Artboard 1Icon/UI/CalendarIcons/Ionic/Social/social-pinterestIcon/UI/Video-outline

Protecting against fraud in trade finance

07 July 2022

14 min read

#Transport, Shipping & Logistics

Published by:

Isabella Costa

Protecting against fraud in trade finance

The decision in Thera Agri Capital No 2 Pty v BCC Trade Credit Pty Ltd t/as The Bond & Credit Co [2022] NSWSC 669 handed down last month ordered a trade credit insurer to pay out an insurance claim to a financier defrauded by a customer.

Trade credit insurance is a product that indemnifies a seller against losses from non-payment of a commercial trade debt. It covers all contracts entered into or goods and services provided on credit terms within the policy period. The insurer agrees to pay a percentage of an outstanding invoice or receivable owed arising from a customer’s insolvency, bankruptcy or “protracted default” (overdue contract payment). 

In this case, the insured purchased trade credit insurance which provided cover for supply chain finance it gave to an international customer to fund the shipment of agricultural commodities overseas under an Islamic “Murabaha” finance contract. The customer submitted false documents, on the basis of which the insured advanced payment and the customer went into liquidation.

The insurer refused to provide cover because the transactions were not conducted strictly in accordance with Islamic law and the terms of the finance documents between the insured and the customer. The insured defeated the insurer’s refusal to honour the indemnity, despite falling victim to fraud, because the customer had contractual obligations in the finance documents to repay the funds.


When providing trade credit to customers, businesses should:

  • clearly draft the policy and finance documents
  • ensure the defined terms in the above are consistent to avoid the court applying different constructions to the same terms in each document
  • be mindful that brokers should thoroughly check financial documents in transactions, in particular, that they are conducting due diligence when setting credit limits
  • be wary of the different debt funding structures available for supply chain finance and the process required to validly draw down on it. For example, what contractual arrangement will it involve if it is structured as conventional finance or Sharia-compliant finance?
  • be mindful to include in the finance documents that your customers have separate contractual obligations to repay the finance on termination, cancellation, illegality, fraud or misrepresentation, so that if the transaction is considered void, you still have alternative rights to payment and the funds remain covered under the trade credit policy.


In February 2020, an Australian non-bank lender specialising in agricultural commodities and products, Thera Agri Capital No 2 Pty (insured) purchased trade credit insurance (insurance policy) from the Bond and Credit Company (BCC) (insurer).

The policy insured performance of a guarantee for supply chain finance (SCF) under a loan provided by the insured to two subsidiaries of parent company and guarantor, Phoenix Commodities Pvt Ltd (Phoenix; guarantor).

The $8 million loan was given to fund the pre-export of grains and pulses (goods) from Australia for sale in South-East Asia and India using a Sharia-compliant facility. The insured’s finance was secured against a trade receivable, being money owed under invoices for goods that have been delivered but not yet paid for. The insurance policy provided cover in the event Phoenix failed to pay due to insolvency.

Under the proposed SCF transaction, the insured was to prepay funds to Australian farmers up to 30 days before the goods were delivered to a warehouse leased by Phoenix. Over a 120-day trade cycle, the goods would be shipped on various Incoterms (standard export trade terms) and paid for before they were received (cash on delivery). Title was to pass to Phoenix as the buyer on payment in full. Phoenix would then receive an invoice for the tonnage delivered and repay the loan to the insured on deferred payment dates in June and July (deferred sale price).

Before obtaining the insurance policy, the insured established the SCF facility with Phoenix by executing a Master Murabaha Agreement, Purchase Agency Agreement, Guarantee, Indemnity and General Security Deed (finance documents). Then, the structure of the proposed deal changed from conventional finance to a “Murabahah” contract. This is an arrangement that must comply with Sharia law to be valid. It involves the following

  1. Party A purchases an asset from a third party at the request of its counterparty 
  2. Party A acquires title to the asset and enters into a Murabahah contract to resell it to the counterparty
  3. the price payable by the counterparty is the original purchase price paid by Party A plus an agreed profit (‘cost-plus’)
  4. the counterparty pays the purchase for the asset on a deferred basis. 

Importantly, the Master Murabaha Agreement (Agreement) envisaged a process where Phoenix would request the insured to buy the goods as its agent and in doing so, represent that the requests were true, correct and Sharia-compliant. The insured would then purchase the goods and sell them to Phoenix in a sequence of transactions by an exchange of documents evidencing each Murabaha contract.

