M & T International Ltd v. Euler Hermes Kreditversicherungs- Ktiengesellschaft

DCCJ 2047/2008

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 2047 OF 2008

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BETWEEN

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Coram: H.H. Judge Chow

Hearing date:   28^th September, 2009

Date of handing down Decision : 24^th December, 2009

Decision

1.There are two summonses required to be dealt with by me.  One summons was taken out by the Plaintiff pursuant to O.14A, R.1 of the Rules of the District Court, for the following construction to be determined, namely, whether Article 7.3 of the General Conditions of Insurance (“GCI”) of the credit insurance policy no. 314.135 (subsequently known as policy no. 315665.00) dated 11 August 2004 between Euler Hermes Credit Underwriters (HK) Limited as agent for and on behalf of the Defendant and the Plaintiff (“the Policy”), properly construed, rendered the debt under Invoice No. MT/11326 not covered by the Policy for the reason that the Policy had not been reinstated at the time the Plaintiff issued Invoice No. MT/11326 on 4 June 2005.  The other summons was taken out by the Defendant for an order for security for costs to be imposed upon the Plaintiff.

Background

2.In this action the Plaintiff claims against the Defendant under the Policy for an indemnity in respect of an unpaid trade debt in the sum of US$70,465.68 owed to the Plaintiff by its customer Winspower Limtied (“Winspower”).  The Plaintiff was granted insurance cover under the Policy by the Defendant to indemnify against unpaid trade debts from 1.8.2004 to 31.7.2005.

3.The Plaintiff’s case is as follows:-

(1)  Under the Policy, cover is provided for debts owed to the Plaintiff by its customers that remain unpaid after:-

(a)     insolvency of that customer; or

(b)    the expiry of 6 months from the date on which payment is contractually due from that customer.

(2)  On 4 June 2005, the Plaintiff issued Invoice No. MT/11326 to Winspower for goods to be shipped on 8 June 2005.  Under Invoice MT/11326, the Plaintiff dispatched on 8 June 2005 a shipment of portable CD players (“the Cargo”) to the United States upon the order of Winspower, at a price of US$70,465.68.

(3)  The due date for Invoice MT/11326 was 90 days after dispatch, i.e. 6 September 2005.

(4)  Despite repeated demands, Winspower has not paid the Plaintiff the sum of US$70,465.68 due under Invoice MT/11326.

(5)  As required by Article 13.3 of the GCI, the Plaintiff informed the Defendant of the overdue account in respect of Invoice MT/11326 within 60 days of the due date, i.e. by 8 November 2005.

(6)  Invoice No. MT/11061 was settled in full on 1 June 2005.  Therefore goods dispatched after that date were not affected;

(7)  On 4 February 2005, the Plaintiff issued Invoice No. MT/11079 for Purchase Order 5700 dated February 2004 and the said goods were shipped to Winspower on 13 February 2005;

(8)  On 14 May 2005, Invoice No. MT/11079 became due;

(9)  The Maximum Extension Period of 30 days from 14 May 2005 for Invoice No. MT/11079 should expire on 13 June 2005.

(10)    By reason of the above, the Defendant is liable to indemnify the Plaintiff against its loss under Invoice MT/11326 in the sum of US$70,465.68.

4.The Plaintiff argues that the exclusion in Article 7.3 only applies where an account with the same buyer “remains unpaid at the expiry of the Maximum Extension Period”.  The Maximum Extension Period is defined in Paragraph 5.1 of the schedule as 30 days from the Due Date of an invoice.  On 8 June 2005, 30 days had not yet elapsed from the Due Date of Invoice MT/11079.  Therefore, the exclusion in Article 7.3 did not apply when the Cargo under Invoice MT/11326 was dispatched.

5.The defence relied upon by the Defendant is based on Article 7 of the GCI of the Policy.  The Defendant submits that by virtue of Article 7, the insurance of Invoice MT/11326 fell outside the circumstances under which cover was provided and therefore the Defendant could not be liable.  Article 7 provides as follows:-

“7.1  The Insured can agree an extension to the Due Date or allow credit to run for a period beyond the Due Date up to the Maximum Extension Period stated in paragraph 5.1 of the Schedule provided that Euler Hermes has not previously cancelled cover in respect of the same Buyer and provided that the Insured has received no adverse information such as that listed in Articles 13.1.2. – 13.1.4 in respect of the same Buyer.

