Glencore International A.G. v Alpina Insurance Company Ltd. & Ors

Following the delivery of my judgment in this phase of the litigation on 20^th November 2003 it became apparent that it would be useful to determine two further issues in order to assist those who are currently preparing for the trial on quantum. One concerns the insurance of the three Cheleken crude cargoes referred to in paragraphs 236-258 of my first judgment; the other concerns diverted cargoes which are discussed in paragraphs 193-203.

The Cheleken crude cargoes had been shipped into Fujairah between September and November 1997 and had been declared to the cover in accordance with the practice established between the parties. In each case a declaration had been made for both transit cover and storage cover by means of the designation ‘FOB-STORE’ in the declaration bordereaux but without specifying the period for which storage cover was required. No further declaration was made at any time.

By 7^th February 1998 it was apparent to Glencore that the three cargoes were missing, but it was not, and is still not, known exactly when they were misappropriated. Insofar as that occurred within 30 days of discharge at Fujairah it is common ground that Glencore was insured in respect of the loss, but Mr. Rainey Q.C. submitted that none of the cargoes was insured in storage for more than 30 days and that insofar as any of them was misappropriated after that time Glencore was not covered.

The way in which these cargoes were declared to the cover did not differ in any way from that in which the majority of cargoes shipped into Fujairah under the arrangements between Glencore and MTI were declared. In each case the bordereaux simply identified them as cargoes in transit to Fujairah for storage. It is accepted that that was sufficient to amount to a request for cover while in store; the question is whether it should be construed as a request for 30 days’ cover only and whether a further request, whether by way of declaration or otherwise, was needed in order to extend the period. It is common ground that there was no further declaration or request of any kind.

Condition 1.18 does not expressly deal with this question. It simply makes storage cover available to Glencore, both on goods that have previously been insured in transit and those that have not. The premium payable for such cover is expressed to be

“0.01125% each 30 days or pro rata in excess of first 30 days if transit covered hereunder, otherwise, 0.01125% each 15 days or part thereof.”

Mr. Schaff Q.C. submitted that the periods in respect of which premium are calculated have nothing to do with the attachment of cover or the period for which it continues. In my view that is correct. It leaves open, however, how one is to construe a request for cover contained in declarations bordereaux of the kind that one sees in this case. Is it, as Mr. Rainey submitted, to be understood as a request for 30 days’ cover, or, as Mr. Schaff submitted, a request for cover for an indefinite period?

Mr. Rainey’s submission was based primarily on the fact that under condition 1.18 Glencore was entitled to 30 days’ cover at no additional premium if the goods had been insured in transit and on the fact that when Glencore declared goods in store that had not been declared as transit risks it did so a month at a time. Declarations of goods in storage as well as goods in transit were routinely made some months in arrears and one therefore finds in the section of the bordereaux covering storage risks references to parcels of oil that were in store during the calendar month ending three months or more earlier. One cannot tell from the bordereaux how long the goods have since remained in store or for how much longer they are likely to do so.

I agree with Mr. Schaff that condition 1.18 does not limit the period for which cover is initially available to 30 or 15 days, as the case may be, and does not require successive declarations to be made in order to maintain continuous cover beyond those periods. I see no reason, therefore, why Glencore should not have requested cover for any period it chose, whether more or less than 30 days or indefinitely. In any of these cases cover would attach and run continuously until the period expired, the goods ceased to be on risk or Glencore notified Alpina that cover was no longer required. One comes back, therefore, to the construction to be placed on the declarations by which cover was requested for these cargoes.

In my view an important factor to be taken into account when answering this question is the fact that condition 1.18 forms part of an open cover and is of a facultative/obligatory nature. The essential purpose of a contract of this kind is to ensure that cover is continuously available in respect of goods bought and sold in the course of trading and is available when, and for as long as, it may be required. The nature of commodity trading is such that it will often be difficult to tell how long goods placed in store are likely to remain there, so it is likely to be of advantage to the insured to be able to obtain cover for an indefinite rather than a fixed period and no doubt insurers are aware of that.

