Frans Maas (UK) Ltd v Sun Alliance And London Insurance Plc

The Claimants (“FM”) carry on business at a number of locations within the UK as freight forwarders, warehousemen and road hauliers. The Defendants (“RSA”) are insurers.

In this action, FM seeks an indemnity from RSA in respect of liabilities incurred by FM to various third party claimants. The indemnity is sought under a policy of insurance No. GA11125045. The policy was originally made on the 9^th March 1995. The policy was subsequently renewed annually until the year 1999 - 2000 (the commencement date being the 1^st April of each year). FM’s claim in this action is brought under the policy in effect for the year 1^st April 1998 to 31^st March 1999.

The following are the policy provisions of main relevance: -

“GENERAL CONDITIONS

The due observance and fulfilment of the terms and Conditions so far as they relate to anything to be done or complied with by the Insured and the truth of the statement and answers in the proposal shall be conditions precedent to any liability of the Company to make any payment under this Policy.

1.

The Insured shall continuously trade under the Contract Conditions International Conventions or Statutes expressed in the Schedule as being Insured and shall take reasonable steps to notify all customer of the application of such Contract Conditions International Conventions or Statutes.

Notwithstanding this Condition the indemnity provided by this Policy shall not be prejudiced should the failure to notify any customer of the said Contract Conditions International Conventions or Statutes be due to an error by the Insured or any Employee provided the Insured can prove to the satisfaction of the Company that they have established procedures for such notification to be given to customers and that instructions have been given to all Employees to this effect.

…

3.

The Insured at his own expense shall take all reasonable precautions to prevent or diminish any Damage to property which may give rise to liability under this Policy.

GENERAL EXCLUSIONS

…

4.

Damage to Property stored at a rental or under a contract for storage and distribution.

GENERAL DEFINITIONS

Damage

Physical loss destruction damage or misdelivery

Event

Any one occurrence or all occurrences of a series consequent on or

attributable to one course or original cause

Property

Goods and merchandise for which the Insured is responsible excluding containers and flats and goods and merchandise owned or hired or leased or loaned to the Insured

WAREHOUSING SECTION

Schedule Item

1.

The National Association of Warehouse

Keepers Conditions of Contract Insured-1983 edition with a financial liability of £100 per ton(ne)

2.

The United Kingdom Warehousing Assoc Insured- Conditions of Contract 1983 edition with a financial liability of £100per ton(ne)

3.

The Road Haulage Association Limited

Conditions of Storage Not insured

4.

The Standard Contact Conditions of the Institute

of Freight Forwarders Limited Not Insured

5.

The Standard Contract Conditions of the British

International freight Association Not Insured

6.

The Insured’s own Contract Conditions

for Warehousing Not Insured

Total Limit of Liability in respect of all

claims arising out of any one Event £3,000,000

General Exclusion 4 is deleted subject to the following

The Company will indemnify the Insured if the Property be damaged during any period of Insurance whilst warehoused at any Location specified in the Schedule to the extent that there is liability for Damage under the Contract Conditions expressed in the Schedule as being Insured or at Common Law if such Contract Conditions cannot be enforced.

CLAIMS CONDITIONS

….

1.

If any claim is in any respect fraudulent or if any fraudulent means or devices be used by the Insured or anyone acting on their behalf to obtain any benefit under this Policy or if any Damage is occasioned by the wilful act or with the connivance of the Insured or by any relative of the Insured all benefit under this Policy shall be forfeited.”

The claims brought by the third party claimants arose out of FM’s relationship with a company called Palmier plc (“Palmier”). Palmier imported clothes from abroad for reselling in the UK to fashion retailers. The greater part of the goods to which the present action relates had been imported by sea to the port of Felixstowe. The goods were shipped from either Hong Kong or the Indian Sub Continent.

The relationship between FM and Palmier originated in late 1994. FM’s function was to act on behalf of Palmier in arranging customs clearance of the goods into the UK, their storage and their onward distribution to Palmier’s customers. From about mid 1997, the location used for the storage of Palmier’s goods was a bonded warehouse at Shipdham, Norfolk. This was specifically rented by FM for the Palmier business and was used almost exclusively for the storage of their goods.