The insured then paid $7.3 million to Phoenix in four drawdowns (advanced payment). Notably, the drawdowns were advanced after the insured and Phoenix entered into eleven Murabaha contracts.

Phoenix went into liquidation shortly after receiving the final drawdown. A formal letter of demand was issued on the subsidiaries that quickly followed suit into liquidation. No payment was received.

The insured claimed on the insurance policy, arguing it was entitled to an indemnity for 90 per cent of its losses caused by Phoenix’s default and failure to honour its obligations as guarantor.

The insurer denied liability, in short, arguing the loaned funds were not repayable because the insured did not perform the transactions in strict conformity with the Agreement and Sharia principles. In the insurer’s view, the insured had not established that it had acquired title to the goods before selling them to Phoenix because it advanced payment after entering into Murabaha contracts, not before as per the Agreement. The insurer argued that this meant the advanced payment was void and the insured had no right to recover payment, which was necessary to trigger the policy. Specifically:

  1. no deferred sale price was payable under the Agreement (Deferred Sale Price Claim)
  2. given the deferred sale price was not payable, there was no obligation for the insurer to repay the advanced payment under the insurance policy (Advanced Payment Claim)
  3. the condition precedent in clause 3.4 of the insurance policy had not been established, which concerned whether the insured had complied with the “applicable material laws” relating to the transaction and the guarantee (Condition Precedent Claim).

When proceedings commenced, it came to light – unknown to the insured or insurer at the time – that some of the documents Phoenix provided to support the insured’s drawdown requests were in fact “shams” to ‘prop up’ its financial position. Among the purchase contracts, commercial invoices and bills of lading were fabricated commodities contracts from two companies in Dubai and Singapore that also went into liquidation. This was another reason the insurer denied liability.


The issue was whether the insured was entitled to indemnity under the insurance policy for loss arising from the guarantor’s default.


The Supreme Court (Court) held the insured was entitled to be indemnified under the insurance policy in respect of its claim and interest under section 57 of the Insurance Contracts Act 1984 (Cth).

Orders were made in the insured’s favour and the insurer was required to pay to the indemnity of $7,224,043.04 and the insured’s costs.

Principles of construction – insurance policies

The Court first set out the principles governing the construction of commercial insurance policies:

  • insurance policies are commercial contracts to be given a businesslike interpretation, noting the language used by the parties, the commercial circumstances of the document and the object they intend to achieve. They are interpreted on the date they are entered into
  • their meaning is determined objectively by what a reasonable business person would have understood the policy to mean, having regard to the text, surrounding circumstances known to the parties, the purpose and object of the transaction
  • the court’s appreciation of the commercial purpose is assisted by an understanding of the aim of the transaction, the background, the context and the relevant market. It assumes the parties intended to achieve commercial efficacy, and will construe the insurance policies to avoid commercial nonsense or working commercial inconvenience
  • the policy is construed as a whole and the quality of drafting may be taken into account. Definition terms do not have substantive effect
  • while the court’s analysis will turn on the specific terms of each policy, the Court drew on the analogous case of MGICA to illustrate how these principles are applied. There, the insurer refused indemnity under a credit insurance policy because the goods were not purchased in the way the policy envisaged. When considering the contract as a whole, the Court in MGICA concluded “sold” meant sold according to the invoices and documents provided by the customer:
“… the policy was intended to operate, as the parties planned, upon the faith of invoices and other documents, given that they would normally (with the other checks carried out) provide satisfactory protection against fraud.”

What rights did the insured have in respect of fraud?

The Court first pointed out that overall, the financial documents provided that if any particular transaction was considered void under Sharia principles, Phoenix was still obliged to repay the loan funds. This was because Phoenix was bound by separate contractual obligations in the Agreement that entitled the insured to call for immediate repayment on the occurrence of an ‘Event of Default’.

This was a warranty in the Agreement that was enforceable if Phoenix engaged in misrepresentation or fraud, it became unlawful for it to perform any of its obligations, the finance documents became unenforceable or its parent company was wound up.

On the facts, Phoenix represented that each purchase request was legitimate and the supporting documents were true and accurate. Given this representation proved untrue, the insured was entitled to treat this as an ‘Event of Default’, which gave rise to a claim against Phoenix for breach of warranty and a remedy requiring repayment in full.

Further, the insured had other contractual entitlements it could rely on in the event Phoenix produced misleading or deceptive information. In particular, Phoenix agreed to wide indemnities that secured the insured against any cost, loss or liability from an ‘Event of Default’ or misleading or deceptive information in the finance documents or the transaction.