Against that background I can see no reason to construe the declarations in this case as requests for 30 days’ cover only, nor can I see any reason why Alpina should have understood them in that way. The fact that cover was free for the first 30 days is relevant only to the calculation of premium; I do not think that it provides any basis for inferring that Glencore was seeking cover for a limited period. The fact that goods in store appeared in declarations bordereaux month by month does not in my view provide any assistance. The primary purpose of the bordereaux was to notify Alpina of the risks that had attached and the premiums that had become due in respect of them. In the case of transit risks premium was payable as a percentage of the value of the cargo; in the case of storage risks premium was payable by reference to the duration of cover. In those circumstances it is not surprising that successive bordereaux contained details of goods in store month by month since that was sufficient in the light of the way in which the parties administered the contract to enable a calculation of premium to be made. The fact that the bordereaux were drawn in that way does not justify the conclusion that Glencore was making separate requests for cover from month to month.

Mr. Rainey submitted that to construe the declarations of the Cheleken crude cargoes as involving a request for indefinite cover would be uncommercial because the insurers would never know the extent to which they were on risk at any time. I do not find that a very persuasive argument. In the first place, both parties were content to work on the basis that declarations would be made three months in arrears, so the information available to Alpina about its current exposure was always out of date and both parties accepted that. Apart from that, the nature of the contract was such that Alpina had no control over the number and volume of storage risks declared to the cover. It can have made little difference to Alpina whether any particular parcel of oil at a particular location was insured for successive periods of 30 days or for an indefinite period, any more than it mattered whether one parcel came off risk and another became attached to the cover. In these circumstances I am satisfied that a request for cover in the form of a declaration to which no specific time limit was attached is to be construed as a request for continuous cover until the goods ceased to be on risk or Alpina was notified that cover was no longer required.

Mr. Rainey submitted that if Glencore intended that the Cheleken crude cargoes were to be insured beyond the first 30 days after discharge they ought to have been declared as cargoes in storage in subsequent bordereaux. Strictly speaking, I think that is right, but the question is not whether they ought to have been declared and premium paid, but whether the failure to declare them is to be treated as notification that cover was no longer required in respect of them. A failure to include those cargoes in subsequent bordereaux could be explained in a variety of ways and in my view is not consistent only with an intention to terminate cover. In my view clear and unambiguous notification would be required to achieve that while the goods remained at risk. Accordingly, I do not think that the failure to make such declarations can be taken as notification that cover was no longer required.

It follows that in my view the Cheleken crude cargoes were insured at the time of loss, whenever that occurred. One result of this conclusion may be that Glencore has not paid the whole of the premium due in respect of these cargoes, but that is a matter than can only be determined once the dates of loss are known.

One question that arose for consideration in connection with diverted cargoes was whether a loss had occurred in cases where MTI, having used part of an incoming cargo to meet its own commitments, credited Glencore with receipt of the full amount of the cargo at a time when it held enough oil of the relevant grade in store for its own account to cover the quantity diverted. I concluded that in those circumstances it might be possible to infer that MTI had intended to transfer to Glencore an amount of oil from its own stock equivalent to that which had been diverted and that by giving MTI full operational control over the facility and the handling of incoming cargoes Glencore had impliedly assented to any transfers of title necessary to reflect operational movements of that kind. If so, there would be no loss. However, I thought it likely that the answer would depend on the particular circumstances of the case and I therefore left the matter open for decision at a later date.

Although I doubted whether it would be possible to determine this issue in advance of the hearing on quantum, the parties invited me to deal with it at this stage because they were both satisfied that no specific arrangements were made between Glencore and MTI in relation to the handling of any of the diverted cargoes. It was common ground, therefore, that in none of these cases had Glencore been asked by MTI to agree that a quantity of oil coming into Fujairah should not be discharged into the facility but should be immediately shipped out for the account of MTI on the basis that MTI would transfer an equivalent quantity of the same grade from its own stock to Glencore. It was also common ground that it is impossible to say at this stage whether MTI was holding an equivalent quantity of the same grade in stock for its own account at the time when it diverted part of an incoming cargo for its own purposes. If it did not, the diversion of oil necessarily involved a misappropriation by MTI and gave rise to a loss under the policy. Only in those cases in which MTI did have sufficient stock to substitute for the diverted parcel might it be said that no loss had occurred.