7.2     In all other cases extensions to a Due Date or allowing credit to run beyond the Due Date is only permissible with the prior written consent of Euler Hermes.

7.3     Losses resulting from goods dispatched or services invoiced at a time when an earlier insured or uninsured account with the same Buyer remains unpaid at the expiry of the Maximum Extension Period are not covered by this Policy.  This applies regardless of whether any notification by the Insured of the non-payment of the account has been made to Euler Hermes.  Once the overdue account or accounts have been paid cover shall be reinstated in respect of goods dispatched or services invoiced after the date of such payment but not for goods dispatched or services invoiced whilst the relevant account or accounts were overdrawn.”

Article 7 refers to the “Maximum Extension Period”.  This means, according to the Definitions of the Policy, “the period shown in paragraph 5.1 of the Schedule”.  Paragraph 5.1 of the Schedule, in turn, states as follows:

“Maximum Extension Period             30 days

(Article 7 GCI)

6.Articles 13.1.2. – 13.1.4 are set out below: -

“13.1   When making a Credit Limited application for a Buyer the Insured must inform Euler Hermes whether, in respect of that Buyer, during the twelve months preceding the application any of the following occurred:

13.1.1    any debts were not settled, or were not settled by the Due Date or any extensions thereto.  Cheques, bills of exchange and direct debits will not constitute settlement until the date they are honoured;

13.1.2    any bills of exchange were prolonged beyond the original Due Date;

13.1.3    any cheques, bills of exchange or direct debts were not honoured for lack of funds;

13.1.4    the Insured received adverse information regarding the Buyer’s financial situation or its ability to settle Debts.”

7.The Defendant’s argument is that when the Cargo was dispatched on 8 June 2005 insurance cover was suspended because an earlier invoice issued to Winpower (Invoice MT/11079) was overdue.  Therefore under Article 7.3 losses arising out of Invoice MT/11326 are irrecoverable under the Policy.

8.In developing this point, the Defendant set out the following facts relating to Invoice MT/11326, Invoice MT/11079, and Invoice MT/11061:-

(1)   On 10 May 2005, the Plaintiff emailed Winspower chasing for payment after Winspower had informed the Plaintiff that it has no idea when payment would be made to the Plaintiff.

(2)   On 14 May 2005, Invoice MT/11079 became due for payment.  On the same day,

(a)   the Plaintiff deposited a cheque in full payment of Invoice MT/11079.  But this cheque was subsequently dishonoured and Invoice MT/11079 remained unpaid; and

(b)  Invoice MT/11061 remained overdue and had not been fully paid by Winspower.

(3)   The above constituted “adverse information” about Winspower within the meaning of Article 7.1.  Therefore, under Articles 7.1 – 7.2, the Plaintiff had no right to extend the due date of Invoice MT/11079 unless it obtained the prior written consent of the Defendant.

(4)   Such written consent was never given by the Defendant.

(5)   Therefore, the due date of Invoice MT/11079 was never extended.

(6)   By the time the Cargo under Invoice MT/11326 was dispatched on 8 June 2005, no payment had been made in respect of Invoice MT/11079 and the same remained overdue.

(7)   By virtue of Article 7.3, the Cargo dispatched by the Plaintiff on 8 June 2005 under Invoice MT/11326 were not covered by the Policy.

9.The Defendant submits that the definition of the term “Maximum Extension Period” must be considered in context and with common sense.  Paragraph 5.1 of the Schedule expressly refers to Article 7 in its entirety.  The Maximum Extension Period must therefore be considered by reference to Articles 7.1-7.3.  The Defendant goes on to argue:-

‘(3)  It is clear from Articles 7.1-7.2 that the assured is not entitled to the benefit of an extension period under certain circumstances.  These circumstances are those in which the risk of a particular customer going into default has demonstrably increased.

(4)  The commercial purpose of Article 7.3 is to protect the insurer from increases in risk.  In fact, this is the purpose of Article 7 as a whole, since Articles 7.1-7.2 appear to have no independent purpose other than to qualify Article 7.3.