In the early years of this trading relationship there was no signed contract between FM and Palmier. A contract was eventually signed by the parties in June 1997 (albeit dated 7^th May 1997). That agreement provided inter alia: -

“Palmier plc contracts as the legal owner of the goods or as the authorised agent of such legal owner. …

Frans Maas UK shall be responsible for any loss or damage to the goods resulting from warehousing and loading of the goods or unloading the goods from the vehicle subject to the provisions of our Standard Trading Conditions which are as set out below…

Frans Maas UK will NOT insure the goods and all claims for loss or damage will be resolved in accordance with our Standard Trading Conditions as applicable which are

British International Freight Association (1989)

Road Haulage Association (1991 edition)

United Kingdom Warehousing Association (1994 edition).

These standard trading conditions rank pari pasu.

This contract shall run for 1 year and will thereafter continue unless at least 3 months notice of termination is given by either party.”

In relation to the goods that Palmier imported by sea, FM had a secondary role as the named delivery agents in the bills of lading issued on behalf of Atlantic Line.

Because the Shipdham store was a bonded warehouse, FM were liable in the first instance to H.M. Customs & Excise for duty on all goods stored there. FM would then bill Palmier for that duty.

In early 1998 FM came to appreciate that a very substantial amount of duty had neither been paid to Customs & Excise nor billed to Palmier. FM accordingly submitted an invoice to Palmier for the sum in question (£2,682,588,76) on the 17^th February 1998.

Not surprisingly, discussions immediately ensued between FM and Palmier. On the 26^th February 1998 FM wrote to confirm acceptance of a payment proposal on the following lines: -

“1.

50% of customs duty by CHAPS today

2.

50% of customs duty by cheque in our possession 5^th March 1998.

3.

Settlement of the balance by 4 equal weekly cheques commencing 12^th March 1998.

4.

Settlement of all other invoices within the normal terms.”

Despite this, by late April 1998 there was still about £1.6 million outstanding on the original account and the accrual of a further £1million.

On the 1^st May 1998 Palmier wrote to FM to advise that it had decided to terminate the existing warehouse agreement. Notice of 3 months was given in accordance with its terms. Negotiations then ensued in an attempt to agree terms for the payment of the monies owed on account of duty. Terms were duly agreed in a letter from Palmier dated the 21^st May 1998 and countersigned by FM.

This letter provided for a letter of credit to be opened by Palmier in the sum of £1,744,121.04 within seven days and confirmed by Barclays Bank. As part of that agreement, Palmier’s notice of termination was withdrawn on the basis that neither party should issue a further notice of termination prior to the end of July.

On the 8^th June 1998, FM wrote to Palmier noting that the letter of credit had still not been opened and rejecting the proposed Indonesian bank which Palmier proposed to use. The letter continued: -

“In view of the foregoing we are suspending all further deliveries forthwith from our Shipdham warehouse and all goods in our care and control are held by way lien in accordance with our standard trading conditions which are UKWA (1994 edition)…”

Notice of the exercise of the lien appears to have been given to, amongst others, Kay Ess Dee Industries Limited in Hong Kong (“KSD”). KSD were the named consignor or shipper under the bulk of bills of lading in respect of Hong Kong shipments. It was understood by FM that there was a close relationship between KSD and Palmier. The companies had a common chairman (Mr Sandhu). The active manager of KSD in Hong Kong was a Mr Gain and his son, Koki, ran Palmier.

KSD’s English solicitors, Messrs. Holmes Hardingham, responded with some despatch by a letter dated 10^th June 1998: -

“We act on behalf of KSD Industries Limited in Hong Kong and have been consulted in connection with your fax to our client dated 9^th June 1998.

If we understand the position correctly, you are exercising a lien against out client’s buyer in the UK, Palmier plc, in relation to sums which are purportedly outstanding from Palmier plc to yourselves….

In relation to our own client’s position, they are not as you are aware involved in the dispute with Palmier plc and yourselves but they do have substantial worth of stock which is caught by lien but to which our clients have legal title. We shall as necessary let you have a full list of stock which is held by you and for which our clients and/or their bank have the original Bills of Lading.

We cannot see there is any basis on which you could possibly exercise your lien against our clients and certainly not, as we see it, on the UKWA. Conditions. If you allege that those conditions in some way bind our clients, no doubt you will provide us with the necessary evidence.”

