of Debt Obligation) the definitions of “Insured Risks” and “Loss” both turn on the expression “Advanced [or Advance] Payment” which is defined as follows:

15. [15]

    The terms of this definition are not entirely consistent with either the conventional or the Sharia law form of transactions (see [2] above). First, under a conventional trade credit financing transaction, whilst the Insured (being the financier) would “advance” funds to the Counter-Party, that would be to enable the Counter-Party (not the Insured, being the financier) to purchase goods from Third Parties. On the other hand, under a Sharia law transaction, the Insured would not “advance” funds to the Counter-Party as the word “advance” ordinarily connotes a loan. Further, the payment would be to the Third Parties for the Insured’s purchase of goods from the Third Parties, not for the delivery of the goods “to the Insured by the Counter-Party”, although the language used is perhaps comprehensible if it is understood that the Counter-Party is to act as the Insured’s agent for purchase of goods from the Third Parties.

16. [16]

    Notwithstanding these anomalies, I consider that the Insuring Clause, when taken with the definitions of “Debt Obligation(s)” and “Advanced Payment”, operates with respect to the contractual loss that the Insured suffered. The use of the word “Advanced” is not in my view significant because, as I have noted, at times the Policy lapses into the language of a conventional trade credit financing arrangement. Secondly, the reference to the future delivery of goods “to the Insured by the Counter-Party” should be understood as a rather garbled reference to the precise transactions contemplated by the documents listed in Exhibit A to the policy. That is, as a reference to the purchase of the goods by the Insured, through the agency of the Counter-Party, and then the sale of the goods by the Insured to the Counter-Party at a higher price.

17. [17]

    The Insured’s loss arose out of the non-fulfillment of contractual obligations of the Counter-Party (and Guarantor) of the type described in the Exhibit A documents, and therefore as contemplated by the Policy. It is not in my view important that the transaction documents were not executed in the sequence contemplated by the Master Murabaha Agreement or that there were anomalies in terms of the times at which events occurred. What is important is that the Insured’s and the Counter-Party’s contractual documents were genuine (that is, not shams) and that they provided that as between those parties their contractual regime accorded with the basic elements of the Master Murabaha Agreement. In particular, their contracts provided that as between them the goods were to be treated as having been, or to be, sold by the Third Parties involved to the Insured, through the Counter-Party’s agency for the Insured, and then sold by the Insured to the Counter-Party.

18. [18]

    To refer more specifically to the documents in fact executed, I note that the Insured and Counter-Party executed a Master Murabaha Agreement and, in relation to the first drawdown, two Murabaha requests, and the following documents described by the primary judge at [91]:

19. [19]

    The primary judge then summarised what had occurred in relation to the first drawdown at [93]:

20. [20]

    There were no presently significant differences in what occurred in relation to subsequent drawdown requests.

21. [21]

    In these circumstances, the Insured was entitled to sue the Counter-Party for debts representing the prices payable by the Counter-Party for its purchase of the relevant goods from the Insured because these are the liabilities for which their contracts provided. The Insured’s inability to recover those debts from the Counter-Party, or the Guarantor, constituted loss for which it was entitled to be indemnified by the Insurer. In an action in debt (that is, in contract) by the Insured against the Counter-Party and Guarantor, the latter would not have been able to assert in their defences that there were no such purchases by the Counter-Party from the Insured and that the Counter-Party’s arrangements with the Insured were different to those the subject of the action, being in the nature of loans or some other type of transactions. The Counter-Party and Guarantor would be bound by the contractual treatment of the transactions. The Counter-Party agreed with the Insured that it contracted with the Third Parties to acquire the goods and agreed with the Insured that when it did so, it acted as agent for the Insured. Likewise the Insured and Counter-Party agreed that the Insured sold the goods to the Counter-Party.

22. [22]

    To put it briefly, the loss that the Insured suffered by reason of its inability to enforce the Counter-Party’s contractual obligation to pay the purchase price (and the Guarantor’s consequent contractual obligations to indemnify the Insured) was a loss against which the Insured was covered by the Policy.

23. [23]

    It is not in my view significant that, without the knowledge of the Insured, the Counter-Party created, or was a party to the creation of, false or sham documents purporting to record the Counter-Party’s acquisition of goods from Third Parties (see primary judgment at [127], [157] and [194]). In particular this did not affect the validity or enforceability by the Insured of its contracts with the Counter-Party. Those contracts (as distinct from the commodity contracts between the Counter-Party and the Third Parties) were not suggested to be shams, that is, arrangements which although taking the form of legally effective transactions were not intended by the parties to have “the apparent, or any, legal consequences” (Equuscorp Pty Ltd v Glengallan Investments (2004) CLR 471; [2004] HCA 55 at [46]).

24. [24]

    By reason of the objective theory of contract, a fraudulent intention of only one party to the contract, uncommunicated to the other, does not suffice to render the contract a sham (Dyson Heydon, Heydon on Contract, 2019, Thomson Reuters at [2.80], [9.280]).

25. [25]

    Applied in an insurance context such as the present, these principles produce the unsurprising result that the Insured is entitled to claim indemnity for its contractual loss suffered under its genuine contracts entered into with another party (here the Counter-Party), notwithstanding that that other party may, unbeknownst to the Insured, have acted fraudulently.

26. [26]

    As the primary judge pointed out (at [194]), this result is consistent with the exclusion in the Policy of indemnity for loss arising out of “the fraudulent, dishonest or criminal acts of the Insured” (clause 2.3; emphasis added). Loss arising from such acts of a person with whom the Insured has contracted is however the very type of loss one would expect to be covered.

27. [27]

    WHITE JA: The issue on this appeal is whether the primary judge was correct in finding that a policy of insurance described as a “Trade Credit Insurance Policy” issued by ED Broking (Asia) Pte Ltd of Singapore on behalf of the appellant, BCC Trade Credit Pty Ltd, responded to the claim of Thera Agri Capital No 2 Pty Ltd (“Thera”) to recover $7,200,000, being 90% of moneys Thera had advanced to Phoenix Agrifoods Pty Ltd (“Phoenix Agrifoods”) (the Counter-Party) for the purchase of commodities from third party vendors.

