Tradigrain SA & Ors v Intertek Testing Services (ITS) Canada Ltd. & Anor

The claimants (“Tradigrain” and its insurers) claim damages for conversion against the second defendant (CBI) arising out of the loss of 15,697.7 mt of vegetable oil. The vegetable oil formed part of a number of consignments imported into India by Tradigrain between August 1999 and May 2000. The oil was discharged into storage tanks in Mumbai under the management of CBI pursuant to a contract, the Collateral Management Agreement (CMA), made between Tradigrain and the first defendant (Intertek). Intertek and CBI were members of the same group of companies to which I shall refer as the ITS Group. The pleaded claim against Intertek for breach of contract is not pursued.

The oil was to be sold by Tradigrain to an Indian buyer, Lanyard Foods Limited (“Lanyard”). It was to be released from the tanks by CBI only when instructed by Tradigrain to do so. The instruction was only to be given upon payment by Lanyard.

The loss was caused by an employee of CBI, a Mr Nair, who, dishonestly, and in league with Lanyard, gave instructions for the oil to be released to Lanyard without authority from Tradigrain and before Lanyard had paid for it.

There has been a considerable and commendable measure of agreement both on matters not, or no longer, in issue and on what the remaining issues are.

(1) The Representative Issue:

The loss (apart from limitation) is agreed at US $ 5.25m. The remaining issues are:

The material provisions of the CMA on the Limitation Issue are as follows. In the CMA, Tradigrain was described as “the Depositor” and Intertek as “ITS”. I have corrected obvious typographical errors.

Clause 1 of the CMA provided that:

“1.1

The Depositor hereby appoints ITS to monitor and manage the storage of the Goods and provide and perform the services (the “Management and Monitoring Services”) set out in Schedule I, on the specific terms of and in the manner provided in Schedule II (the “Specific Terms & Conditions relating to the Management and Monitoring Services”) hereto.

PROVIDED ALWAYS that ITS’ performance of its obligations under this Agreement shall, unless specifically provided to the contrary herein, be subject to and in accordance with ITS’ General Conditions of Service, a copy of which is attached hereto as Schedule III and which shall be deemed to be incorporated herein, mutatis mutandis (and be binding on all the parties hereto) all in accordance with Clause 6 below.

1.2

In consideration of ITS performing its obligations under this Agreement, the Depositor shall pay ITS the fees applicable thereto (and as more particularly provided and set out in Schedules II) (the “Fees”).”

Clause 6 of the CMA provided that:

“6.

ITS’ General Conditions of Business

Without prejudice to the generality of the foregoing, the rights and obligations of ITS hereunder shall be governed by ITS’ General Conditions of Business, a copy of which is set out in Schedule III and which shall be deemed to be incorporated herein and form a part of this Agreement, mutatis mutandis.”

Schedule II Part B made provision for Fees:

“PART B – FEES

The Depositor shall pay ITS Fees on a monthly basis at the rate of US $3,500.00 (Plus all applicable taxes) per month, per terminal ….

The Depositor shall also pay ITS, immediately on ITS’ first written demand therefore (together with any appropriate invoices and supporting vouchers/documentation) all ITS’ out of pocket expenses and disbursements, including, without limitation any insurance premiums paid by ITS on behalf of the Depositor.

OTHER COSTS/FEES/CHARGES

Discharge Supervision………………USD 0.25 Per Metric Ton

Analysis Fees……………...………...USD 80.00 per Test Item

….”

Clause (i) of Schedule III (to which I shall refer as “the limitation clause) provided that:

“SCHEDULE III

ITS’ GENERAL TERMS AND CONDITIONS OF SERVICE

All work in connection with this Agreement is undertaken by ITS on the following conditions:

(i)

That … the total liability of ITS, its officers, employees, agents, and sub-contractors, for any loss or damage caused by or resulting from improper or negligent performance, purported performance or non-performance of such work shall not exceed a sum equal to fifteen times the fee payable for the work.”

Clause 1.4 of Schedule II to the CMA required ITS, if requested, to “use all reasonable endeavours to arrange appropriate insurance” against such risks as were agreed. The relevant insurance and its terms are to be found in a Marine Cargo Policy and the cover note dated 30 July 1999. The Policy itself was an open cover. The Assured was Intertek and “all its subsidiaries and associated companies”. It was subject to German law. In effect, Intertek operated as a coverholder and could (and did) extend coverage to its clients, including Tradigrain, in respect of cargoes under the CMA. It is also common ground that under the cover note, Tradigrain was the “Insured” (Versicherter) and Intertek was the “Assured” (Versicherungsnehmer). The consequence is that in German law the Claimants are only entitled to seek recourse against Intertek if they can satisfy the express terms of the waiver of recourse clause.

By German law, it is permissible to refer to the circumstances in which the waiver of recourse clause came to be agreed if those circumstances are material to the construction of the clause. The clause was the subject of exchanges between Intertek and the brokers, Aon, Jansch & Huberer of Hamburg.

By a fax dated 26 January 1999, a Mr Koop of Aon wrote to Mr Benedict Singh of Intertek, to say:

“following our yesterday’s telcon and the information received I believe that the easiest solution for coverage of the risk requested by the banks would be a waiver of recourse against ITS. I believe that is something which can be agreed, however, excluding as normal wilful act and gross negligence of the management of ITS ….”

Two days later, Aon sent Mr Singh a quotation which included a “Special Agreement” in the terms:

“A waiver of recoveries action against ITS is agreed, however, excluding wilful misconduct and gross negligence of the management of ITS.”