FM duly instructed their own solicitors, Messrs. Eversheds who replied on the 12^th June: -

“… we confirm our clients are exercising a lien pursuant to clause V1 of the UK Warehousing Association Conditions of Contract which were specifically incorporated into the contract between our clients and Palmier. Under those conditions, Palmier warranted that they either owned the goods or were authorised by the owners to accept the conditions…”

Further negotiations between FM and Palmier took place with a view to resolving the question of payment of the substantial debt owed by Palmier. This culminated in the conclusion of an agreement entitled the Warehouse Termination Agreement (“WTA”) dated 26^th June 1998. This agreement provided, so far as material, as follows: -

“- Clause 1 confirmed the lien exercised by FM on 8^th June would remain in place “throughout the termination period” (i.e. the period from the date of the agreement to 31^st October 1998).

- Clause 2 provided that “FM will act as sole suppliers to PL for the clearance and warehousing of PL’s goods during the termination period in accordance with our standard trading conditions which are UKWA (1994 Edition) and BIFA (1989 edition)”.

-By Clause 3 FM undertook to permit “the free flow of bona fide deliveries, subject to a minimum stock level of 30,000 cartons being maintained at the warehouse”, on certain conditions including the receipt of payment from Palmier of £305,647 and the provision of a Bank Guarantee from Habib Bank.

- By clause 6, FM undertook, on certain conditions, not to make any application to the Courts for an order of sale pursuant to the lien.

- By clause 8, “The loan due from PL to FM of £2.9 million (being the balance of monies currently owed by PL to FM, less the first payment specified in Schedule 1) will be repaid in accordance with Schedule 1,”

- By clause 23: “PL will supply original Bills of Lading to FM’s Felixstowe office prior to any release of any containers held by FM at any dock. Alternatively, authority from the relevant shipping line would be acceptable (see Schedule2).

- By clause 24: “Missing Bills of Lading in respect of past containers will be supplied by PL on or before 31^st July 1998, failing which PL will procure completion by the shipping line of a letter in the attached format (see Schedule 2) on or before 15 August 1998.” ”

Schedule 2 of the agreement referred to in clause 23 was a sample indemnity agreement whereby Atlantic Forwarding (China) Ltd as agents for Atlantic Ocean Line were to hold FM harmless in respect of claims arising out of the non-production of bills of lading.

On signature of the WTA, FM resumed deliveries of goods from the warehouse. However, as a result of the delay in the delivery of documents, Atlantic Forwarding (China) Ltd made a proposal to KSD that where shipments were urgent, Palmier should be allowed to obtain release of up to 15 TEU containers without presentation of original bills. This proposal was accepted by KSD and notice of the new arrangement was given to FM by Palmier on the 20^th July 1998.

KSD then gave new instructions to Atlantic on the 12^th August to the effect that Palmier should be allowed to obtain release of goods worth up to US $825,000 without presentation of original bills of lading. Having checked with FM as to whether it was possible to monitor the value of the goods released, Atlantic duly passed the instructions on to FM. Coincident with this new arrangement, FM voluntarily decided to allow Palmier to take delivery of a further US $500,000 worth of goods over and above that permitted by the instructions from KSD.

The whole purpose of these arrangements was to enable Palmier to fund the repayment of the loan. In this respect the arrangement appears to have been entirely successful. As was recorded in a report of loss adjusters, Messrs Collyer, to RSA in February 1999, all of the instalments required by the agreement were met in a timely fashion by Palmier and indeed the debt was cleared rather earlier than the agreement required.

On the 15^th September 1998, a meeting took place in London between FM and their brokers Aon. A note of that meeting referred to the fact that stock was being released without bills of lading. Immediately after the meeting those present went on to a further meeting with underwriters. There is a substantial dispute as to whether, at that second meeting, any disclosure was made as regards the release of cargo without bills of lading.

Shortly before those meetings took place, FM was copied into two telexes from Atlantic Forwarding (Taiwan) Limited making enquiries on behalf of an unidentified Taiwanese shipper as to whether their goods were still warehoused or whether they had been released. By October 1998 FM’s solicitors had prepared a draft agreement in respect of an indemnity by KSD of FM in regard to the release of goods without original bills of lading. This coincided with a request by KSD that the figure of U.S. $825,000 be increased to U.S. $1.825 million. This indemnity although executed on behalf of FM was never executed on behalf of KSD.