28. [28]

    I will refer to the detail of the relevant terms and definitions later in these reasons. For present purposes, it is enough to quote the insuring clause which provided:

29. [29]

    The “Information Package” meant the written information and documents declared in Exhibit A. Exhibit A provides as follows:

30. [30]

    The Financing Documentation referred to in cl 2 of Exhibit A was designed to provide for the financing of the ultimate acquisition of commodities by Phoenix Agrifoods or Phoenix Global DMCC (“Phoenix Global”) through Thera’s financing. The arrangement provided for a reward to Thera that did not involve the payment of interest but was compliant with Sharia law. It is unnecessary to distinguish between Phoenix Agrifoods and Phoenix Global, both or either of whom will be referred to as “Phoenix”. The steps provided in the Master Murabaha Agreement and the Purchase Agency Agreement providing for the ultimate acquisition of the commodities by Phoenix were as follows:

    1. (1)

       Phoenix was to give Thera a “duly completed Murabaha Request”. Clause 4.1 of the Master Murabaha Agreement (“MMA”) provided that either of the Phoenix companies could utilise the Murabaha facility by delivering to Thera a duly completed Murabaha Request at least 5 days before the proposed “Value Date”, being the date on which a Murabaha Contract was to be made between Thera and a Phoenix company. A Murabaha Contract meant “a contract for sale between a Company (viz a Phoenix company) and the Financier (Thera) constituted by an Offer Letter and its Acceptance Notice”.

    2. (2)

       Thera was then to give Phoenix a Purchase Instruction. The Purchase Agency Agreement (“PAA”) provided that Thera appointed each Phoenix company as its Purchase Agent to purchase approved commodities on Thera’s behalf. The form of Purchase Instruction provided for Thera to instruct the relevant Phoenix company to purchase on its behalf the approved commodities from a third party seller.

    3. (3)

       Thera was to provide the Phoenix company with funds to purchase the commodities by 11.00am on the Value Date. (Clause 2.2 of the PAA).

    4. (4)

       Phoenix would then buy the commodities as Thera’s agent. Thera, having paid the purchase price, would acquire title to the commodities. Clause 5.1 of the MMA provided, in substance, that Thera, acting through its Purchase Agent, would purchase “Commodities” from the “Commodities Seller” and obtain from it all applicable title documents clearly identifying the commodities purchased on its behalf. Clause 2.2 of the PAA provided that Thera would transfer the funds to the relevant Purchase Agent as may be necessary for it to complete the agreed purchase on Thera’s behalf and to enable the Purchase Agent to effect payment of the purchase price due to the Commodities Seller.

    5. (5)

       Phoenix was to give Thera a “Purchase Confirmation” confirming that it had bought the commodities pursuant to its Purchase Instruction (PAA cl 2.3).

    6. (6)

       Thera was to give Phoenix an “Offer Letter” to sell the commodities to Phoenix. Clause 5.2 of the MMA provided that:

    7. (7)

       Clause 5.3(a)-(b) provided that the relevant Phoenix company was required to deliver to Thera an “Acceptance Notice” and acknowledge that Thera would be purchasing commodities pursuant to a Murabaha Request in reliance upon the Company’s promise to purchase the commodities from Thera after Thera had purchased the same from the relevant Commodities Seller. Clause 5.4 provided that, on delivery of the Acceptance Notice, Thera would sell the commodities to the relevant Phoenix company, which would purchase them from Thera and a Murabaha Contract would then be made between Thera and such company upon the terms of the Offer Letter and incorporate all of the terms and conditions set out in the MMA. Clause 5.5 provided that title to the commodities would then pass to the relevant Phoenix company which would obtain ownership of the commodities.

31. [31]

    At that point, the relevant Phoenix company was required to pay 10% of the cost price for the Murabaha Contract (cl 6.1 of the MMA). It was required to pay the remaining 90% on the “Deferred Payment Date” being a date to be specified in the Offer Letter as the last day of the Murabaha Contract Term.

32. [32]

    The Information Package referred to in the insuring clause also included the Completed Proposal Form. That proposal form was completed by Thera on a proposal form that bears the logo for ED Broking (Asia) Pte Ltd, the insurer’s agent. The form provided:

33. [33]

    The proposal included the following under the heading “The Insured Transaction”:

34. [34]

    The proposal differed from the financing documents in that it provided that Thera would pay what was called the “loan proceeds” to the Phoenix company, only after it had received a duly executed set of Murabaha Contracts from the Phoenix company. Under the financing documents, that would occur at step 7 but Thera would pay funds to Phoenix to acquire title to the commodities on its behalf at step 3. The proposal contemplated that the Financing Documentation at steps 4, 5, 6 and 7 outlined above would precede the payment of funds by Thera to Phoenix for the purchase of commodities whereas the financing documentation provided that Thera would pay those funds before those steps were taken.

35. [35]

    Unlike the financing documentation referred to in cl 2 of Exhibit A, the proposal referred to in cl 1 of Exhibit A was itself part of the policy.

36. [36]

    The policy has to be construed with this in mind. It seriously weakens the appellant’s submission that the policy should be construed in the same way as the insurance policy was construed in Prepaid Services Pty Ltd & Ors v Atradius Credit Insurance NV [2013] NSWCA 252 so as only to provide insurance where “credit” was provided in accordance with the financing documentation.

37. [37]

    Basten AJA, whose reasons I have had the advantage of reading in draft, has described (at [83]-[90]) how the transactions were actually implemented. The departure from the MMA and the PAA is undisputed. Whether that departure means that Thera’s loss is not covered by the policy depends upon the construction of the policy, including the proposal.

38. [38]

    There is no dispute that Offer Letters and Acceptance Notices were exchanged such that the Phoenix companies were obliged to pay the purchase prices under those contracts to Thera (in substance to repay the advances made by Thera). Nor is there a dispute that Phoenix Commodities Pvt Ltd (“Phoenix Commodities”) was liable for those payments under its guarantee.

39. [39]

    The insuring clause is quoted above at [28] in my reasons. To understand the clause, it is necessary to have regard to the defined terms which are stated in bold (so far as relevant). Some of those defined terms themselves refer to other defined terms, so that reading all of the defined terms into the insuring clause is a difficult exercise, although not without utility.

40. [40]

    The Schedule referred to in the insuring clause relevantly identified the Insured as Thera; the Counter-party as Phoenix Agrifoods and Phoenix Global; the Insured Transaction as “The lnsured's interest in a AUD 8,000,000 trade finance agreement, where the Insured disburses funds to the Counter-party with a maximum repayment tenor of 120 days, based on invoices from third-party vendors”; the Insured Percentage as being 90%; the Guarantee as being a guarantee provided by Phoenix Commodities in favour of the Insured to guarantee “the obligations owed to the Insured under the Insured Transaction”; and the Insured Goods as being “Financing the purchase of grains and pulses”.

41. [41]

    “Insured Risk” was defined as follows:

42. [42]

    It should be observed that in cl 1.1 the “obligations for repayments of Advance Payment” are not exhaustive of the Insured Risk, which includes the failure or refusal of the Guarantor to honour its Debt Obligations.

43. [43]

    Clause 4.21 defines “Insured Transaction” in the same terms as that expression is defined in the Schedule.

44. [44]

    The insuring clause, with its reference to “Insured Risk”, directs attention to the obligations of the Guarantor under the Guarantee. Under the Guarantee, each of Phoenix Agrifoods and Phoenix Global was named as a Counter-party. Recital 3 provided that the Guarantor agreed to guarantee the performance and payment by the Counter-party of all obligations and payments which may be owed to Thera by the Counter-party, and to indemnify Thera against any losses whatsoever.

