Marketlend V QBE – A Warning For Trade Finance Banks

A recent judgment from the Singapore Commercial Court will be of interest to trade finance banks when taking their borrower’s insurance policies as security.

This briefing considers the decision of the Court and the resulting implications and takeaways for banks. While the decision is of direct relevance to Singapore, the principles laid down will undoubtedly have an impact overseas, given the global nature of the credit insurance market.

Background

The case concerned a dispute under a trade credit insurance policy issued by QBE to a company called Novita Trading. The policy covered losses arising from non-payment by certain of Novita’s buyers.

However, the case was not brought by Novita and Novita did not engage with the proceedings. Instead, the claim was brought by:

• Marketland, a platform which connects investors and businesses that require financing. Marketland extended financing to Novita for its trading activities which were the subject of the policy. Novita assigned its rights to the policy to Marketland, but such assignment was not consented to by QBE.

• Australian Executor Trustees Limited (“AETL”), the trustee of a securitised trust which funded Marketland’s facilities to Novita. AETL were included as a joint insured by way of banker’s endorsement.

Novita’s buyers defaulted and Marketland brought a claim against QBE, which was rejected. At trial, the Singapore Court considered the following issues:

1. Did Marketland have standing to bring a claim under the policy and/or has there been a breach of the policy terms in failing to obtain QBE’s consent before assigning the policy?
2. Had there been a breach of condition precedent under the policy by reason of the failure to provide certain documents and/or information requested by QBE?
3. Was there proof of an Insured Debt under the Policy? QBE argued that it could not be shown that Novita sold and shipped the goods to its alleged buyers and that the underlying trades were not “genuine physical trades”.

Decision

In response to each issue, the Court held as follow:

1. Marketland did have standing to bring the claim as the policy was assigned to them. However, as QBE did not consent, the assignment constituted a breach of the policy. The net effect of this breach was that QBE were entitled to avoid the policy as against Marketland and AETL (there was limited consideration given to the terms of the banker’s endorsement issued in favour of AETL as the claimants’ counsel conceded at trial that, if there was a breach of the policy provision requiring insurer’s consent to the assignment, the effect would that QBE would be entitled to avoid liability as against both Marketland and AETL).
2. The failure or inability to produce documents which were requested by QBE, and which were deemed relevant to the policy/underlying trade, constituted a breach of condition precedent, such that QBE was not liable in respect of Marketland’s claim.
3. The Claimants failed to prove, on the balance of probabilities, that the alleged underlying trades were genuine physical trades (indeed the Court found that two trades were fictitious).

The Court therefore found in favour of QBE.

Implications

The decision of the Singapore Court should serve as a warning to banks that a passive role in monitoring their borrower’s insurance policy (which is provided to support, and often as a pre-condition of, lending) may have significant implications in the event of borrower default. In monitoring the policy, banks should consider the following steps:

1. The terms of the borrower’s policy. The policy may include onerous terms which affect recovery rights in the event of a claim (for instance, any clause giving the insurer a right to avoid liability in the event of assignment or purported assignment of the policy). Simply having a policy as security is not enough – the policy must be effective and robust.
2. A financier should consider what rights it has to bring a claim independently of its borrower, as the borrower’s actions (i.e. a breach of a condition precedent) may prevent a successful recovery. For instance, a bank may wish to include a non-vitiation clause in a financier’s endorsement.
3. A bank should be mindful of the impact of a non-cooperative borrower. Often, post default, a borrower may not be fully committed to pursuing a claim under an insurance policy (which can take years). As was made clear from the decision in Marketland, failure to provide relevant documents and information to an insurer may be fatal to a claim.
4. Banks should be aware of the impact that the borrower’s trading activities may have on insurance cover. For instance, the bank may wish to consider how its borrower typically handles bills of lading and how this fits in with the cover under the policy (which may require evidence of a shipment).
5. A bank may also wish to purchase simple “non-payment” cover, as opposed to trade credit cover, as the latter can have more onerous provisions in terms of demonstrating an insured debt (however, the former may not be suitable in all instances).

If you have any specific questions on the above or would like to discuss further, feel free to reach out.