In the event the value of cargo released to Palmier was greatly in excess of even the last figure proposed as being appropriate. By December the figure was probably in excess of U.S. $5million.

Towards the end of November 1998 negotiations took place between FM and Palmier with a view to a further 2 year contract. However, at a meeting on the 4^th December 1998, at a time when FM was anticipating execution of such an agreement, they were informed that an administrative receiver had been appointed to Palmier and thereafter no further deliveries were made by FM to Palmier.

On the 7^th December 1998 a meeting was called by KSD at Palmier’s premises. Mr Jain of KSD claimed that he was acting on “behalf of all the bill of lading holders” and produced at the meeting bundles of bills of lading contained in two plastic bags. Messrs Collyers were then appointed to investigate the matter on behalf of the Defendants and their preliminary report was issued on the 22^nd December 1998. This drew attention to the fact that, by way of facilitating the agreement for repayment of the outstanding debt, arrangements had been made to allow Palmier to take delivery of goods without production of the bills of lading. The reaction of the underwriters was to “reserve their rights under the policy accordingly”.

In the course of 1999, actions were commenced against FM by various third parties (both banks and sellers/manufacturers) claiming damages for conversion and wrongful interference by reason of misdelivery of their goods. There were five such actions, four of which were settled before trial at approximately 30% of the value of the claim. The fifth action went to trial in the course of which FM conceded liability and Langley J gave judgment in the claimant’s favour. It is the payments made in respect of those settlements and the trial which are the subject of the present action.

The indemnity provided by the warehousing section of the policy arises when property (i.e. goods and merchandise for which the insured is responsible) is damaged (e.g. misdelivered) to the extent that there is liability for such damage “under the Contract Conditions expressed in the schedule as being insured or at common law if such contract conditions cannot be enforced”. It was the claimant’s case that the policy accordingly afforded an indemnity in respect of the liability incurred by FM for mis-delivery of the third party claimants’ goods because it was a liability “at common law” in circumstances where the contract conditions could not be “enforced”.

I am unable to accept that submission. In my judgment, on a true construction of the policy, an indemnity is only available in respect of a liability to a customer i.e. a person who has contractually engaged FM’s warehousing facilities. The relevant activity of FM for the purposes of the cover was the conduct of warehousing under the terms of NAWK and UKWA conditions. In short the only relevant liability must be those incurred to customers under those terms. The only exception would arise if the terms could not be “enforced" as against the customer e.g. because appropriate notification had not been given.

On the facts of the present case, the terms were not “unenforceable”. They were simply inapplicable in the sense that the third party claimants were not customers and the requirement for the notification of the standard terms did not arise.

This analysis received a significant measure of support from the expert evidence. Both parties were given leave to call an expert on the issue of “the type of cover customarily provided by freight forwarder policies”. In the event, only the Defendants called their expert, Mr John Potter, to give evidence.

In the expert’s joint memorandum, this much was already common ground: -

“The Points of Agreement are as follows: -

In insurance of the cargo liability incurred by transport operators, the general approach of insurers is to insure the liability an operator incurs towards his customer, with whom there is a contractual nexus. The policies usually seek to define the terms of that contract, by requiring the operator to contract on the basis of approved trading conditions. These may be specific to the operator concerned or they may be those of a national association, such as the BIFA Standard Trading Conditions. Sometimes the measure of liability insured is agreed to be that contained in the relevant international convention, such as CMR (for the Carriage of Goods by Road), or the Warsaw Convention (for the carriage of goods by air).

Insurers accept also that there is a risk that sometimes the contractual terms will not be effective to protect the insured. This can arise primarily from two causes; either the terms have not been adequately incorporated into the contract with the claimant or the terms, though duly incorporated, are set aside by the court, on the grounds, for example, that they fail the test of reasonableness under the Unfair Contract Terms Act of 1977. Insurers will usually offer the insured so-called ‘contingent risk’ insurance in these circumstances, provided the insured can establish, in the first example, that he had in place a system to ensure the incorporation of the trading conditions in his contracts with his customers and that, in the given instance, the failure to incorporate was due to the isolated mistake of an employee.