Mr Singh was not happy with this wording. It was replaced by the wording which was agreed and which I have quoted at paragraph 4 viii). “The management of ITS” was replaced with “members of board of executives, directors, general partners, proprietors or the equivalent category of persons in case of foreign firms”.

The Claimants’ factual evidence is substantially based on the documents. They also served hearsay notices in respect of a number of statements provided to Mrs Lehocky (who gave oral evidence), an employee of Control Risks Group, who, beginning in July 2000, conducted an investigation into the loss of the vegetable oil on behalf of Tradigrain’s insurers. The statements made to Mrs Lehocky included statements made by Mr Nair and by those who were at different times said to have been his supervisor, Captain Alok Bahuguna, and Debashish Mukherjee. Captain Bahuguna was senior general manager in charge of bulk oils. He left CBI on 30 November 1999, before any of the oil was wrongly released. Mr Mukherjee joined CBI as Senior Manager in Marketing and Trading on 6 November 1999. There is a dispute on the evidence as to the extent (if any) that after Captain Bahuguna’s departure, Mr Mukherjee had responsibility for supervising Mr Nair’s work in relation to the CMAs and in fact did so.

Mr Nair joined CBI, or its predecessor company “Seascan”, in March 1983. Intertek acquired Seascan in August 1998. Mr Rackham was appointed Chief Executive Officer of Intertek’s Indian operation. Mr Rackham was granted a power of attorney by CBI, dated 17 August 1998, which included provision that he was “to manage and carry on the business of the company” and “generally to act as the Company’s Attorney in relation to all matters in which the Company may be interested or concerned as fully and effectively in all respects (as) the Company could do”. Mr Rackham was not appointed a director of CBI.

Mr Rackham reported to John Notman-Watt, General Manager of the ITS Group’s Middle East and Indian Subcontinent operations. Mr Notman-Watt gave oral evidence. Mr Rackham’s evidence was given by a hearsay notice, on the basis he was unwell and unfit to attend court. The notice was accompanied by a report from his GP to the effect that he had been treating Mr Rackham for stress and depression since 30 December 2005. Mr Rackham’s employment with CBI ended in August 2000. Mr Singh was in charge of ITS Group’s vegetable oil business. Mr Singh gave evidence orally. Evidence was also given orally by Captain Venugopal Suvarna and Anil Kumar. Captain Suvarna was senior general manager (operations and quality) at CBI who took over responsibility for vegetable oils in India in June 2000. Mr Kumar was a member of the board of directors of CBI from August 1998 and Chairman from December 1999.

Lanyard had a subsidiary company, incorporated in Singapore, called Shweta International Ltd which acted as agent for Lanyard in arranging contracts for the purchase of bulk vegetable oil. Himanshu Gandhi was CEO of Lanyard and Shweta, based in Singapore. Nakul Mulluck was an executive director of Lanyard, based in India.

Expert evidence on German law was given by Dr Thomas Remé (instructed on behalf of the Claimants) and Dr Jost Kienzle (instructed on behalf of Intertek and CBI). There was a considerable measure of agreement between the experts recorded in two joint memoranda. Dr Remé recently retired as senior partner in Remé Rechtsanwalte of Hamburg. Dr Kienzle is a partner of CMS Hasche Sigle of Hamburg. Both are specialists in insurance law.

Expert evidence was also given on “conduct/practice/systems to be expected of an ordinary competent operator of storage facilities in India”. Alexandre Hirsch gave evidence instructed on behalf of the Claimants. He is Global Commercial Collateral Manager at Societé Générale de Surveillance (SGS). Ravi Laxmidas Gandhi gave evidence on behalf of Intertek and CBI. He is vice president with Dr Amin Superintendent & Surveyors Pvt. Ltd (DASS).

The Representative Issue

The claimants did allege that both Mr Nair and Mr Mukherjee were “representatives” of CBI within the meaning of the waiver of recourse clause. They (rightly) no longer pursue such a case. Their case is that members of the board of directors of CBI and/or Mr Rackham were representatives. To quote Mr Lydiard QC and Mr West’s skeleton argument on behalf of the Claimants, derived from the Pleadings:

The Gross Negligence Issue

The claimants’ allegations of gross negligence against the board members of CBI and Mr Rackham are set out in paragraph 10(2) of the Re-Re-Amended Reply. They are (in my summary)

The claimants rely in support of these allegations upon the terms of a “Compliance Policy” issued on 14 October 1998 applicable to all ITS Group companies and the fact that it was only after the loss of the oil had been discovered that CBI issued a written quality assurance procedure. They also rely on the fact that Mr Nair issued “more than 28 unauthorised release orders over a period of about 6 months without being detected”.

The Limitation Issue

The claimants alleged that the loss was at least the amount of $6.9m paid by insurers to Tradigrain. Quantum is, as stated, now agreed in the sum of $5.25m. The claimants contend that on its true construction the limitation clause does not apply to liability resulting from gross negligence. They also contended (and pleaded) that for the purpose of calculation of the limit the “fees” included all charges for collateral management services for Tradigrain oil between 21 December 1999 and 31 December 2000, including analysis and insurance charges. Those charges, set out in a schedule to the Reply, total $402,560.20. On that basis the limit under the limitation clause (if it did apply) would have been $6,038,403. However, after the conclusion of the evidence, Mr Lydiard informed the court that the Claimants would no longer seek to contend for that figure but for a figure put forward as an alternative by the defendants, based on a multiplicand excluding insurance costs, producing a limit of $2,310,196.90.

