Priya Fernandopulle & Peter Banco | July 2012 | Insurance & Financial Services
On 7 June 2012 the New South Wales Supreme Court found in PrePaid Services v Atradius [2012] NSWSC 608 that the trade credit insurer was entitled to deny a claim on the basis that the insureds had not properly disclosed the credit history of the insured buyer nor was the insured able to establish that debts arising from its trading relationship were in fact covered by the policy as the terms of trade were not on the same terms as disclosed to the insurer.
Who does this impact? Trade Credit insurers and commercial entities with Trade Credit insurance.
What action should be taken? >> Before entering into the Policy insurers should check the Contract that is the subject of the insuring clause and ensure all related contracts that may be covered are provided by the insured.
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Non-disclosures held to be fraudulent in trade credit claim
>> Remember that if the party is a named Insured and the Insured Buyer is listed in the Policy, there is a potential for an agreement between those parties that is in the same terms as the Contract the subject of the Policy, to be covered. >> Consider that if the Contract with an Insured Buyer under which the claim is made is not the Contract the subject of the insuring clause, the Policy may not respond. >> Insureds need to disclose the complete trading history with the Insured Buyer. >> Insurers should conduct their own checks in respect of the financial background of Insured Buyers as if this information is readily available, the insured may not be required to disclose the information.
Facts A trade credit policy was issued to the plaintiffs, PrePaid Services Pty Ltd (PrePaid Services), Optus Mobile (Optus) and Virgin Mobile (Virgin), by the defendant insurer Atradius for the plaintiffs’ business dealings with Bill Express (BXP) in the event that BXP became insolvent. The plaintiffs collectively sold prepaid access to telecommunications networks to their customers via BXP’s retail point-of-sale terminals. PrePaid Services provided network access to BXP on behalf of Optus as its agent. However, Optus also provided network access directly to BXP. Virgin Mobile also sold network access directly to BXP. BXP provided to the customer an e-voucher containing a PIN that, when activated, enabled the customer credit
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to use the plaintiffs’ networks. BXP collected payment from the plaintiffs’ customers and was required to remit that payment, less commission, to the plaintiffs.
(iii)
BXP became insolvent, and the plaintiffs suffered losses arising from BXP’s debts to them in excess of $62 million. The plaintiffs made a claim of $27 million on the Policy, being the limit of indemnity. Atradius, the defendant, refused the plaintiffs’ claim on several grounds:
Under the sub-agency agreement covered by the Policy, PrePaid Services, as agent for Optus, provided e-vouchers to BXP which were capable of being delivered to the ultimate consumer. However, at the time of policy inception it was also disclosed that Optus directly supplied e-vouchers to BXP separate from the agreement between PPS and BXP. Following BXP going into liquidation, Optus made a claim pursuant to the Policy for unpaid invoices issued directly to BXP. Atradius argued that these invoices did not fall within the scope of cover as the terms of that agreement had not been disclosed and the onus was on Optus to prove those terms fell within the cover of the Policy.
1. Atradius was entitled to avoid the contract of insurance under Part IV of the Insurance Contracts Act due to the plaintiffs’ fraudulent misrepresentation and non-disclosure at inception of the policy; 2. Alternatively, if found not to be entitled to avoid the contract of insurance then Atradius was entitled to reduce its liability to the plaintiffs to nil due to the plaintiffs’ fraudulent misrepresentation and non-disclosure at inception of the policy; or 3. Atradius could reduce its liability by $16 million on the basis that some of the debts claimed in this sum fell outside of the scope of cover afforded by the contract of insurance. The plaintiffs commenced proceedings in the Supreme Court of NSW, seeking orders that Atradius indemnify the plaintiffs for their losses in the sum of $27 million.
Decision On 7 June 2012, McDougall J delivered a decision in favour of Atradius. The main issues were:
Debt not arising from the Sub-Agency Agreement The ‘Contract’ under which debts would be insured was defined in the Policy as the ‘SubAgency Agreement between: (i) (ii)
Prepaid Service Pty Limited, Optus Mobile Pty Limited, Optus Internet and Bill Express Limited Optus Mobile Pty Limited and Bill Express; and
Virgin Mobile Australia and Bill Express
for open account sales of goods insured up to 28 days from date of invoice.’