Further, both experts recognise that the operator has another potential source of contingent exposure to claims in respect of cargo, namely the non-contractual claim that can arise in tort or bailment. In these cases, the question whether the trading conditions have been incorporated is irrelevant, because there is, by definition, no contract into which they could have been incorporated.”

In his supplementary report and in his oral evidence, Mr Potter drew attention to other policy wordings, some of which excluded a non-contractual claim and some of which did not. In his view, for what it was worth, the RSA policy was an example of the former. I agree with him for the reasons set out above. Accordingly, the third party liabilities incurred by FM were not within the scope of the cover.

Strictly speaking it is not necessary to go on to consider the various other arguments that were deployed by the Underwriters in defending the claim but, since they were fully argued, I will deal with them briefly.

RSA next contended that the liabilities incurred by FM to the third parties were incurred in consequence of purported performance of the WTA and accordingly were not incurred by reason of warehousing activity within the scope of the policy.

The original warehousing contract was executed in June 1997. Palmier gave three months notice of termination on the 1^st May 1998. (Whether this was appropriate contractual notice given that the initial term was for 1 year must be doubtful). In any event, by virtue of the supplementary agreement dated the 21^st May 1998, the notice was withdrawn with a provision that neither party could issue a further notice of termination prior to the 31st July unless Palmier failed to meet the prescribed payment schedule for extinguishing the outstanding debt. In short, with that proviso, the supplementary agreement extended the warehousing contract until the 31^st October.

In fact, Palmier failed to comply with the threshold requirement to open a letter of credit within 7 days, which provoked FM to exercise a lien on Palmier’s goods. This lead to the conclusion of the WTA, which replaced the warehousing agreement with a purpose-made contract covering the run-off until termination on the 31^st October.

Clause 2 provided that FM should be Palmier’s sole suppliers of clearance and warehousing services during the termination period in accordance with UKWA and BIFA. Clause 1 made for the provision of the continuation of the lien but Clause 3 allowed for free flow of deliveries subject to a minimum stock level.

It is true that the agreement also made provision for treating the outstanding sums due from Palmier as a loan by FM, together with an exacting repayment schedule. But the nature of the agreement remained one in respect of warehousing activity. The fact that (at least as from August) deliveries were made without production of the bills of lading so as to aid repayment of the loan does not detract from the nature of the activity undertaken. Indeed, much of the exposure to third parties arose from the receipt into, and the subsequent mis-delivery of, goods despatched from the Shipdham warehouse after repayment of the debt.

The next argument advanced by RSA was that FM was in breach of General Condition 1 in failing to trade continuously under “the Contract Conditions” that being a condition precedent to liability. The argument, as I understood it, was that no supplementary terms to those contained in the standard terms were permissible. In short, it was submitted that the FM should trade exclusively under the conditions.

If the proposition advanced went that far, I certainly reject it. The original warehousing contract contained a range of provisions supplementary to the standard terms concerning such matters as charges, warranties of authority, maintenance, termination and so on. Without these additional terms, no long-term agreement with a customer could be reached. Thus, rightly, it was never suggested that the 1997 agreement constituted a breach of the general condition. Indeed the point is emphasised by general condition 2 to the effect that certain terms could not be entered into by the insured with a customer without the prior agreement of the Underwriters. It follows that the insured could properly agree other terms without consent.

The less extreme version of the underwriters’ submission was in effect driven by the complaint that the WTA was an instrument to facilitate repayment of a loan. In part, of course, that was so. But the condition is simply directed at the requirement that any warehousing activity should be conducted on the basis of the standard conditions. Such was and remained the case by virtue of Clause 2.

Underwriters further contend that FM failed to comply with General Condition 3 and/or Claims Condition 5 in that their liability to the third parties (on the assumption that there was otherwise cover under the policy) was caused by their failure to take reasonable precautions or by their wilful act.

For this purpose the Underwriters alleged a failure to take precautions or a wilful act in allowing goods owned by third parties to be released to Palmier without receipt of corresponding bills of lading either during the whole currency of the WTA or alternatively after notice to FM from Atlantic Forwarding in August that some specific goods should not be released without bills of lading.

