Collateral Management Agreements Limits of Liability

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AIR Legal Page                                                                  Asia Insurance Review.

Collateral Management Agreements: Limits of
                        In this articles, Mr Nigel Wagland, a Partner, and Mr Patric
                        McGonigal, an Associate in the Marine, Energy and Transport team
                        at Barlow Lyde & Gilbert, look at the landmark case of Tradigrain,
                        SIAT & others v Intertek Testing Services (“Intertek”), which judges
                        described as being a resounding success of Intertek in defeating on,
                        all counts, allegations of gross negligence in the way various Collateral
                        Management Agreements (CMAs) were conducted in India.
     Mr Nigel Wagland                                                                                                     Mr Patric McGonigal

        he case of Tradigrain, SIAT & others v Intertek Test-          Intertek might be exposed in relation to goods covered
        ing Services1 (Intertek) was a long running coverage           by the policy. The policy was governed by German law
        dispute involving consideration of: (i) Allegations            and contained a waiver of recourse clause reflecting the
of gross negligence (as defined under German law) against               principle that a marine policyholder was not entitled to
Intertek’s representatives (as defined), in particular the              be indemnified in respect of a loss arising out of his own
board of directors and CEO of Intertek’s Indian sub-                   wrongful act, unless otherwise agreed.
sidiary; as well as (ii) the contractual limits of liability              Consequently, if the loss was caused by the wrongful
applicable to a commodity testing company.                             acts or omissions of persons who had a significant degree
                                                                       of autonomy in acting on their behalf, Intertek would
The Case                                                               not be entitled to be indemnified under the policy. This
The claim arose out of the theft in late 1999/early 2000               was the crux of the dispute and it was common ground
of approximately 27,000mt of vegetable oil from storage                that in order to succeed, SIAT had to establish wilful
facilities in Mumbai, India, at an alleged value in excess             misconduct and/or gross negligence on the part of an
of US$16 million. Intertek had undertaken the testing,                 Intertek representative(s). Representatives were defined
safe-keeping and release of the oil to certain nominated               as “members of board of executives, directors, general
third parties within the framework of a somewhat unusu-                partners, proprietors or the equivalent category of persons
ally bipartite CMA.                                                    in case of foreign firms.”
                        It was discovered that a former
                      rogue employee of Intertek’s Indian              The Judgement
                       subsidiary had released quantities of           In a particularly robust first instance judgment, Langley J
                        vegetable oil prior to payment and             found in favour of Intertek, concluding that on the facts
                         in the absence of instructions from           and upon application of the relevant German law prin-
                           Intertek ’s customers, in this              ciples, the allegations made against the board members did
                             instance, Tradigrain. Tradi-              not begin to satisfy the relevant tests for gross negligence
                              grain’s losses were indemnified           (or, indeed, in one respect even to address them) and that
                               by cargo/CM A insurers,                 the board was entitled to delegate management of the busi-
                                  SIAT who then sought to              ness to professional managers. Setting out what is perhaps
                                   recover the sums paid               a topical reminder of the scope of a board’s obligations,
                                        out by way of a subro-         Langley J held that the board was not concerned with
                                          gated claim against          operational matters. Nor was it responsible for procedures
                                            Intertek.                  or quality assurance – matters in respect of which there
                                                                       were no reasons to suspect that Intertek’s managers were
                                              The Dispute              not discharging their duties fully and properly.
                                              Inter tek had               Of some interest in this regard was the relevance of the
                                              ta ken out t wo          German law test for gross negligence which was found to
                                             relevant insur-           incorporate not only an objective element but also a sub-
                                            a nces, one of             jective element - both of which are required to be satisfied
                                           w h ic h prov ide d         in order for gross negligence to be established. Although
                                         cover for CMA risks           on the facts, the outcome of this case did not turn upon
                                          and extended to li-          the difference in practice between the two limbs of the
                                           abilities to which          test for gross negligence, it was accepted by the Court

                                                             Tradigrain, SIAT and others v Intertek Testing Services [2006] All ER (D) 127 (Apr)

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that the added subjective element of the German law test        there was a danger in assuming that the words chosen were
could in theory have provided a defence to a claim of gross     recognised German law concepts as this could result in
negligence – even if the claimants had managed to satisfy       the clause being treated as containing words other than
the objective element of the test.                              those which were actually used. It was therefore important
                                                                when construing the waiver of recourse clause, in this case,
Subjective Excuse                                               to remember that the Intertek subsidiaries involved were
In any event, the Court found that the objective limb           Canadian and Indian companies, respectively, and so it
of the test required an assessment of the facts, including      was desirable that a range of expressions were used to suit
such matters as the immediate and obvious nature of the         a variety of possible circumstances.
risk and whether “any” steps at all had been taken to seek
to meet it. In this respect and in relation to the CEO of       Appeal Dismissed
Intertek’s subsidiary, while the Court did not accept that      Ultimately, the Court of Appeal found that Langley J was
(i) he was a representative as defined; or (ii) there had been   right to have concluded that the use of the word director
any relevant failings nor what would otherwise objectively      in the definition of a representative referred only to those
be considered a “gross violation of ordinary care”; even        who had been formally appointed as directors. In this
if there had been, it was recognised that Intertek could        regard, while the CEO enjoyed significant day-to-day
nevertheless have argued, for example, that the ill health      management powers, he was not a representative within the
of the person whose conduct was impugned may have pro-          meaning of the clause. It would have been quite straight-
vided a subjective excuse, thereby precluding any finding        forward for the parties to have devised a form of wording
of gross negligence.                                            that included senior management roles but they had not
                                                                attempted to do so.
Terms Limit Defendants’ Liability                                  The Court of Appeal upheld all other aspects of Lang-
With regard to Intertek’s contractual limitation of li-         ley J’s judgment and, accordingly, dismissed all grounds
ability, although on the Court’s earlier findings the issue      of the appeal.
did not arise for determination, it was nevertheless held
that even if there had been any gross negligence (or, in-       BLG represented the successful defendants Intertek
deed, even wilful misconduct), Intertek’s general terms
and conditions of contract which refer to “improper or
negligent performance” would have applied to limit the
defendants’ liability. In this regard, it was recognised that
UK civil law does not have a concept of “gross negligence”
as distinct from that of negligence and, in any event, the
phrase “improper performance” was sufficiently wide as
to cover both gross negligence and wilful misconduct.
Thus, the criticism directed at Intertek’s failure to refer
expressly to these terms in its standard terms and condi-
tions was rejected.
   Ultimately, the claim was said by the Court to have
failed in its entirety and, unusually, costs were awarded
against the claimants on an indemnity basis.

Appeal-CEO a Representative
On appeal, SIAT challenged each of the findings made at
trial except that they no longer maintained that the board
of directors of Intertek’s subsidiary were guilty of gross
negligence. Instead, they focused on the subsidiary’s CEO
and, in particular, on the Court’s finding that he was not
a representative as defined.

Policy Drafted for International Organisation
SIAT made some headway in relation to the scope of
German law in English proceedings and agreed that its
relevance was limited to proving the principles of con-
struction. Moore-Bick LJ made clear that it would not be
appropriate for an expert to be asked for his opinion of
what a particular clause meant or how it might be con-
strued by a German court. The policy had been drafted
in English for an international organisation with relevant
global interests and was therefore to be interpreted on that
basis. The German equivalent of “representative” was a
term of art in German insurance law, but the parties had
defined its scope for themselves. The Court stated that

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