45. [45]

    The Guarantee then provided that the Guarantor:

46. [46]

    There is no dispute that Phoenix Commodities was liable under its guarantee to Thera for the funds provided by Thera to the Phoenix Companies.

47. [47]

    The issue then is whether that failure is a failure either by the Guarantor or by the Counter-Party to honour its “Debt Obligations”.

48. [48]

    Debt Obligations is defined in cl 4.8 of the policy as follows:

49. [49]

    What is the “unearned portion of the Advanced Payment”? “Advanced Payment” is defined in cl 4.1 as follows:

50. [50]

    It is here that the policy unravels. In part, this is because of the definition of “Insured Goods”. Insured Goods are defined in cl 4.18 as follows:

51. [51]

    The item so specified is the “Financing the purchase of grains and pulses”.

52. [52]

    Neither under the Financing Documentation, nor under the proposal, was there to be a delivery of goods by a Counter-Party to Thera. In any event, the Insured Goods were not “goods”, but a financing. Even if the last part of the definition of “Advanced Payment” is to be wholly rejected on that account, there remains an inconsistency between cl 4.1 and the proposal. Clause 4.1 assumes that a payment will be advanced by Thera to the Counter-Party in accordance with “[Thera]’s interest… in a trade finance agreement where [Thera] disburses funds to [a Phoenix company]” (definitions of “Advanced Payment” and “Insured Transaction”). But the proposal, which is also part of the policy, provides that that payment will not be advanced except after the provision of the Offer Letter and Acceptance Notice between the Phoenix company and Thera and the receipt by Thera of a duly executed set of Murabaha Contracts.

53. [53]

    Essentially, the issue of construction is whether the fact that the definition of “Advanced Payment” in cl 4.1 refers to a payment advanced in accordance with the terms and conditions of the Insured Transaction, which is not a reference to the financing documents, but to Thera’s interest in the Trade Finance Agreement, means that the “Debt Obligations” of the Counter-Party and the Guarantor as defined in cl 4.8 are not engaged, so that the Guarantor could not be said to have failed to honour its “Debt Obligation” that falls within the definition of Insured Risk, so that the insuring clause is not engaged.

54. [54]

    The definition of “Advanced Payment” did not provide that it is a payment to be advanced to the Counter-Party by the Insured under the financing documents. But even if it should be so construed, there is a conflict between the proposal and the financing documents. The financing documents do not form part of the policy, whereas the proposal does.

55. [55]

    I do not accept that, in these circumstances, the definition of “Advanced Payment” can govern the construction of the policy by informing the definition of “Debt Obligations” and hence the definition of “Insured Risks”.

56. [56]

    Setting aside the definition of “Advanced Payment”, the policy is engaged because the Guarantor failed to honour its obligation to repay the payment advanced to the Counter-Party by Thera in accordance with the Trade Finance Agreement as it was implemented in accordance with the proposal.

57. [57]

    For these reasons I would dismiss the appeal with costs.

58. [58]

    BASTEN AJA: The respondent, Thera Agri Capital No 2 Pty Ltd (Thera), acted as financier for two companies, part of the Phoenix Group, which operated out of Dubai and was engaged in the international trade in agricultural commodities. Thera agreed to provide $A8 million in trade finance for the purchase and supply of Australian pulses and grains, primarily to customers in the Middle East and South Asia.

59. [59]

    The financing facility and related documentation were executed on 13 February 2020. The parties were Thera as financier, and Phoenix Global DMCC and its Australian subsidiary, Phoenix Agrifoods Pty Ltd, as traders involved in shipping grains and pulses from Australia for sale in the Indian subcontinent and South-East Asia. The facility was guaranteed by the British Virgin Islands parent company, Phoenix Commodities Pvt Ltd. The Finance Documents were in a form intended to be compliant with Sharia law. In substance that meant that in place of a loan agreement, with a loan carrying interest, the financier became the purchaser of the commodities which it immediately sold to the trader, retaining for itself a profit margin.

60. [60]

    On 11 February 2020, Thera entered into a trade credit insurance policy (the Policy) with the appellant, BCC Trade Credit Pty Ltd t/as The Bond & Credit Co, by which Thera obtained an indemnity against a risk that the Phoenix Group would default in making repayments.

61. [61]

    Both before and after entering into these agreements, and in particular the Policy, the Phoenix companies had arranged the shipment of commodities from Australia. As a result of these transactions, which will be more precisely described below, payments totalling $8 million in trade finance were provided by Thera to the Phoenix companies.

62. [62]

    Although the Phoenix Group had a global operation, with offices in a number of countries, it appears that, unknown to the parties to these proceedings, the Phoenix Group had been hedging its trading risks by transactions which, by late February or early March 2020, had resulted in a financial disaster. On 20 April 2020, the principal company (the guarantor, Phoenix Commodities) was placed in liquidation. Neither the trading companies nor the guarantor was able to make any repayments to Thera. Thera sought to invoke the indemnity under the Policy issued by the appellant. However, the appellant denied that, in the circumstances in which Thera had made payments to Phoenix, the policy was engaged. It rejected Thera’s claim.

63. [63]

    In October 2020, Thera commenced proceedings in the Equity Division against the insurer, claiming the amount of the losses indemnified, being 90% of the $8 million provided by way of finance, namely $7.2 million, plus interest. The trial took place in March 2022 and, on 31 May 2022, the trial judge (Rees J) gave judgment for Thera in an amount of $7,224,043.04. [1] The insurer appealed.

The Policy and contractual documents

1. [64]

   The Policy issued on 11 February 2020 comprised some 17 pages apparently prepared by a broking office in Singapore. The proper law governing the policy was that of New South Wales. The first two pages comprised a schedule containing a number of defined terms to which it will be necessary to return. The insuring clause read as follows:

2. [65]

   As appears from the second paragraph of the insuring clause, the transactional documents had not been executed at the time the Policy issued, but were to be executed in materially identical terms shortly thereafter. They were in fact executed without change two days later on 13 February 2020. [2] They were provided to the appellant four days later. The term “information package” in the insuring clause was defined to mean “[t]he written information and documents which are declared in Exhibit A”: cl 4.14. Exhibit A had two parts, one was described as “Underwriting Information” and contained a completed proposal form. The second was headed “Financing Documentation” and referred to the following five documents:

3. [66]

   The parties to the Master Murabaha Agreement (Master Agreement) were Thera, Phoenix Agrifoods and Phoenix Global DMCC. Phoenix Agrifoods was an Australian subsidiary of Phoenix Global which was registered in the United Arab Emirates. Thera was referred to in the Master Agreement as “the Financier” and the two Phoenix companies as “a Company” or “the Companies”.