Both terms in effect raise the same factual issue namely whether in the circumstances the release of goods without production of bills of lading “was done recklessly, that is to say without actual recognition of the danger…and not caring whether the danger was averted”: see Fraser v Furman [1963] 3 All ER. 57 at p.62 per Diplock J.

By way of assistance in resolving this issue I have had the benefit of oral evidence from Mr Keith Harrowing, the Company Secretary of FM and Mr Raymond Mossman, the former Chief Accountant of FM.

It is clear from the terms of the WTA, and in particular Clause 23, that FM had well in mind the need to release containers only against original bills of lading or, in the alternative, an indemnity from the NWOC carriers. Indeed, the proposed indemnity attached to the WTA makes it clear that claims for mis-delivery were anticipated in the event that the original bills were not produced.

As recorded earlier in the judgment, delays in delivery of documents led to the proposal made by Atlantic Forwarding to KSD for the release of up to 15 TEU’s without presentation of the relevant bills. KSD accepted this proposal in late July.

I accept the evidence of Mr Harrowing that, at this stage at least, he regarded KSD as the owners or at least as the authorised agents of the owners. I also accept that he regarded KSD and Palmier as almost one and the same. Against this background, the release of goods without presentation of bills was, if not necessarily reasonable, at least not reckless.

The situation however changed during August. KSD approved replacing the 15 TEU limit with a figure of $825,000 in value (subject to FM being able to monitor values). But FM appeared to have voluntarily extended the relevant value by a further $500,000. It is manifest that the purpose of this extension was to give further elbowroom to Palmier to fund repayment of the loan. Even then it is apparent that FM in fact permitted Palmier to obtain release of goods to a value far in excess of the $500,000 or even a total of $1,325,000.

On the 29^th July, Mr Mossman wrote a memorandum recording the supposed limits on the value of goods that could be released under these arrangements. One of the items in the memorandum was: “9. £50k extra fee payable in November”. In November FM in fact duly invoiced Palmier for £50,000 in respect of “miscellaneous” charges. Mr Mossman suggested that this was simply in respect of the additional administrative and overhead costs caused by policing the scheme.

In contrast, in a statement made for the purposes of the action tried by Langley J, and relied on by RSA in the present proceedings, Mr Singh, the company secretary of Palmier, stated that the payment of £50,000 was demanded by FM as “a danger fee”. Mr Mossman denied this and drew attention to the fact that he had not given evidence in the earlier action.

In August and September enquiries had started to emerge from Taiwanese shippers as to whether their goods had been released. This appears to have had no effect on the manner and extent to which goods were released although, by October, FM unsuccessfully sought to obtain a written indemnity from KSD in respect of the excess of a figure of £1.825 million over £825,000.

In my judgment, the true contemporary state of mind of Mr Mossman is revealed by a letter dated the 9^th November 1998 written by him to Mr Singh of Palmier: -

“At our last meeting we discussed at length the above problem and I have set out below the main aspects of the matter: -

Frans Maas does not arrange for the delivery of goods without the presentation of bills of lading for any other client than Palmier and it is only by tacit agreement that the current mode of operation exists. I have registered my unease on this subject from an early date and included a clause to that effect in the original termination agreement.

My view is that it is a financial matter which Palmier should resolve without Frans Maas being involved in the risk, potentially, of not acting in accordance with Atlantic’s instruction. As you know I would be perfectly willing to continue with the present arrangement provided I can obtain absolute clarification from Atlantic of their instruction. Unfortunately but not surprisingly you would not agree to me seeking the necessary clarification. Palmier and KSD’s interpretation of that instruction has already been received in writing.

You asked if I would accept an indemnity from Palmier as an alternative. I think at this stage in Palmier’s recovery it is too early to place complete reliance, financially, on such an indemnity although one should be in place as a matter of course.

It seems to me that as Palmier’s strength grows, its ability to obtain appropriate credit lines with banks will also grow. As Frans Maas does not wish to remain as a quasi bank indefinitely, it is essential that fees are levied to discourage the status quo as well as to cover the risk undertaken. My proposal in this respect is attached but may need some adjustment as I have made various assumptions regarding the level of new bills of lading and the speed with which they are presented.”