The Representative Issue

The definition of “Representatives” in the waiver of recourse clause is limited to directors formally appointed as such. Mr Rackham was not a representative so defined.

The Gross Negligence Issue

There was no gross negligence by the directors (nor by Mr Rackham) in the sense required by German law.

The Limitation Issue

The limitation clause does apply even where there is “gross negligence” and the “fees” are to be construed as the fees payable for “the work” which generated the loss and so the fees payable in respect of the cargo which was misappropriated. Insurance premiums, discharge supervision and analysis costs are not “fees” nor referable to any impugned “work”. The primary case for the defendants is that the multiplicand for the limit is the monthly fee of $3,500 for the period when unauthorised releases occurred (December 1999 to mid-June 2000). If that be right the limit is $2.023m. Alternatively the defendants put forward the figure now adopted by the claimants of $2,310,196.90. The difference between the two figures is accounted for by charges for analysis of the oil and supervision of its discharge from the vessels bringing it to Mumbai.

The principal business of the ITS Group is marine inspection, testing and surveying. The ITS Group acquired Seascan (CBI) in August 1998. The management of cargo in storage was a new area of business which began to be developed towards the end of 1998. The business was described as CMA because financial institutions would often have a security interest in the cargoes. That was not, however, the case with Tradigrain.

Mr Rackham (an existing Group employee) was appointed, on 28 May 1998, as General Manager, India reporting to Mr Notman-Watt, who was based in the UAE. The offer of the post was made by a UK member of the ITS Group. The terms of Mr Rackham’s employment were recorded at a board meeting of CBI held on 17 August 1998. Mr Rackham was based in Mumbai. The position was anticipated to last 18 months to 2 years at the end of which it was expected that Mr Rackham would hand over to a local successor.

The first meeting Mr Rackham attended (and chaired) was held in Mumbai on 10 July 1998, shortly prior to finalisation of the acquisition. Mr Notman-Watt attended the meeting. The minutes record that Mr Rackham advised the board that the acquisition would result in a number of changes and that

“his appointment as Chief Executive Officer (CEO) is primarily to manage the integration of Seascan into ITS and to determine short, mid & long term business plans. He will manage the business and (the previous “owner”) will assume the position of non-executive chairman. Non-executive being defined as an advisory role in a capacity of supporting the CEO without responsibility for decision and policy making.”

On 12 July 1998, Mr Notman-Watt wrote to Mr Rackham setting out a list of “operational” “financial” and “people” “objectives” through to the end of the year on which the level of bonus payments payable to Mr Rackham depended. They were a formidable list and the letter acknowledged the “enormous challenge” Mr Rackham had ahead of him. The “operational objectives” included “Develop Q(uality) A(ssurance) Procedures Manual” to which 1% of a total possible bonus of 30% was attributable. It was planned that the manuals and commencement of implementation should be in place by October 1998 with “accreditation” during the second quarter of 1999.

The board meeting on 17 August was the first board meeting of CBI following completion of the acquisition. Mr Kumar, Mr Rackham and Mr Notman-Watt (and others) attended by invitation. 3 directors resigned and were replaced by nominees of the ITS Group including Mr Kumar. All the directors, except Mr Roy (who held an executive position prior to the acquisition), thereafter were non-executive.

It was on this date that Mr Rackham was granted the power of attorney to which I have referred in paragraph 18.

In October 1998 the ITS Group provided to CBI (and all group companies) a document entitled “Compliance Policy” which was signed by Mr Chalmers the Professional Standards Director. The document was said to be mandatory. Section 2 dealt with “technical standards”. It required all companies to implement “quality systems”, which were “documented and controlled” and “audited by competent auditors”. It also stated that “ all work shall be carried out by competent staff” and that management must ensure that “staff have been properly selected”; that “levels of staff qualification and experience are appropriate for the work to be undertaken” and that “levels of supervision are appropriate and in place and that records of supervision are maintained”. To quote the Claimants (opening) Skeleton Argument:

“CBI’s failure to take the sort of steps required by Mr Chalmers’ document is one of the main foundations for the claimants’ allegations of gross negligence in this case.”

Mr Rackham distributed the Compliance Procedure to all offices in India. He sent an e-mail to Mr Notman-Watt about it on 26 October. He said he envisaged “several problems from the Indian company side”. On “Ethical Standards” Mr Rackham commented that:

“The Indian market is riddled with graft and corruption as we all know. I have already had all managers and staff sign a statement of business ethics and records are on file. However this does not necessarily mean that the contents of the document will be observed at all times.”

On “technical standards” Mr Rackham commented:

“I actually have a meeting today with a quality systems company with a view to implement ISO 9002 pan India. Currently no form of QA is in place and a number of practices give cause for concern. Most Inspectors are of sub-standard education and need supervision on any matter other than a straight forward load/disch operation. If there is any problem whatsoever assistance is always provided by senior managers. Equipment is of the minimum and mostly ships or terminal gear is utilised. Calibration of inspection equipment is unheard of and I am told that there is no service available in India for calibration of any type. This I find hard to believe and am investigating at present. I am also told that even IOC equipment is uncalibrated. Training records have never been maintained by Seascan. This will have to be implemented.”

Mr Rackham concluded his e-mail:

“The document itself is fine but appears to be tuned solely for a European/USA operation. I have already commenced implementation of certain quality systems here in India but the entire concept is alien to the Indian Company.

Implementing the Policy will not be an easy or quick operation, however striving to improve standards is a basic part of management.