That clause was operable where the insured acted on a request it reasonably believed was genuine, correct and appropriately authorised. Phoenix also gave an undertaking to comply with all laws, if its failure to do so would materially affect the insured.

What were the findings under the insurance policy?

In sum, the insurer’s claims were rejected.

With respect to the Deferred Sale Price Claim, the Court concluded that the deferred sale price term did not contain a requirement that the parties strictly comply with the steps in the Agreement. Instead, it was a definition provision that was not substantive and did not impose a condition on the precise sequence of events that must have unfolded before the insured advanced payment.

This addressed the insurer’s argument, which was that rather than taking each prescribed step in the correct sequence, the parties executed Murabaha contracts which said they did. Therefore, in the insurer’s view, the transactions breached the requirements for a valid Agreement and Phoenix was not obliged to repay the funds. Further, the contracts did not comply with Sharia principles and there were no cost price and deferred sale price terms within the meaning of the Agreement.

In addition to the above, the Court rejected this argument on the basis that although the way the contracts were entered into made them invalid and unenforceable from a Sharia law perspective, that did not mean the contracts failed to have force for the purpose of the Agreement between the insured and Phoenix. The Court stated that how the parties implemented the contracts envisaged under the finance documents must be put aside when construing those documents. The Court cited settled principles that post-contractual conduct does not assist on the question of what a contract means,[1] nor is it a legitimate means to construe anything the parties said or did after it was made.[2]

The Court also acknowledged it did not matter that the cost price and deferred sale price terms were based on sham documents because Phoenix warranted those were true and correct in the requests. The Agreement established a procedure that allowed the insured to rely on representations by Phoenix and advance funds without independent inquiry on the authenticity of each proposed purchase in the requests.

Furthermore, the insurer construed the Agreement in a way that effectively argued that Phoenix could breach its obligations by giving the insured false information and the cost price and deferred sale price terms would “disappear” with it. The Court stated that construction was wrong and could not be the case, because those terms attached to the Agreement, which was the source of the obligations. In essence, construing the Agreement in this way made commercial nonsense because it allowed Phoenix to simply avoid its obligations to repay the funds by providing false documents and information. 

The commercial purpose of the finance documents was for the insured to advance funds and be repaid regardless of any misrepresentation or fraud by Phoenix or failure to comply with Sharia principles. To that end, the insurer’s arguments were at odds with the whole Agreement and the unconditional payment obligations Phoenix agreed to, such as the indemnity and undertaking.

With respect to the Advanced Payment Claim, the Court concluded that the advanced payment term was another definition provision that did not impose a substantive condition on the insured’s cover. The wording of that clause was defined as payment advanced to Phoenix by the insured in accordance with the terms and conditions of the transaction in consideration for the future delivery of goods.

The Court agreed with the insured that an interim step in the transaction was that Phoenix would buy goods for the insured as its agent and the parties never envisaged that there would be “future” delivery to the insured. The purpose of the policy was to insure against the risk that the funds were not repaid. [3] Consequently, the insurer’s argument failed because it was clear the insured was only providing finance and the clause was a reference to the delivery of finance, not the actual goods.

In passing, the Court also noted the policy was “complex and imperfect” like the finance documents and there was no uniformity in the defined terms.

Lastly, with respect to the Condition Precedent Claim, it was necessary for the Court to consider what the “applicable material laws” were within the meaning of the insurance policy to determine whether the insured had complied with the condition precedent. Satisfaction of this clause had to be seen in light of another clause, which provided that in the event of any payment of a loss under the policy, the insured would do nothing to prejudice the insurer’s right to subrogated recovery.

The Court agreed the “applicable material laws” were the laws of New South Wales as that was the law governing the insurance policy and finance documents. In doing so, the Court noted that the laws of the UAE may also qualify because the condition proceeded to excuse the insured from complying with UAE law in certain circumstances. However, when considering the laws that Dubai courts could apply, the Court concluded that UAE public policy did not satisfy the meaning of ‘material.’

This claim failed because the insurer could not establish that other laws or principles were applicable to the terms of the insurance policy. 

If you have any questions about this case, please contact us below or get in touch with our team here.

Authors: Nathan Cecil & Isabella Costa

[1] Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153; [2001] NSWCA 61 at [25]-[26].
[2] Agricultural & Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570 at 582.
[3] Kelly v R (2004) 218 CLR 216; [2004] HCA 12 at [103].

The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Isabella Costa

Share this