In the light of this letter I am driven to the conclusion that FM was only too conscious of the risks associated with the arrangement that they had embarked on but deliberately chose to run those risks to obtain reimbursement of the loan. In this respect I concur with the finding of Langley J at page 13 of his judgment: -

“For much the same reasons, FM must, or at least should, have appreciated that if they did not permit the unlawful release of the goods the consequence would be that the Claimants would not be paid for them. Indeed in a real sense that was the purpose of the release of the goods. As I have already said, FM knew or at the very least should have known that there were suppliers and of the interest of the bank. The loss by the Claimants of the price payable was therefore the probable and foreseeable consequence of FM’s conduct.”

In summary, it is clear that, as FM appreciated, Palmier could not conceivably trade themselves out of their indebtedness without FM allowing the goods to be released prior to the arrival of the original bills of lading. It may well be that FM could reasonably have embarked on such a process against the comfort of the written permission of KSD and Atlantic affording liberty to release 15 TEU’s or, at a later stage, goods to the value of $825,000. But I accept the submission of RSA that FM were recklessly indifferent to the risks of third party claims in volunteering release of a further $500,000 worth of goods from August. Even then, despite a tentative suggestion emanating from Mr Mossman on the 21^st August as to the manner in which a breach of the limit could be avoided, FM failed to police the value of the released goods.

The risk was an obvious one. It was clearly perceived. Indeed Mr Mossman insisted on the inclusion of Clause 23 in the WTA because of it. Further, I find that a “danger fee” of £50,000 was duly invoiced in respect of the risk. In any event, FM received the clearest prompt of the risks involved with the receipt of enquiries from Taiwanese shippers in late August and early September and the ensuing express instruction of Atlantic prohibiting premature release. The reaction was a delayed and unsuccessful attempt to retrieve the situation by obtaining KSD’s indemnity to a total of $1.825m.

By way of further confirmation, I also agree with RSA that Mr Mossman’s letter of the 9^th November establishes that FM had shut its eyes to an obvious risk by continuing to release goods without bills of lading and without regard to value. This continued right up until early December when a receiver was appointed to Palmier.

It follows that FM were in breach of General Condition 3 and Claims Condition 5.

The Underwriters have also purported to avoid the policy for non-disclosure. The basis of the plea was that FM had already established a practise of handing over goods to Palmier without production of original bills at the time of the renewal in April 1998.

FM was minded to concede that such practise was in existence at that time. This concession was not based on their own witness evidence, but on the content of a report by loss adjusters made to underwriters. The report, dated February 1999, observed at page 6: -

“Up to February 1998, with only this exception, there is no record of goods ever having been obtained or released without presentation of fully endorsed bills of lading…. It seems that at around this time general discussions ensued whereby, as a result of Palmier’s claim of potential insolvency, they were permitted to receive containers without original bills of lading in return for repayment of the monies owed. It is unclear, and unlikely, that any agreements were formalised at this time leaving things to come to a head in June 1998….”

I am not persuaded that the practise had been adopted as early as this passage might suggest. Indeed it is inconsistent with an earlier part of the report on p.4 which timed the “novel agreement” to allow premature release as being coincident with the WTA. If this analysis is right, of course no question of non-disclosure arises. In any event, if the concession was well founded, it is difficult to see how the underwriters did not have the requisite knowledge of the practice by reason of their receipt of the report and thus must be treated as having affirmed the policy by its extension in April 1999 and subsequent renewal.

FM also argued that, even if there had been any such non-disclosure, it did not induce RSA to enter into the policy (albeit it was conceded to be of a material fact) since the underwriters would have made exactly the same contract if full disclosure had been made. In support of that submission, FM relied both on the fact that the policy was renewed on the same terms in 1999 and by the alleged reaction of underwriters (or more accurately lack of it) when, as FM claim, RSA was told of the practice at a meeting in September 1998.

I take the latter point first since it also is the basis of an alternative case on affirmation. On the morning of the 15^th September 1998, Mr Harrowing and Mr Wilson (FM’s Claims Manager) met with representatives of FM’s insurance brokers, Aon. Later that day the party went on to meet representatives of RSA, Mr Eaton and Mr Moffat. Both the FM and the RSA representatives gave oral evidence before me. I heard no evidence from the brokers.