The only direction Caleb Brett Seascan can take is toward improvement. I do foresee problems in the future particularly with regard to integrity and honesty but we will have to tackle these instances as they arise. What we face here in India is an uphill struggle to change a culture and this will not happen overnight.”

It is not suggested that Mr Notman-Watt disagreed with Mr Rackham’s comments. Indeed, when he gave evidence, he was at pains to point out, and I accept, that Mr Rackham achieved a great deal and that the size of the task he had faced in India was bigger than had been appreciated.

Mr Notman-Watt’s evidence is borne out by the terms of Mr Rackham’s “performance and development review” for 1998. In relation to quality assurance it was noted that the manual was now to be compiled in the first quarter 1999. Mr Notman-Watt, who was responsible for the appraisal, commented on Mr Rackham’s overall performance that his takeover in India had been delayed for reasons outside his control which had reduced the amount of time to fulfil his objectives and “given this fact, Chris has achieved a lot of progress in ’98 towards his set objectives as well as meeting the challenge of taking over a company. I am very pleased with his performance”.

It was in January 1999 that Mr Singh identified the business opportunity to manage the custody of edible oil shipments to India. By 24 March 1999, a transaction was proposed with the Singapore Branch of Rabobank, which held a security interest in oil to be imported by Refco (a Singapore company) for sale to Lanyard or Shweta. The structure of the transaction was that the oil would be discharged into tanks sub-leased to CBI or subject to undertakings that it would only be released against instruction from CBI. The CMA contracts were negotiated by Intertek and performance of them in India was to be carried out by CBI in accordance with Clause 1.3 of the CMA.

The Tradigrain CMA was made on 23 July 1999 between Tradigrain and Intertek. It is governed by English law. The services to be carried out by CBI, set out in Schedule I to the CMA, included weekly monitoring of cargo in the shore tanks and giving instructions for the release of the appropriate quantity to the party specified by Tradigrain in delivery orders.

The operation of the Tradigrain CMA by CBI was managed at first by Captain Bahuguna. The first shipment of oil was made by the Antares on 3 August 1999. Mr Singh provided Captain Bahuguna with a “release protocol” for release of the cargo which required a fax or telex message from Tradigrain which was to be numbered and to have a “release code”. Upon receipt, CBI was to confirm the instructions with Tradigrain either by telephone or telex and upon confirmation to release the specified quantity of oil and notify Lanyard/Shweta accordingly.

The first Tradigrain release order was dated 13 August 1999 and others followed which were properly authorised and acted upon. Captain Bahuguna managed these releases and Mr Nair did most of the paperwork. The two were the authorised signatories for and signed the release orders.

Mr Notman-Watt spent two days in Mumbai on 25 and 26 October 1999. In the course of meetings with Mr Rackham, it was agreed that Mr Mukherjee was to be appointed Acting Manager of the Bulk Oils Department in place of Captain Bahuguna. It was also agreed that implementation of Quality Assurance procedures needed to be speeded up and driven forward. The notes record: “to date no manual drawn up, no audits have taken place. Ownership of this project needs to be allocated and time frames set and agreed (note your objectives for ’99).” In the event, Mr Rackham got a nil bonus award for Quality Assurance and accreditation procedures for 1999.

Captain Bahuguns left CBI in November 1999. The witness statements are not consistent as to the responsibilities for bulk oils after his departure. Mr Rackham said Mr Mukherjee (who joined CBI on 6 November) was appointed to supervise Mr Nair in addition to his other duties and Mr Nair reported to him. Mr Mukherjee told Mrs Lehocky that Mr Nair handled the CMA “exclusively”, and he was not told to supervise him. However, Mr Mukherjee and Mr Nair were the only two authorised signatories under the CMA after Captain Bahuguna’s departure and Mr Nair raised the Kandla Incident (see below) with Mr Mukherjee. Mr Nair told Mrs Lehocky that Mr Rackham had asked him to take charge of Captain Bahuguna’s work and that Mr Mukherjee was to supervise him “but he did not carry out his job”.

The position, as I find it to have been, was stated in a number of e-mails sent by Mr Rackham in early December 1999. Captain Bahuguna’s responsibilities were given to Mr Nair (who was promoted) as from 1 December. But Mr Nair was to report to Mr Mukherjee who was responsible for his supervision. Mr Mukherjee was largely dependent on Mr Nair choosing to bring matters to his attention.

It is well established on the evidence that Mr Nair, who had worked for CBI and its predecessors for some 18 years, was generally considered by the senior management of CBI to be honest, hard-working and efficient. Mr Nair was fully acquainted with the established procedures for operation of the CMA and had operated them properly and successfully under Captain Bahuguna’s supervision.

Mr Rackham suffered increasingly severe health problems from November 1999 onwards with recurrent bouts of nausea and diarrhoea. He was hospitalised in India from 9 to 12 November 1999. He returned to the UK on leave before Christmas returning to India on 20 January 2000. To quote from his statement: “by February 2000 I was having ten day periods where I had a very high temperature accompanied by headache, severe nausea and diarrhoea, which continued until I was ordered to take sick leave for most of the month of March 2000”. His weight dropped from 10 to 8½ stone. He suffered from short-term memory loss. He was again in hospital in India from 13 to 16 August when he was treated for enteric typhoid. He then left India and returned permanently to the UK.

The first unauthorised release was signed by Mr Nair alone, dated 15 December 1999, and related to 750 mt of rapeseed oil from a cargo on the M.T. Paros. Between 15 December 1999 and 31 May 2000 the documents include some 28 unauthorised releases signed by Mr Nair relating to 4 cargoes from 3 vessels. The release forms were faxed to the storage location. 6 of the unauthorised releases were sent from fax machines located away from CBI’s offices. Mr Nair also produced false stock reports which he sent to Tradigrain monthly.