4. [67]

   The recital to the Master Agreement stated:

5. [68]

   The Finance Documents included the Master Agreement, the Purchase Agency Agreement and “the documents evidencing each Murabaha Contract”.

6. [69]

   As has been noted, the underlying structure provided by the Master Agreement was that, with respect to each transaction entered into by Phoenix, a specific volume of a particular commodity (such as faba beans or chickpeas) would be purchased by Thera through its appointed agent, Phoenix; Thera would immediately on-sell the goods to Phoenix for delivery to a shipper and ultimately for supply to an overseas customer. Thera appointed Phoenix as its purchasing agent pursuant to the Purchase Agency Agreement. The price at which Thera purchased the commodity was known as the “Cost Price”. The “Commodity Seller” meant “any third-party supplier approved by [Thera] and that is not an affiliate of [Phoenix]”.

7. [70]

   The Master Agreement provided for a “Profit Amount” which was calculated as 8% per annum applied for the number of days which elapsed between the making of the particular contract and the last day of the contract term. (That was expected to be 120 days in accordance with the terms of the Master Agreement.) The “Deferred Sale Price” was the sale price less 10% of the cost price, described as the “Value Date Sale Price Amount”.

8. [71]

   The term “Value Date” was defined in the Master Agreement to mean “the date on which a Murabaha Contract is made between the Financier and a Company in accordance with clause 5.4 and as specified in each Murabaha Request and Offer Letter corresponding to that Murabaha Contract”. Clauses 5.4 and 5.5 should be read together:

9. [72]

   The appellant emphasised the importance of the steps which were necessary to engage the operation of the Master Agreement so as to produce a “Murabaha Contract”, which was defined to mean “a contract for sale between [Phoenix] and [Thera] constituted by an Offer Letter and its Acceptance Notice pursuant to clause 4”. Clause 4 provided for the delivery of a Murabaha request in the following terms:

10. [73]

    Clause 4.3 provided in part:

11. [74]

    Clause 5 provided for the purchase and sale of commodities: its operation was critical to the scheme. It relevantly provided as follows:

12. [75]

    Clause 6 dealt with the payment of the deferred sale price and read as follows:

13. [76]

    The Purchase Agency Agreement entered into by the two Phoenix companies and Thera provided for the appointment by Thera of the Phoenix companies as purchase agents to purchase commodities on behalf of Thera as an undisclosed principal. The central operative provision of the Master Agreement was cl 2, which relevantly provided:

14. [77]

    Having set out the key elements of the structure of the contractual documentation, it is convenient to return to the Policy. As the insuring clause set out above provided, the indemnity ran with respect to an “Insured Risk” in relation to the “Insured Transaction”. The term “Insured Transaction” was defined in the schedule to the Policy as follows:

15. [78]

    Returning to the definition of Insured Risk, the critical factor was the failure of the guarantor (Phoenix Commodities) to honour its “Debt Obligation(s)”. The term “Debt Obligation(s)” was defined in cl 4.8 of the Policy as follows:

16. [79]

    The term “Advanced Payment” was defined in cl 4.1 of the Policy:

17. [80]

    In short, the advanced payment was the amount paid by Thera to Phoenix on entering into a contract to purchase a commodity. However, the term “Insured Goods” is problematic in this context. It is defined as item 17 in the schedule as “[f]inancing the purchase of grains and pulses”. On one view, the insured goods might be thought to be the grains and pulses (commodities) which were to be the subject of future delivery. On the other hand, the insurance was not with respect to financing secured against the value of the commodity, or the safe delivery of the commodity. As the term appears in a credit finance agreement, an alternative reading is that future delivery of the insured goods is the repayment by Phoenix to Thera under a Murabaha Contract.

18. [81]

    Leaving that difficulty to one side, it is necessary to identify, for the purpose of the definition of “Debt Obligation(s)”, what amount is constituted as “the unearned portion” of the Advanced Payment. The trial judge accepted that this phrase (which was not defined) referred to “the funds advanced by the insured under the Master Murabaha Agreement and related documents, which the Counter-Party was not entitled to retain”. [4] Neither party took issue with this proposition. However, the appellant submitted that such an amount could only be ascertained by reference to the operation of the Master Agreement and the identification of the “Value Date Sale Price Amount” and the “Deferred Sale Price” which the relevant Phoenix company was “absolutely and irrevocably obliged to pay”, pursuant to cl 6.1.

19. [82]

    Before turning to what actually happened, it is convenient to note the significance of these contractual arrangements on the appellant’s case, namely, that the credit risk to which the Policy responded was dependent upon compliance with the structured nature of the transactions envisaged under the Master Agreement.

History of transactions

1. [83]

   There is no dispute that what in fact happened departed in significant respects from the structured arrangements required under the Master Agreement.

2. [84]

   The first drawdown involved two requests, each in the form provided by schedule 2 to the Master Agreement and dated 20 February 2020 with a time noted as 15:30 hours. The requests related to (i) a volume of Australian chickpeas with a value of $US726,782.10, the seller being identified as Avon International Pte Ltd, and (ii) a volume of Australian faba beans with a value of $US425,224.98 from the same seller. Each request was made by Phoenix Global DMCC and addressed to Thera.

3. [85]

   Although the requests purported to be in the scheduled form, there were a number of irreconcilable discrepancies. First, the “Value Date” was identified as 17 February 2020, that is three days before the date of the request. As has been noted, the term “Value Date” was defined as the date on which a Murabaha Contract was executed within the terms of the Master Agreement: the scheme did not envisage a contract predating the request. In the terms of the standard form, Phoenix confirmed that certain representations were “true and correct on the date of this Murabaha Request and will be correct on the proposed Value Date” (emphasis added).

4. [86]

   The request identified the “Murabaha Contract Term” as “CAD” which was an acronym for “cash against documents”. [5] That was not in accordance with the Master Agreement.

5. [87]

   In fact, there was a contract by which Phoenix had already purchased the commodities from Avon dated 10 January 2020. On 17 February 2020, Avon provided a “commercial invoice” to Phoenix dealing with chickpeas and faba beans and a total payment of $US1,152,007.08. The “payment term” was identified as “cash against documents”.

6. [88]

   In accordance with the Master Agreement, Phoenix should have been acting as agent for Thera in purchasing the commodity for Thera. However, the Purchase Agency Agreement was not executed until 13 February 2020. There did not purport to be a “purchase instruction” issued by Thera to Phoenix in accordance with cl 5.1 of the Master Agreement and cl 2 of the Purchase Agency Agreement.

7. [89]

   Also accompanying the request dated 20 February 2020 were bills of lading issued by Cosco Shipping Lines Co. The earlier bills stated the “Date Laden on Board” as 15 January 2020; further bills of lading were dated 27 January 2020.