It was the evidence of Mr Harrowing and Mr Wilson that they were anxious to discuss the release of stock without bills of lading with the brokers and duly explained that Palmier had been allowed by that means to clear their debt to FM and that these explanations had been repeated to underwriters at the second meeting. Indeed, it was Mr Wilson’s evidence that he asked the underwriters’ representatives whether they were “comfortable” with this arrangement and the underwriters raised no objection.

In contrast both Mr Moffat and Mr Eaton said they had no recollection of being informed about the release of goods without bills of lading at the meeting.

The resolution of this dispute of fact inevitably focuses attention on the contemporary documents. One of the brokers, Mr Booth, kept notes of both meetings. As regards the first meeting with the brokers alone, his note, so far as material, reads as follows: -

“KH queried the need for Frans Maas to insure the total stock as they do not have a lien on the whole stock. Palmier have been allowed to trade to clear their debt to Frans Maas and they currently owe around £1.5m. New stock is coming into Shipdham up to £800,000 without a bill of lading which has been agreed by the shippers Atlantic Shipping and in addition Frans Maas also allow another £500,000 on top. Also the original stock of £10m on which the lien was obtained has been substantially reduced and FM no longer have clear ownership of the entire stock. KH asked whether Ian could get the property insurers to reduce their sum insured to the amount of the current debt £1.5m and the freight liability insurer to resume their cover.”

So far as Mr Booth’s note of the second meeting with underwriters is concerned, in its typewritten form, it reads so far as material as follows: -

“KH raised the position on the lien which was no longer iron clad as FM had to allow Palmier to trade themselves out of the debt and they currently owe around £1.5m. The original stock was reduced considerably and the new stock coming in is not subject to the lien. SH advised that Aon would approach FM’s property insurers to reduce Palmier’s stock sum insured to £1.5m and the balance of stock needs to be covered under the freight liability policy under the usual UKWA conditions. JE will consider their position on this and advise.”

A note of the second meeting kept by Mr Moffat was in similar terms to Mr Booth’s. These notes are only consistent with Mr Harrowing having explained to brokers that Palmier had been allowed to trade themselves out of the debt and how, but with neither he nor the brokers having told the underwriters how it had been achieved at the second meeting.

The only contemporary document supporting Mr Harrowing and Mr Wilson’s recollection was an undated manuscript note of Mr Booth which may relate to the second meeting. It was disclosed in October 2002 under cover of a letter from the Defendant’s solicitors that contained the following observation: -

“We have asked Norman Booth to prepare a typed version of the note and we may wish to serve a statement from him verifying his belief in the accuracy of his note and to what extent his notes are a record of his own spoken word at the meeting.”

In the result no additional statement was forthcoming. So far as the note is concerned it simply has an entry under the heading of Shipdham: “Palmier lien £1.3m. £500,000 cargo moved without bill of lading agreed with Atlantic Shipping. £500,000 on top agreed by FM. Ownership now in dispute. UKWA write to Jonathan Eaton ? OK”.

It may be that this note is in relation to the earlier meeting or more likely a note prepared for the purposes of the second meeting. But I am quite unable to accept this note outweighs the preponderance of the other contemporary material (the more so without any explanation from Mr Booth) that is only consistent with no mention of the matter as to how the debt had been reduced having been made at the meeting with Underwriters. Thus no question of affirmation arises.

Equally the content of the meeting does not help on the issue of inducement. But as regards the time of placement, assuming disclosure, it is clear from the evidence given by the underwriters that they would each have referred the issue up the chain of command. The most senior was a Mr Cook, Manager of the Regional Marine Department. It was his evidence that, in the event there had been disclosure, liabilities arising out of the premature release of goods would have been excluded from the cover (or, if such activities were found to be “endemic” in the Frans Maas operation, the insurance programme would have been cancelled).

In this context, it is true to say that cover was in due course renewed without any express exclusion. But by then the matter had been thoroughly investigated and, accordingly, RSA were in a position to conclude (rightly) that the losses actually sustained were outside the scope of the cover. Thus for what it is worth, I would have accepted the submission that (assuming non-disclosure) the Defendants were thereby induced to provide cover since exposure to a customer by reason of delivery of goods without bills of lading could prima facie be substantial.

For the reasons set out earlier in this judgment, the claim must fail.