Mr Nair told the police and Mrs Lehocky that he had acted on Mr Rackham’s instructions in preparing and sending the unauthorised release orders. The Claimants rightly decided that this allegation against Mr Rackham should not be pursued. It was (and is) denied by Mr Rackham and is belied by the documents.

On 21 February 2000 a power point presentation on CMA business prepared by Mr Singh was sent to Mr Rackham to be passed on to Mr Roy. The presentation drew attention to the need to ensure that CBI was insured against the risks in the business including the risks of theft and unauthorised release.

Mr Notman-Watt wrote to Mr Rackham on 24 April 2000. Mr Notman-Watt wrote

“it is clear to us that management control in India has slipped somewhat in recent months. Whilst it is understood that your health has played a part in the development of this scenario, the smooth running of the Indian operation remains your responsibility as a country manager. If at any time you feel unable to execute your duties as the country manager, you should inform your line manager immediately.”

Mr Notman-Watt was Mr Rackham’s line manager.

It is probable that it was shortly prior to 14 May 2000 that Mr Rackham learnt that Lanyard/Shweta had wrongly taken some 3000 mt of Tradigrain oil from storage tanks at Kandla. Kandla is about 1000 miles from Mumbai. At this time, as is apparent from an e-mail sent by Mr Rackham on 19 May to Mr Notman-Watt, it was thought that the oil had been released to Lanyard by mistake on the basis that it was not a CMA cargo. Mr Nair, in mid-March 2000, allegedly on the instructions of Mr Mukherjee, had, however, issued a false stock certificate to Tradigrain on Tradigrain seeking confirmation of the stock. The certificate showed the oil still in storage despite Mr Nair being informed by Kandla that no stock in fact remained. Mr Rackham said in his e-mail that he had removed all control of CMA and vegetable oil operations from both Mr Nair and Mr Mukherjee and that he and Captain Suvarna were now sorting out the paperwork and investigating. It seems that this incident led to a complaint by Lanyard about CBI’s performance (save for saying “good things about Mr Nair”) which was passed on by Mr Singh to Mr Rackham. Mr Rackham had responded on 14 May expressing great surprise and describing Shweta/Lanyard as “the most corrupt outfit we have to deal with here”. He also said he appreciated the comments about Mr Nair who was “doing a sterling job at all hours to try and meet Shweta/Lanyard late requests for impracticable demands”.

Mr Notman-Watt passed on Mr Rackham’s comments to his own superior, Mr Loughead, in an e-mail dated 21 May 2000 in which he commented:

“Whilst operational mistakes and miscommunications are a factor of doing business, the subsequent attempts to cover up and falsify information are unforgivable as well as breaching compliance. Unfortunately, this will result in dismissals in India although I will evaluate all the facts once the problems have (hopefully) been resolved in order to ascertain responsibility and corrective action.

Chris has been somewhat shocked over all this as I think he realizes that it may indirectly be attributed towards the main source of my dissatisfaction with him last month, ie lack of managerial control in place. Ben evidently is not very happy and has a pre-scheduled meeting with Tradigrain on Tuesday. If we are able to manage the exposure on the current affairs, we (and Ben) will then have the commercial challenge of not losing the customer who is important to our CMA operations (not just in India).”

In fact, Lanyard did replace the missing 3000 mt on 2 June by use of 3000 mt which had properly been obtained from the same cargo.

Mr Notman-Watt went to India. He reported further to Mr Loughead on 6 June. He concluded that:

“CMA operations have been poorly managed/controlled. Lack of documentary control evident. Excessive use of verbal (non-documented) issuance and acceptance of instructions;”

and that:

“Quality Assurance has still not been addressed despite being a priority management task. Procedures need to be drawn up and implemented as a matter of urgency.”

Mr Notman-Watt said there were informal procedures but they needed to be documented and that his comments were a serious (but not very serious) criticism of Mr Rackham. He decided to take the quality assurance procedures out of Mr Rackham’s hands and use “an external source” (a Mr Neil) to assist in drawing them up. He said it was evident at this time that Mr Rackham’s health was suffering. Mr Notman-Watt also “recommended” that Mr Nair “be fired immediately” and that Mr Mukherjee “receive written reprimand for negligence”.

Mr Loughead responded “what a mess” and suggested CBI should not accept any more CMA business “unless we have complete confidence in understanding the procedures that must be followed, better controls are in place and also we are assured that our inspectors and dept/branch managers will perform to the correct standards”.

Mr Notman-Watt replied on 6 June that Mr Loughead’s requirements were met by the appointment of Captain Savurna and hiring an assistant to undertake surveys to replace Mr Nair “who will be dismissed tomorrow”. He commented to Mr Singh that “on the basis of what I found in Mumbai, it is fortunate that only one instance has arisen of operational failures” and that “Chris carries a large portion of responsibility on his shoulders” for not monitoring CMA activities more closely. Mr Nair “resigned” on 7 June. In fact he had continued to issue unauthorised releases up to and including 31 May.

Mr Notman-Watt instructed Mr Rackham to ensure that all CMA files were audited and verified. That task was given to Captain Suvarna. On 13 June, when he arrived back in the Emirates from India, Mr Notman-Watt was informed that matters were “further reaching” and Lanyard had acknowledged that they had removed 25,000 mt of oil without release orders from principals. The police were informed. Mr Nair was arrested.