8. [90]

   Following the “Murabaha Request” on 23 February 2020, Thera provided Phoenix with a “Purchase Instruction”, a “Purchase Confirmation” from Phoenix and an offer letter and acceptance already executed by Thera. All related to the purchase of chickpeas and faba beans as identified in the Murabaha Request. The purchase instructions for each commodity were dated 22 February 2020 and were signed on behalf of Thera. Each confirmed that “by no later than 11.00am on the proposed Value Date specified above, the Cost Price as set out above” would be transferred to a Phoenix account. The value date was identified as 24 February 2020. Each “purchase confirmation” (dated 23 February 2019 but intended to be 23 February 2020), stated that Phoenix had “purchased the Approved Commodities from the applicable Commodity Seller on your behalf in accordance with the terms of the above Purchase Instruction”. The offer letter was dated 24 February 2020 at 10:28. The letter from Thera to Phoenix confirmed that “we” (Thera) had purchased the commodities for a specified amount from the commodity seller. The letter then offered to sell the commodities to Phoenix, noting the cost price (being the price paid to the commodity seller) in the case of faba beans, $639,436.06, the “Profit Amount” of $15,346.47, the “Value Date Sale Price” amount as 10% of the cost price and the “Deferred Sale Price” which was 90% of the cost price. The deferred payment date was given as 23 June 2020, being 120 days after 24 February 2020. The deferred sale price was an amount equal to 90% of the cost price plus the profit amount. The acceptance notice was executed by Phoenix and dated 24 February 2020 at 11:03.

Findings at trial

1. [91]

   It is not necessary to address the circumstances of the arrangements between Thera and Phoenix further. The judge made detailed factual findings in relation to the requirements of the Master Agreement and the process in fact followed. These appear from the following passages.

2. [92]

   First, the judge noted the features of the Murabaha request:

3. [93]

   Then, having set out the terms of the documentation in fact drawn up in response to the first drawdown request, the judge stated: [6]

4. [94]

   The judge concluded her reasoning in relation to the first drawdown notice by reference to the payments and the non-compliance with the Master Agreement:

5. [95]

   Before turning to the significance of these findings, the judge dealt with the other drawdown requests, summarising the effect of the second and third requests in the following terms:

6. [96]

   Similar findings were noted more briefly with respect to the fourth drawdown request.

7. [97]

   The judge then noted some further evidence which had come to light in the course of the proceedings. In short, it appeared that the contractual documents involving Avon (and another supplier, ACME) were false documents created by Phoenix. None of the funds received by Phoenix from Thera were paid to suppliers: all the funds were disbursed by Phoenix Agrifoods either to Phoenix Global DMCC or, in one case, to Phoenix Commodities. The judge concluded on the basis of the evidence:

8. [98]

   Finally, relevantly for present purposes, the judge identified the positions of the parties in the following terms, which largely reflected the way the issues were addressed in this Court:

9. [99]

   The trial judge set out the short history of the collapse of the Phoenix Group, noting that Phoenix Commodities had been placed in liquidation on 20 April 2020, following which Thera made formal demands for payment by Phoenix Agrifoods and Phoenix Global DMCC. [7] The judge reached her conclusion with respect to the liability of the insurer in the following passage:

Issues on Appeal

1. [100]

   The case for the appellant was succinctly identified in the ground of appeal formulated as follows:

2. [101]

   The respondent’s case was succinctly put in the opening of its written submissions in the following terms:

3. [102]

   The dispute between the parties thus arose at two levels. At a high level, the appellant submitted that its liability under the Policy was not a generic liability for debt obligations incurred by the Phoenix Group in favour of Thera as a result of finance advanced by Thera to Phoenix for the purchase of grains and pulses. Rather, the Policy was formulated in terms of a set of structured transactions and a risk that in the counterparty (Phoenix) might fail to honour the debt obligations thus created to Thera. By contrast, Thera contended that the Policy was a form of trade credit insurance which responded in circumstances where Thera advanced moneys under enforceable contracts with Phoenix.

4. [103]

   At a more particular level, there was a difference of view as to how the specific terms of the Policy were to be understood. Thera, whilst pressing for a particular construction of key provisions in the Policy, also relied upon the lack of clarity within the Policy as support for its submission that the Policy did not require strict compliance with a precise structure of the transactions.

Determination of issues

1. [104]

   The appellant submitted that the correct approach to the construction of the Policy was that identified in Prepaid Services Pty Ltd v Atradius Credit Insurance NV. [8] That case involved an attempt by the respondent insurer to avoid liability under a policy of trade credit insurance issued to the appellants who were members of the Optus Group of companies. The appellants provided carriage services using their telecommunication networks, including by selling access through the distribution of “e-vouchers” through distribution agents, including one identified as BXP. BXP in turn operated a retail distribution network with point-of-sale terminals in the premises of small retailers and service stations. BXP went into liquidation owing money to Optus. Optus had a policy of trade credit insurance with Atradius, upon which it made a claim with respect to losses suffered as a result of the failure of BXP. One issue in the case was whether the policy responded to such a claim. That turned on whether the debt arose under the specific terms of the agreement identified in the policy. The factual background was summarised by Meagher JA in the following terms:

2. [105]

   Meagher JA then noted the reasoning of the primary judge, McDougall J, which he accepted as correct:

3. [106]

   Much of the remaining discussion turned upon the possible operation of s 54 of the Insurance Contracts Act 1984 (Cth). Optus Mobile had contended that, due to the operation of s 54, the insurer could not refuse to pay the claim by reason of Optus engaging “either in contracting with BXP with a supply of e-vouchers on credit terms which were not within the description in Item 6 or in supplying on the terms of such a contract”. [11] Section 54 was not relied upon in the present case, but it is consistent with the legal approach which requires the act causing loss to be identified with precision.

4. [107]

   The other authority to which the Court was referred, and which was relied upon by the trial judge, was MGICA Ltd v United City Merchants (Australia) Ltd. [12] That case involved insurance of a facility used for domestic trade finance whereby the respondent had advanced moneys to a third party for the purchase of, or payment for, specific goods, upon which the third party defaulted. The question was whether the loss suffered by the respondent arose from the provision of finance provided for specific goods or provided on terms which permitted the customer to use the finance (known as “accommodation finance”) as it saw fit. The policy explicitly excluded losses flowing from the provision of accommodation finance. The relevance of the case was primarily limited to the construction of specific terms of the policy. McHugh JA identified the issue in the following terms: [13]

5. [108]

   In short, the money was used by the insured, not at its discretion as accommodation finance, but for payment to customers for the purchase of goods. Whether the customers actually obtained goods or misappropriated the funds was not material.

6. [109]

   MGICA turned on a different kind of financing transaction, pursuant to a differently worded policy, and with different surrounding practices. It is true, as Thera submitted, that money had been paid away to an intended recipient, and not repaid. However, that would not have been sufficient to satisfy the terms of the policy. Indeed, there is some irony in the fact that the payments were to be made as “cash against documents”, whilst in the present case, the payments were indeed made as cash against documents, but inconsistently with the terms of the contractual scheme identified in the Policy.

