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Note: From December 1997, Suncorp Metway Limited (Issuer) provided Daewoo Australia Limited (Applicant) with commercial funding under a trade finance facility. In November 1998, a the facility was restructured occurred using trade credit insurance. On 29 March 1999, Issuer and Applicant entered a written agreement styled as a trade finance agreement. Clauses 4, 5, 6, and 7 set out how the facility would operate.

They provided that:

(1) [Applicant] might enter into contracts to buy goods from suppliers (cl 4.1);

(2) every time [Applicant] did so, it would request the supplier to issue an invoice to [Issuer], and would request [Issuer] to issue a letter of credit to the supplier for the purchase price (cl 4.3);

(3) property in the goods would pass to [Issuer] once [Issuer] paid the supplier (cl 4.7);

(4) when [Issuer] received an invoice from a supplier, it would invoice [Applicant] for the relevant goods at the amount of 111.12% of the purchase price (cl 5.1);

(5) [Applicant] would pay each of [Issuer's] invoice by its due date (cl 5.2) and if [Applicant] did so, it need pay only the actual price paid by [Issuer] to the supplier (cl 5.5);

(6) title in goods would pass from [Issuer] to [Applicant] at the later of the time when [Issuer] obtained title to the goods or the time when [Issuer] issued its invoice to [Applicant] in relation to the goods (cl 5.6);

(7) it was a condition precedent to the provision of facilities under the agreement that [Issuer] have appropriate trade credit insurance in place, for which [Applicant] would pay the premium (cls 6.1 and 6.2); and

(8) [Applicant] would pay interest to [Issuer] on the amount of each amount drawn down pursuant to a letter of credit. All interest was payable in advance on or before any drawdown (cl 7.1).

HIH Casualty & General Insurance Ltd (Insurer) wrote a Domestic Policy of Trade Credit Insurance, insuring Issuer from 23 March 1999 to 31 March 2000. Insurer obtained reinsurance from General Reinsurance Australia Ltd. (Reinsurer). Reinsurer was not aware of the underlying structure between Issuer and Applicant.

On the experience of loss under its policy, Insurer made a claim on Reinsurer which was refused and Insurer sued Reinsurer for its quota under the reinsurance agreement for losses in its Trade Credit and Export Credit reinsurance policy. The New South Wales Court of Appeal, Allsop P, , in a opinion by Allsop, P., with which Hodgson JA, Macfarlan JA agred, dismissed the appeal with costs, affirming the decision of McDougall, J, at first instance.

McDougall, J, at first instance held Reinsurer liable to honour its reinsurance contract with Insurer, for its quota share. The Court of Appeal accepted McDougall J's decision, Appellant contended that one supplier, a subsidiary of Applicant in Hong Kong, sold the goods direct to Applicant and no title was obtained by Issuer. The Court of Appeal adopted a broad definition of a 'trade credit policy' and rejected Reinsurer's assertions that industry practice supported a narrower definition.

Allsop, P, noted that there was no suggestion that the arrangements were a sham, so that the agreement reflected the parties' true intentions. His Honour stated:

[Subsidiary of Applicant] can be taken as offering to sell the goods to [Issuer] by directly invoicing it (having been requested to do so by the letter of credit and, one would naturally infer, having been otherwise requested to do so). [Subsidiary of Applicant] was intending to divest itself of title by sale. Given that [Applicant] (to whom the bills of lading were sent) and [Issuer] had a commercial relationship in which the latter provided the former with financial accommodation, the nature of any title to be held by [Issuer] rested on their mutual intention. That intention was to be found in unequivocal terms in the Trade Finance Agreement.

Comments by Dr. Davidson:

The decision reflects the importance of the construction of reinsurance contracts. The collapse of HIH in the 1990s led to many such legal proceedings. Reinsurance contracts should be carefully crafted to precisely determine in advance the extent of the liability and coverage.

Use of letters of credit in the refinance arrangements served as evidence and force the intention of the parties in relation to the restructure of the finance facility where doubts about Applicant, Daewoo Australia's, operations were questioned by Issuer, Suncorp.

[AD/csb]

* Dr. Alan Davidson is Senior Lecturer TC Beirne School of Law University of Queensland; Solicitor and Barrister Supreme Court of New South Wales and of the High Court of Australia. Dr. Davidson is a member of the DCW Editorial Advisory Board.

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