Mr. Rainey submitted that if at the time of a diversion MTI had sufficient stock to enable it to transfer a substitute parcel to Glencore and effectively did so, any loss was made good, whether Glencore had agreed to it or not. Thus, although attention had previously been directed primarily to whether there was agreement between the parties to handle matters in that way, that was not an essential element in his argument. If one accepts the premises on which this argument is based, I think Mr. Rainey’s submission is correct. Even if the diversion was unauthorised and resulted in a loss of its property, Glencore would not be entitled to recover under the policy if the loss had already been made good. The most obvious example is where goods are stolen from the insured and subsequently returned in undamaged condition before any claim is made. In the present case there could be no return of the specific goods, but where one is dealing with a fungible commodity the return of the same amount of goods of the same quality ought to lead to the same result.

However, the position in the present case is not quite as straightforward as that. In the first place, it is necessary to establish that MTI did in fact intend to transfer property in an equivalent quantity of oil to Glencore. Mr. Schaff submitted that there is no evidence of MTI’s intentions in this respect other than that which is to be found in the records relating to the operation of the facility. I think that is right, but most of those records reflect the position as it should have been rather than as it actually was. For example, the spreadsheet kept by Miss Gene showed large quantities of oil held in stock for Glencore that by February 1998 were not physically present within the facility. The documents that come closest to providing reliable records of MTI’s view of interests in physical stocks are the manuscript ledgers mentioned in paragraph 137 of the Phase 2 judgment and the “daily reports” described in paragraph 138. The ledgers record oil entering MTI’s inventory on the ITT date and leaving it as and when parcels were drawn for MTI’s account, but I am not aware of any case in which they record an in-tank transfer from MTI to Glencore to balance the shipment out of a diverted cargo. Similarly, I do not think that any of the daily reports reflect a transfer of stock between MTI and Glencore of that kind.

It is important to bear in mind in this context that an intention to make a transfer by way of substitution cannot safely be inferred simply from the existence of sufficient stock with which to make it. In my judgment in Phase 1 I considered the case of James Roscoe (Bolton) Ltd v Winder [1915] 1 Ch. 62 which is authority for the proposition that an intention to transfer title cannot be inferred simply from the fact that a wrongdoer has added to a commingled bulk a quantity of his own goods (or in that case money) sufficient to reverse the effect of previous wrongful withdrawals. In my view the same applies in the case of the wrongful diversion of cargoes in this case. The mere fact that MTI may have had enough oil in stock to make good losses caused by diverting oil belonging to Glencore does not by itself justify the conclusion that it intended to make the necessary transfer to Glencore in order to do so. It is just as likely (if not more so) that Mr. Kilakos intended to use the oil and pay for it at a later date when an ITT contract was issued in respect of it. The fact that this is not by any means a far-fetched possibility is demonstrated by the fact that one issue between the parties was whether an insured loss has occurred in those cases where MTI withdrew parcels of oil from stock before later buying them from Glencore under ITT contracts: see paragraphs 204-224 of my first judgment. It is for this same reason that one gets no help from the fact that Glencore was credited in MTI’s records with the diverted parcels which were subsequently sold to MTI under ITT contracts: it is simply not reliable evidence that MTI intended to transfer title to Glencore in a corresponding quantity of oil at the time of the diversion. If it were possible to identify in MTI’s records a transfer from MTI to Glencore that matched a diverted cargo, that would be evidence of the necessary intention, but the fact is that there are no such entries.

I adhere to the view I expressed in paragraph 202 of my first judgment, namely, that by giving MTI full operational control over the facility and the handling of incoming cargoes Glencore consented to any transfers of title necessary to reflect operational movements, but it does not follow that all diversions of cargo can be regarded as purely operational matters. In order for them to be treated in that way it would be necessary to show (at least) that MTI did have stock that was available to cover its export and that it intended to replace the diverted cargo with oil from its own stock as from the moment of the diversion. This means that the substance of the enquiry is the same.

The parties invited me to decide the issue in relation to diverted cargoes on the basis of the evidence before me which they both accepted was representative of the evidence available in all cases in which cargo had been diverted. For the reasons given above I am not satisfied that MTI did intend to transfer a corresponding parcel of oil to Glencore in any of those cases, even when it had sufficient stock available to do so. It follows that in my view a loss occurred under the policy each time a parcel of oil was diverted. This makes it unnecessary to consider Mr. Schaff’s further submission that even if MTI had intended to transfer title in a corresponding part of the bulk to Glencore, it failed to do so effectively under the law of Fujairah.