7. [110]

   The approach adopted to the construction of the policy in Prepaid Services should be applied. In that case, both McDougall J at first instance and this Court held that the trading terms, which were for payment to be made within “30 days from statement” could not accommodate credit supplied on terms which required payment in 21 or 28 days “from invoice”. It may be doubted that any different approach was revealed in MGICA.

8. [111]

   As noted in the trial judgment at [93] (set out at [94] above), having found that Thera and Phoenix executed documents purporting to comply with the scheme under the Master Agreement, but not in fact complying, stated that she would “return to whether this matters under the Policy in due course”. In the passage at [211]-[212] (set out at [99] above), the judge concluded that these variations from the intended structure under the Master Agreement did not take the transactions outside the scope of the Policy. The judge concluded that “Debt Obligation(s)” arose, which fell within the definition of “Insured Risk” and included an obligation for repayment of “Advanced Payments”. The appellant took issue with this reasoning.

9. [112]

   The judge stated principles for construing a commercial contract in the following passages to which neither party took exception (with the original citations in footnotes):

10. [113]

    Importantly, the Court was required to construe the Policy as a whole, so that where the meaning of one part was revealed by other parts, each clause should be given a meaning to render each harmonious with the others. Further, to the extent it was permissible to take into account the surrounding circumstances known to the parties, those circumstances must have existed at the date on which the Policy was executed. At that time the appellant had no knowledge that the transactions entered into by Thera and Phoenix some two weeks later would not conform to the draft documents attached to the Policy, which were required to be executed without alteration.

11. [114]

    As noted above, the insuring clause of the Policy granted an indemnity to Thera subject to “the terms and conditions of the Policy … and in reliance upon the completed Schedule and the Information Package”. The information package, identified in exhibit A to the Policy, included the completed proposal form, the Master Agreement and the Purchase Agency Agreement. There are many infelicities with the drafting of the Policy. However, it must be given meaning having regard to the document as a whole, including the attachments and materials forming part of the Policy.

12. [115]

    The term “Insured Risk” in the insuring clause may be understood as referring to cl 1.1 of the Policy which bears the heading “Insured Risks”. (In accordance with cl 8.3, the heading is for convenience of reference only and does not constitute part of the Policy.) The insured risk was the refusal or failure of the guarantor (Phoenix Commodities) to honour its “Debt Obligation(s)” in accordance with the terms and conditions of the guarantee. The “Guarantee and Indemnity” provided by Phoenix Commodities to Thera guaranteed the obligations of the counterparties (Phoenix Agrifoods and Phoenix Global) to Thera. It referred to the fact that Thera and the counterparties had executed formal documents as part of the “Arrangements” by which Thera would provide “commodity financing and/or financial advances … under or in connection with the Transaction Documents” to Phoenix Agrifoods and Phoenix Global. [21] The term “Transaction Documents” was defined in cl 30 of the guarantee to mean “the Master Murabaha Agreement between each Counter-Party and Thera Agri Capital dated on or about the date of this Guarantee and each Finance Document (as defined in that agreement) …”. The guarantee contained an undertaking by the guarantor that “if any Event of Default occurs it will pay Thera the amount of the Guaranteed Moneys”. The term “Event of Default” was defined to have the same meaning as in the Master Agreement: cl 30(b). “Event of Default” in the Master Agreement was defined to mean any of the events or circumstances specified in cl 15. Those events included the appointment of a liquidator in respect of any member of the Phoenix Group. It is therefore indisputable that the Policy responded to default by the guarantor as described in the Master Agreement.

13. [116]

    Clause 1.1 of the Policy referred to the guarantor failing to honour its “Debt Obligations” including obligations for repayments of the “Advanced Payments”. (The term “Advanced Payments” may be assumed to refer to the defined term “Advanced Payment” in cl 4.1.) The Debt Obligations were the obligations “to repay the unearned portion of the Advanced Payment in accordance with the terms and conditions of the Insured Transaction and/or the Guarantee.” The “Advanced Payment” was defined to mean the payment advanced to Phoenix by Thera “in accordance with” the terms and conditions of the Insured Transaction. The definition of “Insured Transaction” in Item 9 in the schedule to the Policy is awkward. As noted above, it referred to Thera’s interest in the $8 million trade finance agreement whereby Thera was to disburse funds to Phoenix with a maximum repayment tenor of 120 days. Taken literally, Thera’s interest was an interest in the transaction, namely the repayment of the money in accordance with the terms of the Master Agreement. A commercial understanding of the interrelating (and perhaps unduly complex) set of definitions is that the Policy covered Thera’s interest in repayment by the Phoenix counterparties, guaranteed by Phoenix Commodities.

14. [117]

    There is, however, a further difficulty with the defined term “Advanced Payment” in cl 4.1. It is said to refer to the payment advanced to Phoenix by Thera, not only in accordance with the terms and conditions of the insured transaction, but also “in consideration for the future delivery of the Insured Goods to the Insured by the Counter-Party”. The Insured Goods were defined as “[f]inancing the purchase of grains and pulses”. It makes no sense to speak of Phoenix providing financing to Thera: the whole purpose of the transaction was for Thera to provide financing to Phoenix. It was true that Phoenix was required to sell the commodities to Thera under the Master Agreement, pursuant to a Murabaha Contract. On the other hand, it was not intended that there be actual “delivery” of the commodities to Thera.

15. [118]

    The obscurity caused by these terms formed a significant element of Thera’s case in favour of the proposition that the Policy was not restricted to financing undertaken in strict compliance with the Master Agreement and the Purchase Agency Agreement by which it was intended that Phoenix should purchase on behalf of Thera. By contrast, the appellant read the definitions as reflecting the arrangements under the Master Agreement and the Purchase Agency Agreement, and thus constituted confirmation that the Policy was limited to circumstances where an Advanced Payment had been made in accordance with the Master Agreement, giving rise to obligations to repay an amount calculated in accordance with the provisions of the Master Agreement.

16. [119]

    While acknowledging elements of incoherence in the definitional provisions, the appellant contended that that circumstance provided an inadequate basis for suggesting that payments could be advanced otherwise than in accordance with the terms and conditions provided in the Finance Documents. That contention should be accepted. As has been explained sufficiently above, and without reference to each interlocking element, it is impossible to divorce the coverage under the Policy from the structured arrangements under the Master Agreement and the Purchase Agency Agreement. Assuming that cl 4.1 referred to the payment made by Thera to Phoenix in accordance with the Finance Documents, that provision can only refer to the intended purchase by Thera of the commodities for sale to Phoenix. Although the commodities were not to be physically delivered to Thera, the drafter, which appears to have been the agent in Singapore, must have intended the term “delivery” with respect to the Insured Goods to refer to the passing of title in the commodity. However, whatever meaning is given to the description of the consideration, there is no doubt that the term “Advanced Payment” referred to the payment made by Thera to Phoenix in accordance with the terms and conditions of the Insured Transaction, meaning the $8 million trade finance agreement to which Thera was a party and therefore in which it had an interest.