(5)   Given this context, it would flout commercial common sense if the assured was, for the purposes of Article 7.3, to have a grace period of 30 days without any regard to the extension period mechanism set out in Articles 7.1-7.2.  It would be pointless to lay out in Articles 7.1-7.2 detailed provisions for the allowing of an extension period, only to then completely disregard these provisions when it comes to Article 7.3.  It would also be contrary to the commercial purpose of Articles 7.3, which is to protect the insurer against increases in risk.  Therefore, the “Maximum Extension Period” in Article 7.3 can only benefit M&T insofar as an extension period is validly granted under Articles 7.1 – Artcile 7.2.’

(Underlines provided)

10.The Defendant relies on Article 7 as a defence.  It bears the burden to show that Article 7 applies in this case.  The Plaintiff does not rely on Article 7 to support its case. 

11.The sentence ‘the “Maximum Extension Period” in Article 7.3 can only benefit M&T insofar as an extension period is validly granted under Articles 7.1 – Article 7.2” ’ is problematic.  If an extension of 10 days after the Due Day for payment of the debt is granted, then is it the case that the Maximum Extension Period still applies?  According to the Defendant’s argument, the answer must be “yes”.  If an extension of 10 days is granted, a period of 20 days (30 days – 10 days) is not covered by this extension of 10 days.  Yet according to Article 7.3, the losses are still covered by the insurance, because the Maximum Extension Period of 30 days has been invoked, covering losses within these 30 days.  Only losses which remain unpaid at the expiry of the Maximum Extension Period are not covered by the Policy.  This is because although the extension is 10 days after the Due Day, it is the “Maximum Extension Period” which operates.  It is only 30 days after the Due Day that the losses will not be covered.  Hence the losses of the Insured subsequent to these 10 days but before the expiry of the 30 days are still covered by the Policy.  This is the consequence of the operation of the Maximum Extension Period, and not the consequence of the extended period of 10 days.

12.According to the plain and natural meaning of Article 7.3, it is not a pre-condition that in order to invoke the operation of Article 7.3, an extension period must be validly granted under Article 7.1 – Article 7.2.  If this had been the intention of the drafter of this Article, he could have easily inserted this requirement in Article 7.  The very fact that this was not written in Article 7 reflects that that was not the intention of the drafter of the Article.  The phrase “Maximum Extension Period” contains the word “Extension”.  This word is an integral part of the term “Maximum Extension Period” which has a clear and unambiguous definition, namely 30 days.  I cannot see how Article 7.3 cannot be interpreted expressly or impliedly to embody a requirement that an extension period must have been validly granted under Articles 7.1 – Article 7.2 as a pre-condition for Article 7.3 to be invoked.

13.The Maximum Extension Period is defined to be 30 days (after the Due Day).  It is not equivalent to “the extended period”, which can be range from 1 to 30 days (the maximum extension).  In the example shown above, the 10 days of extension is the extended period.  It does not trigger the operation of Article 7.3.  This demonstrates that the operation of Article 7.3 does not depend upon the operation of Articles 7.1 and 7.2.

14.To conclude, the answer to the question set out in the Plaintiff’s summonses is that the debt under Invoice No. MT/11326 was covered by the Policy at the material time.

15.If it is correct that the “Maximum Extension Period” in Article 7.3 can only benefit the Plaintiff in so far as an extension period is validly granted under Article 7.1 – Article 7.2, there is no evidence that the Plaintiff has agreed to grant an extension period.  Since Article 7.3 is not applicable in the present case, the Defendant cannot make use of it as a defence.  Its defence simply fails.

16.The Defendant is unable to put up any valid defence.  The Plaintiff succeeds in its summons application.  I enter judgment in favour of the Plaintiff for the entire action in the sum of US$70,465.68 with interests thereon, at judgment rate, commencing from 15 May 2008 until satisfaction.

17.Since the Plaintiff’s succeeds in its application, the Defendant’s summons for security of costs to be imposed upon the Plaintiff must fail and I dismiss it.

Costs

18.I make an order nisi, to be made absolute in 14 days’ time, that the Defendant do bear costs of these 2 summons and the costs of this action, to be taxed, if not agreed, with certificate for Counsel.

The Plaintiff:   represented by Mr. Jerry Chung, instructed by Messrs. Johnnie Yam, Jacky Lee & Co., Solicitors.

The Defendant:   represented by Mr. Abraham Chan, instructed by Messrs. Clycle & Co., Solicitors.