On 15 June, Mr Rackham instructed all terminal operators that cargo should only be released on written authorisation from CBI signed by two of the four personnel whose copy signatures were provided.

This instruction was a consequence of written procedures prepared by Mr Neil in Mumbai which also included a requirement for weekly inventory checks.

Captain Suvarna made a written report on his investigation into the unauthorised releases which is dated 17 August 2000. He found that there had also been unauthorised releases to Lanyard in the same period of cargoes held to the order of Refco and not Tradigrain. Captain Suvarna was able to identify unauthorised releases by collating tank receipts, all available release orders from Tradigrain and Refco, the release instructions prepared by Mr Nair, the manuscript logs of actual releases kept at the terminals, and comparing the results with the false monthly stock reports to Tradigrain and Refco which Mr Nair had prepared and sent. Captain Suvarna’s Report calculated the missing Tradigrain stock to total 15,947.799mt and the missing Refco stock to total 11,155.50mt.

The experts were agreed that the parties to an insurance contract were at liberty to define the scope of application of “representatives” (or, in German, representanten).

Dr Kienzle’s evidence, and reports, were impressive in their presentation and reasoning. In my summary, his evidence was that:

Whilst I have no doubt that Dr Remé was expressing a genuine opinion his evidence was much less impressive. His opinion was based on the fact that the waiver of rights clause used the expressions “board of executives” and “directors”, that they must therefore have different meanings, and that there is no concept of “director” in German law. Therefore it was open to a German court to construe the word “directors” as extending to a person “working like a director”. The context, of course, is the status of Mr Rackham, albeit it was also Dr Remé’s evidence that “a German court may be inclined to construe the waiver of recourse clause so as to bring Mr Nair under the term director.”

Dr Remé was, however, unable to support this thesis in his evidence. Indeed, I do not think it was consistent with other passages in his reports and Mr Lydiard expressly did not seek to advance it in his closing submissions.

Dr Remé, like Dr Kienzle, said that German law had developed a definition of representative applicable in insurance law. He said the waiver of rights clause “shows in an unequivocal manner that it should work to the benefit of the Defendants” and “the wording is clear”. Dr Remé also referred to the two types of company in German law. The “AG” (analogous to a Plc) which has two boards, a supervisory board (Aufsichsrat) which “controls” the “board of executives” (Vorstand) whereas the GmbH has one or more executive directors entitled to represent the company.

I think the essence of Dr Remé’s opinion is to be found in paragraph 28 of his second report dated 11 September 2005:

“28.

The Waiver of Recourse Clause deals in its wording only with the formal position of board members, directors etc. It is perceivable that the author of the Clause does not deal with an informal director because it does not come to his mind. Nevertheless, the reference to “director” in the wording allows the construction that it includes an informal director if the courts treat the latter as director. The same rationale applies as described in the jurisprudence on the “special representative” quoted above: a legal entity must not be allowed to escape liability by simply not appointing an employee formally as a director although the same functions are conferred upon him. I take the view that a German court would, in all probability, construe a waiver of recourse clause like the one at stake as meaning that an employee working like a director had to be treated as a director or equivalent.”

I much prefer the views and reasoning of Dr Kienzle. I think the wording of the waiver of recourse clause is clear; especially so when read in the context of the two types of companies (AG and GmbH) and boards recognised by German law. The wording is intended to benefit the Assured. It does deal “only with the formal position of board members”, whether they be “executives” or “directors”. As Dr Remé acknowledged, if he was right the supervisory board of an AG would not be expressly referred to which is wholly improbable in a clause drafted in German law terms and applicable to “foreign” equivalents. Concepts derived from the law of torts should not be material in a contractual context in which it was open to the parties to provide for “informal” directors if they wished. Nor, Dr Remé agreed, was there any obligation upon CBI to appoint Mr Rackham a director of the company. Dr Remé acknowledged there was no case law to support him, and his thesis led him to the unsustainable conclusion that Mr Nair was (or at least might be) a “director” within the meaning of the clause. The clause itself contrasts “employees” and “representatives” as defined.

The flaws in Dr Remé’s opinion led Mr Lydiard and Mr West, in their closing submissions, to construct and offer a new analysis of German law said to be based in part on Dr Remé’s analysis and in part on answers given by Dr Kienzle. That was, if they will forgive me, a bold and desperate move. It fails in principle, as I have no expert opinion to support it and, despite German law being a question of fact, I can see no legitimate basis on the evidence which is before the court for coming to my own view of German law or for rejecting the views of Dr Kienzle. It also fails in analysis for reasons which I will now seek to summarise only shortly.

The analysis begins with Sections 30 and 31 of the BGB (the German Civil Code). So, too, did the analyses of Drs Kienzle and Remé. Those Sections come from the part of the Civil Code which addresses corporate entities and whose acts or omissions may be binding upon them. Section 30 addresses questions of authority of directors and “agents” (“vertreter”) appointed by the statutes of the company. Section 31 addresses the liability of a company for damages for acts of such directors or agents. Such persons are the “Organe” of the company. The “tort cases” have broadened the effect of Sections 30 and 31, as described by Dr Remé, to persons not formally appointed under the statutes. This leads to Mr Lydiard’s submission that “it makes no sense to suppose that (the meaning of the Sections) changes according to the context in which they fall to be applied”. The submission continues by reference to an exchange during Dr Kienzle’s cross-examination:

“Q. You see, I suggest that it is an entirely arbitrary limitation on the scope of sections 30 and 31, and the related jurisprudence, to say that it can only apply in the context of tort cases.

A.

Your criticism would probably be very well received within the German legal literature but so far, I believe, it is not the standard of the German courts.”