17. [120]

    This reading is fortified by the need to identify the “Debt Obligation(s)” which were created by the payment from Thera to Phoenix and which were guaranteed by Phoenix Commodities. Just as the Policy did not create the obligation of Thera to make a payment to Phoenix, neither did it create the Debt Obligations imposed on Phoenix or the guarantor. Those obligations could only be found in the Master Agreement. Relevantly for present purposes, the basic obligation incurred by Phoenix was that identified in cl 6.1 of the Master Agreement, set out at [75] above. That clause imposed obligations to make two payments, being first an obligation to pay the “Value Date Sale Price Amount” on the date on which a Murabaha Contract was executed, and, secondly, payment of the “Deferred Sale Price” which, according to the definitions in the Master Agreement, was payable on the last day of the Murabaha Contract term as specified in the offer letter for that contract. As noted above, the Value Date Sale Price amount for a particular contract was 10% of the Cost Price of the commodities. The Deferred Sale Price was the remaining 90% of the Cost Price plus the Profit Amount calculated as 8% of the Cost Price. It was an essential element of the scheme that a Deferred Sale Price be calculable and that the Deferred Payment Date be specified. Absent those details, there was no specific repayment obligation defined according to amount and date of payment.

18. [121]

    Thera did not deny the last part of this analysis. Rather, it submitted that the terms had been complied with by specification of the various amounts and dates in the “offer letter” which had been prepared for each transaction and executed by it and accepted by Phoenix. However, it necessarily conceded that there had been no Advanced Payment for the purchase of commodities by Thera, followed by a sale to Phoenix; Thera having obtained no title to commodities had not passed title to Phoenix in consideration of Phoenix’s obligations.

19. [122]

    In effect, the only flaw identified by the appellant in the reasoning of the trial judge in a careful, clear and comprehensive judgment, was an absence of explanation as to why the replacement arrangements, which were formulated with some care to mirror so much of the Master Agreement structure as could be done in circumstances where the commodities had already been purchased and shipped from Australia, were a sufficient compliance with the provisions of the Policy defining the nature of the debts which had been incurred and were unpaid. In particular, the appellant submitted, it was necessary for the judge to apply the reasoning in Prepaid Services.

20. [123]

    It appears that the judge accepted a submission on behalf of Thera that, it being a condition precedent to the making of a claim that there was an enforceable debt, that was a necessary and sufficient condition for a claim under the Policy. So much appears from the first sentence in [213] of the primary judgment, set out at [99] above. At the same time, the judge found that (i) there had been an “Event of Default”, (ii) the “Deferred Sale Price” had become payable with respect to each contract in accordance with the Master Agreement, but (iii) had not been paid with the result that (iv) Phoenix had “failed to honour its Debt Obligation(s)”. That failure, it was said, fell within the definition of “Insured Risk” and accordingly within the terms and conditions of the guarantee.

21. [124]

    The appellant did not deny that the contractual arrangements between Thera and Phoenix may have given rise to legally enforceable obligations on the part of the Phoenix companies. Nor did it deny that, if they wished, the companies could order their affairs otherwise than in accordance with the Master Agreement. However, although they used the language of the Master Agreement, it did not follow that the defined terms used in the Master Agreement had been engaged in circumstances where the structure under which money was to be advanced had not been complied with. Further, the appellant did not deny that there might be departures from the strict terms of the Master Agreement without abandonment of its structure. However, it submitted that departure from the contractual elements whereby Phoenix was appointed an agent to purchase commodities on behalf of Thera, followed by a carefully structured pricing arrangement by which Thera provided funds to cover the purchase subject to an immediate resale, with a part repayment and subject to a final repayment including a “profit margin”, could not be abandoned without a substantial variation in the form of the legal arrangements. That took the actual contractual arrangement outside the scope of the Policy.

22. [125]

    That submission should be accepted, consistently with the approach adopted by McDougall J and this Court in Prepaid Services. It was also consistent with the approach adopted in MGICA. An insurer can define the cover provided by a policy and the risks it is prepared to insure at a specific premium, in any way it wished. If the terms were accepted and the premium paid, consideration of a claim required careful attention to whether the insured risk had caused the loss or whether the risk that materialised departed in a material respect from the risk defined in the policy, so that the loss did not fall within the parameters established by the policy. The appellant submitted that the trial judge had fallen into error by failing to give proper weight to the structure of the arrangements created by the Master Agreement and the Purchase Agency Agreement, and thus failing to acknowledge the operative effect of the defined terms in the Policy. There was force in that complaint, as identified in ground 1, and further explained below. In fact, the judge’s approach to contractual construction appears to have given rise to two separate problems.

23. [126]

    The first passage in the judge’s reasons said to disclose an erroneous approach to the definitional provisions concerned the definition of “Insured Goods”. The problem with that provision has been noted above and the judge was undoubtedly required to address it. Her reasoning was as follows:

24. [127]

    There are two main problems with this passage. First, in [173], the judge rejected a reading of the definition of Insured Goods as a reference to commodities because the construction “does not sit well with the underlying finance transaction, the purpose of which was that the insured would provide finance to the Company”. Further the judge described the purchase of the commodities as “an interim step in that process”. Dealing with these propositions in the reverse order, it was undoubtedly true that the purchase by Thera was an interim step: however, it did not follow that it was not an essential step in the contractual arrangement which the insurer had accepted. Further, to identify the purpose of the transaction as the provision of finance was to define the purpose at too general a level. The Policy was self-evidently not intended to cover any form of provision of finance by Thera to Phoenix; the transaction documents were formulated in detail and with precision. It may have been a purpose of Thera’s relationship with Phoenix that it was providing finance, but the Policy was not expressed to cover such a general formulation.

25. [128]

    As noted above, the judge continued, in [174], “… 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.” It may be that Thera would have identified its purpose in obtaining insurance in these terms; again, however, the Policy issued by the appellant did not accommodate such a broad statement of purpose.