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Non-disclosures held to be fraudulent in trade credit claim Priya Fernandopulle & Peter Banco | July 2012
His Honour held that as a matter of common sense and language, the definition of ‘Contract’ was to be taken to refer to: ‘supplies made by Optus Mobile as principal directly on the terms of, or of similar effect to, the sub-agency agreement.’ That is, if Optus traded directly with BXP on the same terms as those of the Sub-Agency Agreement, then those debts would also be covered under the Policy because the relationship between Optus and BXP was listed in the Policy. His Honour was of the view that Optus needed to establish that it supplied to BXP substantially on the same terms as the sub-agency agreement in order for the Policy to respond to the debts arising from the direct supply agreement. However, Optus was unable to establish that the terms upon which it supplied e-vouchers to BXP were the same or similar to the terms referrable to the Sub-Agency Agreement and therefore the unpaid invoices arising out of that direct relationship were held not to be covered under the Policy.
Goods not “irretrievable” Atradius also argued that its liability could be reduced further on the basis that invoices issued following the termination of the Sub-Agency
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Agreement on 24 April 2008 were not insured under the Policy because, despite terminating the agreement, the plaintiffs continued to supply e-vouchers to BXP although on different terms to the Sub-Agency Agreement. His Honour held that where goods supplied were done so “irretrievably”, whether on shipment or consignment, then a debt arising in those circumstances would likely give rise to an Insured Debt. However, as the e-vouchers remained retrievable by the plaintiffs in that they could be cancelled by either Optus or Virgin (unless a consumer bought them), any unpaid invoices following termination of the agreement did not fall within the scope of cover. Further, His Honour noted that any sales of e-vouchers to customers after the termination of the Sub-Agency Agreement did not occur in the same terms as the Sub-Agency Agreement and therefore were not covered by the Policy.
Misrepresentation and Non-disclosure Atradius argued that PrePaid Services either fraudulently or innocently misrepresented or failed to disclose its true trading history with BXP at the time of completing the proposal form. PrePaid Services had indicated on the proposal form that: 1. BXP had been late with payments ‘on occasion’ up to 7 to 10 days from the due date. 2. The delays in payments were experienced due to a reduction of the payment terms from 28 days to 21 days. 3. PrePaid Services had not entered into any payment plans with BXP. An expert analysis of the history of payments between PrePaid Services and BXP was conducted which indicated that 70% of invoices examined were paid late by BXP. The evidence also established that the answers provided by PrePaid Services in respect of late payments were inadequate and in particular, the representation that late payments were only 7 to 10 days late ‘on occasion’ was grossly incorrect. PrePaid Services also failed to disclose to Atradius that it had entered into at least three payment plans with BXP, one of which was not
complied with, before completing the proposal form. His Honour concluded that the proposal form was recklessly completed and the answers were wrong (noting that the second answer was somewhat ambiguous). On that basis, His Honour found that PrePaid Services misrepresented the trading history with ‘reckless indifference to their truth or otherwise,’ was therefore fraudulent and entitling Atradius to avoid the Policy from inception. With respect to non-disclosure, His Honour found that PrePaid Services failed to disclose the true trading history with BXP. There was a further question with respect to whether PrePaid Services should have disclosed BXP’s difficulties with respect to working capital. In this instance, his Honour found there was no non-disclosure on the part of PrePaid Services as this was information that was readily and publicly available to Atradius.
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Non-disclosures held to be fraudulent in trade credit claim Priya Fernandopulle & Peter Banco | July 2012
Ramifications There are some lessons to be learnt by both Trade Credit insurers and commercial entities who obtain trade credit insurance arising out of this decision: 1. The Contract that is the subject of a Trade Credit Insurance Policy may not be the only one that triggers cover if a named Insured has other agreements with an Insured Buyer in effectively the same terms as the Contract. 2. If the Contract between the Insured and the Insured Buyer is terminated, the insurer may be liable to make payment for debts incurred even after termination of the Contract if the goods or services are no longer retrievable, and they were supplied to the Insured Buyer on the same terms as the Contract that is covered under the Policy. 3. Insureds must disclose the true trading history with Insured Buyers. 4. Insurers must be careful if they rely solely on financial information provided by the insured regarding the buyer. If adverse financial information is publicly available an insurer may not be able to rely on a failure to disclose that information by the insured.
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For more information, please contact: Priya Fernandopulle Lawyer T: 02 8257 5729 M: 0434 115 260 priya.fernandopulle@turkslegal.com.au
Peter Banco Lawyer T: 02 8257 5756 M: 0412 931 383 peter.banco@turkslegal.com.au
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Non-disclosures held to be fraudulent in trade credit claim Priya Fernandopulle & Peter Banco | July 2012
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