On the basis of that answer, the conclusion to be drawn was, it was submitted, that:

“Dr Kienzle is saying no more than that there is no German decision on point. But he is effectively admitting that the point put to him is a compelling one. This evidence provides reason to suppose that a German court that had occasion to decide the issue would accept the point put by the claimants.”

I think this is to turn Dr Kienzle’s evidence on its head. The “conclusion” was not put to him, and if it had been his evidence read as a whole, including the passages which precede and follow the quoted passage, leave no room for doubt that he would have rejected it. His analysis was and remained as I have set out in paragraph 67. The so-called “related jurisprudence” is the jurisprudence of tort in the context of vicarious liability. Insurance is different. The logic of the analysis now proposed continues to lead to the unsustainable conclusion that Mr Nair might qualify as a director.

In my judgment, the “directors” and “executives” referred to in the waiver of rights clause are and are only those formally appointed as such in an AG or GmbH and their equivalents in CBI or Intertek. This conclusion does not depend in any way on the documents to which I have referred in paragraphs 14 to 16. Those documents do, however, support and add further justification to the conclusion. Intertek was concerned not only to limit the circumstances in which it could lose the cover but also to do so by avoiding exposure to the conduct of those who could generally be described as “management”.

Dr Remé and Dr Kienzle were agreed that in German law gross negligence required two “elements”: “one an objective severe violation of what is considered as ordinary care as well as, second, a subjective violation of such ordinary care”.

In the course of the evidence, it did appear at one time as if Dr Remé considered that the “subjective element” could be found in an act or omission neglecting in an unusually high degree to observe “what in the given circumstances would have been evident to anybody”. I think, however, that in the course of his evidence it became apparent that Dr Remé was not intending to depart from the experts’ agreement and accepted the definition in a judgment of the BGH given on 30 January 2001, referred to by Dr Kienzle, which reads:

“… gross negligence presumes an objectively-serious and subjectively inexcusable violation of the due diligence required in trade. This due diligence must be violated to an unusual extent and what should have been clear to everyone in this case must have been disregarded. As objectively-gross violation does not per se justify the conclusion of a correspondingly-increased personal culpability, merely because the two usually go hand in hand. Rather a claim against the injuring party exempt from other reciprocal claims by way of recourse only appears justified if there is also a subjectively-inexcusable violation that considerably exceeds the extent permitted in S 276 para 1 BGB ….”

Section 276, paragraph 1, of the BGB provides for the test of “simple negligence”: “he who does not observe ordinary care does act negligently”.

It follows, as the experts both said, for example, illness of the person whose conduct is impugned may provide a subjective excuse for what would objectively be considered a “gross violation of ordinary care” and so preclude a finding of gross negligence. The objective element of the test requires an assessment of the facts, including such matters as the immediate and obvious nature of the risk and whether any steps at all were taken to seek to meet it.

I admit to considerable reservations about this evidence. That is not to question in any way the actual evidence given by Mr Hirsch and Mr Gandhi, both of whom fully observed the duties of experts, and both of whom, albeit in rather different ways, had experience of the operation of CMAs. Nonetheless my reservations were confirmed by their evidence. The undoubted fact is that in 1999/2000 the use of CMAs in India was in its early stages and limited to no more than a few companies. What was required of those companies providing secure storage would depend on what was agreed with the client, and the evidence does not suggest that there were any standard forms or practices. Indeed the court only has before it the CMA agreed by Tradigrain with Intertek and evidence as to how CBI in fact provided for and operated the storage and release arrangements with which the court is directly concerned.

Mr Hirsch’s experience was of fairly short duration and, since April 2004, confined to working at the Head Office of SGS in Geneva. Prior to that, and then only from 2002, in other employment he was an in-house lawyer largely concerned with drafting documents including documents concerned with CMAs. He referred to some experience of CMAs in India but made the point that the operation of CMAs is worldwide and (in SGS, as with Intertek) largely controlled centrally with individual locations following centrally established procedures. He also made the point that it was “”highly unusual” for a collateral manager to limit liability to a multiple of fees because that would ”defeat the whole purpose of collateral management – a credit enhancement for a bank/lender/creditor”. But the Tradigrain CMA did have such a limit and involved no bank or lender. That serves to illustrate the diverse and particular nature of the business. Mr Hirsch considered the facts and documents leading to and commenting upon the unauthorised releases largely as I have sought to set them out in this judgment. His criticisms can, I think fairly be summarised from the conclusions to his report to be:

Those features are said to have been aggravated by Mr Rackham’s failure to implement supervision of Mr Nair when he discovered, at the end of February 2000, that Mr Nair was overworked and “somewhat lax in reporting and communication”, and by a failure to investigate the Kandla incident promptly and properly so as to reveal earlier the unauthorised releases in Mumbai.

Mr Gandhi had and has hands-on experience of Indian collateral management operations. He said that in 1999/2000 CMAs were a new form of business for inspection companies in India and ITS were one of very few companies involved in such work in India. There was therefore very little practical experience and CMAs might differ depending upon the country, parties, terms of finance and commodities involved.

Mr Gandhi agreed that release procedures had to be (and were) agreed in advance with the client; he said that in India in 1999/2000, in his experience, “there was in fact a distinct lack of training and instruction manuals, standard CMA procedures, and compliance standards within the inspection companies operating CMAs”. He also said there was no standard practice for release orders to be signed by two persons, but he would have expected standard safeguards to include surprise cross-checks of releases by senior managers and regular stock checks carried out by a person who was not responsible for managing the day-to-day CMA operations.