26. [129]

    The next statement was entirely correct:

27. [130]

    However, as the judge recognised in the next full paragraph, that was not what had happened, although it was what the appellant said should have happened for the Policy to respond to the losses. The judge described the appellant’s position in terms which the appellant accepted was indeed its core argument:

28. [131]

    The rejection of those submissions involved the passage challenged in the first ground of appeal and should be set out in full as Thera denied that the ground fairly encapsulated the judge’s reasoning:

29. [132]

    The appellant submitted that it was erroneous to treat cl 4.1 as a definition, not having operative effect. The justification for that approach was identified by the trial judge by reference to an earlier passage in which the judge adopted principles relating to construction of definitional provisions in statutes, [22] which had, as the judge observed, been applied to the construction of commercial contracts. However, this last proposition should be approached with some caution. In one authority relied on by the trial judge, Vincent Nominees Pty Ltd v Western Australian Planning Commission, [23] Beech J referred in passing to the manner in which a definition should be inserted in relevant operative provisions and then the contract construed as a whole, referring to the “cognate principle of statutory construction” in Kelly v The Queen. [24] There was no attempt to explain how that might apply in the longer passage referring to other generally relevant principles of contractual construction set out at [112] above.

30. [133]

    It is immediately obvious from a perusal of the Policy that it was not drafted according to principles which underpin statutory drafting, variable though they may be. Lewison and Hughes, The Interpretation of Contracts in Australia, [25] refers to the practice of reading the words of a definition into the operative text of the contract, citing Halford v Price. [26] However, while the practice is applied by Dixon CJ in Halford at 28 (and by each other member of the Court), that case involved the straightforward insertion of an extended definition of “the firm” in clauses of a professional indemnity policy. It stands for no more general or inflexible proposition.

31. [134]

    The present case illustrates that there may be no clear distinction between definitional provisions and operative provisions. A blurring of those functions may be bad drafting, but is not a dichotomy which can be imposed as a matter of principle in construing all contracts. The plethora of defined terms makes it almost impossible to follow the edict of reading definitions, which themselves contain several defined terms (at least in the case of cl 4.1), into operative provisions as if they were separate and readily identifiable, and then construe the result.

32. [135]

    In Segelov v Ernst & Young Services Pty Ltd, [27] Gleeson JA, dealing with language in a trust, recognised that the principle of statutory construction which militates against using the defined word to construe the words of the definition may have limited operation in relation to contracts and trusts. Although Gleeson JA applied the principle of reading the words of the definition into the operative text, the difficulties which accrued in that case, with quite a simple definition, were also noted. [28]

33. [136]

    In the present case, any attempt to characterise particular provisions in the Policy as definitional or operative is apt to lead to confusion and possible misapplication of principle. Thus, by way of example, cll 1.1 and 4.1 are, in form, definitional. They are not operative in the sense that provisions of the Master Agreement imposing obligations on Thera and Phoenix are operative. However, they are operative in the sense that they define the scope of the risk to which the Policy applies.

34. [137]

    The function of the Court is to construe the Policy as a whole. To identify the “purpose” of individual clauses is apt to distract attention from that fundamental exercise. Returning to the reasoning of the trial judge, to characterise the purpose of cl 4.1 as being “to describe the payments contemplated by the Master Murabaha Agreement” [29] invites the question as to why it does so. The answer is that it does so in order to reflect the fact that the financing documents are incorporated into the Policy in order to identify the scope of the risk covered by the insurance.

35. [138]

    Further, while it may be true, as the judge stated, that cl 4.1 does not impose, as a condition of cover, “strict compliance” with the terms of the Finance Documents, that statement does not answer the question raised by the text, namely whether it imposes a condition of cover that the insured has advanced money “in accordance with” the terms and conditions of the Finance Documents. That, as the appellant conceded, may not involve “strict compliance”, but it is not satisfied by abandonment of key steps in the process under which Thera agreed, in seeking the Policy, that it would be providing finance to Phoenix.

36. [139]

    Further with respect to [176], reading down a particular provision on the basis that it might create redundancy elsewhere in the document assumes that the Policy has been drafted with a keen eye to avoiding overlapping provisions. That is clearly not the case. However, if it be true that elsewhere the Policy “deals with the insured’s obligation to comply with the finance documents”, then that would be sufficient to demonstrate that the Insured Risk involved a risk which arose by carrying out the transaction in accordance with the Finance Documents.

37. [140]

    Finally with respect to [176], it is not entirely clear how cl 2.3, which excluded loss arising directly or indirectly from “material default” by Thera in the performance of its obligations under the Insured Transaction, limited the operation of cl 4.1. The exclusion required a causal link between the conduct of Thera and the loss suffered. In the course of submissions, cl 2.3 was relied upon as the basis of an implication that an “immaterial” default would not disengage the Policy. However, it appears that the term “material” merely describes the nature of the causal link between Thera’s conduct involving a default, and the loss suffered. Nor is it clear that the concept of “default” by Thera would capture an arrangement between Thera and Phoenix by which Thera, without complying with the Finance Documents, created a legal obligation of repayment, with respect to which Phoenix defaulted. Yet, to construe cl 4.1 as stating that such an agreement is not within the Insured Risk is to give it separate and coherent work to do.

38. [141]

    The submission did not help to determine what is constituted by a “default”, but rather illustrated the risks of construing terms in isolation in order to draw negative inferences about unrelated provisions.

39. [142]

    In short, construing the Policy as a whole, cl 4.1 reflected an underlying purpose of defining the Insured Risk in terms of finance provided in accordance with the terms and conditions of the Master Agreement and the Purchase Agency Agreement. The latter, it may be noted, had no work to do under the arrangements adopted by Thera and the Phoenix counterparties.

Conclusion

1. [143]

   As the trial judge found, the arrangements in fact undertaken between Thera and Phoenix did not involve the purchase of commodities by Phoenix, at the request of Thera and on behalf of Thera. There was no payment made with respect to such a transaction. The “Value Date” was defined in the Master Agreement as the date on which Thera provided funds to Phoenix to purchase the goods, that term as defined in the Master Agreement, was not satisfied.

2. [144]

   It may not have mattered if, for example, Phoenix had merely not sent Thera a “purchase confirmation” pursuant to cl 2.3 of the Purchase Agency Agreement, but it did matter that the purchase on behalf of Thera never took place. Further, as title in the commodities did not pass from Thera to Phoenix, no Murabaha Contract was created by the letter of offer and acceptance. While there was an obligation created on the part of Phoenix to repay an amount calculated as if the earlier transactions had taken place under the Master Agreement, that was not an obligation which arose “in accordance with” the Master Agreement, although it used the language of the Master Agreement and related documentation. Accordingly, the obligation upon which Phoenix defaulted was not an obligation created in accordance with the Master Agreement and therefore the default was not one to which the Policy responded.

Orders

1. [145]

   The orders made by the trial judge on 31 May 2022 and entered on 22 June 2022 involved a declaration that Thera was entitled to be indemnified under the terms of the Policy, together with an order that BCC pay Thera (the plaintiff) the amount calculated in accordance with the Policy. Those orders should be set aside.

2. [146]

   The Court should make the following orders:

   1. (1)

      Allow the appeal and set aside orders (1), (2) and (3) made in the Equity Division on 31 May 2022.

   2. (2)

      In place thereof, order that:

   3. (3)

      Order that the respondent pay the appellant’s costs in this Court.