The waiver of recourse clause is to be construed in accordance with the evidence of Dr Kienzle. It is effective save only where there is gross negligence by a director formally appointed as such. On the facts that excludes Mr Rackham. It includes (as is accepted) members of the board of CBI. No other persons are relied upon by the claimants.

The unauthorised releases were the result of dishonest conduct by Mr Nair, no doubt (as Mrs Lehocky concluded) under pressure from Lanyard/Shweta. They were the result of a deliberate failure to follow the systems which had been established for the receipt of instructions from Tradigrain and issue of matching release orders. What had happened was concealed by false stock reports prepared by Mr Nair. It was discovered only when Tradigrain sought confirmation of the stock at Kandla which itself led to the investigation by Captain Suvarna which was able to identify reasonably promptly what had occurred at Mumbai.

It can readily be concluded that Mr Nair was given a responsibility for which he was not suited and that he needed but did not in fact receive supervision. He was in a position to carry out a significant fraud which CBI’s systems did not prevent and which went undetected for some 6 months and gave rise to substantial losses.

On the other hand:

To satisfy the gross negligence requirement of the waiver of recourse clause, as I have construed it, it must be shown by the claimants that a member or members of the board of directors of CBI was or were guilty of gross negligence. The allegations made against the board members of CBI (paragraph 24) do not, in my judgment, begin to satisfy the objective test for gross negligence and do not even address the subjective test. The board was entitled to delegate management of the business of CBI to Mr Rackham who was in fact chosen and supervised by others and was in any event a suitable appointee. It was not their concern to deal with any of the matters set out in paragraph 24 which were operational matters under the management of Mr Rackham and not strategic matters nor financial affairs nor matters of the importance of the discovery of Mr Nair’s fraud which Mr Kumar said were the province of the board. The board was not responsible for procedures or quality assurance. Nor did Mr Rackham report to the board. Nor did the Board have any reason to suspect that Mr Rackham (or Mr Notman-Watt) were not discharging their duties fully and properly. There was good sense in the management of CMA business being organised on a global basis.

If it were (which, on my findings, it is not) necessary to consider whether Mr Rackham himself was guilty of gross negligence in the sense I have identified, I would also have concluded that he was not. I would endorse Mr Notman-Watt’s assessment that Mr Rackham bore some of the responsibility for what occurred but he did take some steps to provide a supervisory system for Mr Nair whom he was entitled to believe was honest and hard-working. He also took firm action on consideration of the Kandla incident.

I do not think that the evidence justifies the conclusion that Mr Rackham’s conduct should be characterised as disregarding what would otherwise have been done by or would have been evident to anyone. There was no deliberate or knowing failure on his part. The risk of unauthorised release was, I think, obvious in theory or analysis but it was not obvious in the sense of its actual occurrence or immediacy being self-evident, which has been a feature of the decisions of the BGH to which I have been referred. Nor do I think, in the circumstances of his workload and illness, his conduct demonstrates the necessary “subjectively inexcusable violation of the requirements of ordinary care”. I do not think the claimants have shown more than that Mr Rackham was honestly and conscientiously doing his best in difficult circumstances in the belief that those he had appointed were the best available, honest and up to the job. It may have been, and in 2000 I think was, a poor best but it is not, in my judgment, deserving of the epithet “gross” negligence.

I find therefore that none of the directors of CBI (nor Mr Rackham) were guilty of gross negligence and the claim must therefore fail.

Although on my findings this Issue also does not arise, I will comment on it shortly. The limitation clause (paragraph 11) limits “the total liability” of the defendants to “a sum equal to fifteen times the fee payable for the work” (my emphasis). I agree with Mr Swainston QC, for the defendants, that “the work” means the work which gives rise to the liability in question. In this case that was the work of storing the vegetable oil. The fee payable for that work was $3500 a month. The “analysis fees” were payable for analyses about which no complaints are made. The sum payable for supervision of discharge was not expressly described as a “fee” (paragraph 10) and in any event no complaint is made about such supervision. Thus, if the limit applied, I would assess its application at the figures submitted by the defendants ($2.023m) not the figure now sought by the claimants (paragraphs 26 and 29). The figures as figures are agreed.

The major issue is whether or not the limitation clause applies at all in a case in which (if it were such) there was gross negligence (or wilful default) on the part of “ITS”. Mr Lydiard points to the fact that the clause does not refer in terms to either wilful default or gross negligence when the draftsman knew and used both terms in clause 9 of the CMA. But Mr Lydiard also and rightly acknowledged that the words in the limitation clause “improper or negligent performance” were wide enough to encompass both wilful default and gross negligence as a matter of language. Further, the use of the words in clause 9 was as an exception to Tradigrain’s obligations to indemnify Intertek: no such exception appears in the limitation clause.

The limitation clause was part of ITS Group’s self-contained set of “general conditions of business” which were incorporated in the CMA. The conditions were subject to UK law. UK civil law does not have a concept of “gross negligence”. In those circumstances, I do not see any greater force in Mr Lydiard’s submission about the use of identical language than in the counter-submission that if such conduct was to be excepted it would have been expressly stated.

The words used in the clause are of considerable width and its object was, I think, to be as all-embracing as permissible in law. If it had been relevant I would therefore have held that the limitation clause applied to limit the defendants’ liability to the sum of US$ 2.023m even had they been found to have acted with gross negligence.

The claim fails in its entirety. I will hear the parties on the appropriate order to be made and any ancillary applications either when this judgment is formally handed down or on a date to be fixed thereafter.