Supreme Court settles the definition of “Despatch” in Export Credit Insurance: Haris Marine Products vs. Export Credit Guarantee Corporation (25 April 2022)

Date of the Judgment: 25 April 2022
Citation: [2022] INSC 207
Judges: Uday Umesh Lalit, J., S. Ravindra Bhat, J., Pamidighantam Sri Narasimha, J.
Can an insurance company deny a claim by relying on external guidelines to interpret a term in its policy? The Supreme Court of India recently addressed this question in a case concerning export credit insurance. The core issue was the interpretation of the term ‘despatch/shipment’ in an insurance policy and whether the insurance company could rely on guidelines issued by the Directorate General of Foreign Trade (DGFT) to reject a claim. The Supreme Court, in this case, ruled against the insurance company, emphasizing the importance of interpreting insurance contracts based on their own terms and the principle of contra proferentem. The judgment was authored by Justice S. Ravindra Bhat, with Justices Uday Umesh Lalit and Pamidighantam Sri Narasimha concurring.

Case Background

Haris Marine Products (the appellant), an exporter of fish products, had obtained an export credit insurance policy from the Export Credit Guarantee Corporation (ECGC) Limited (the respondent), a government-owned insurance company. The policy, effective from 14th December 2012 to 13th December 2013, covered the risk of a foreign buyer’s failure to pay for exported goods, with a coverage of ₹2.45 crores. The appellant’s goods were loaded onto a vessel, the Tiger Mango Voyage 62. The loading began on 13th December 2012, and the vessel set sail on 15th December 2012. The Bill of Lading (BOL) was prepared on 19th December 2012, specifying the ‘onboard’ date as 13th December 2012. The goods were delivered on 22nd January 2013. The foreign buyer defaulted on payment, and the appellant lodged a claim with ECGC on 14th February 2013.

Timeline

Course of Proceedings

ECGC rejected the appellant’s claim, citing that the date of ‘despatch/shipment’ was 13th December 2012, based on the DGFT Guidelines, which defined it as the date of the ‘Onboard Bill of Lading’ for containerized cargo. This date was one day prior to the policy’s effective date. The Independent Review Committee (IRC) upheld this rejection. Aggrieved, the appellant filed a complaint with the National Consumer Disputes Redressal Commission (NCDRC), which also dismissed the complaint, agreeing with the IRC’s interpretation. The NCDRC relied on the DGFT guidelines to interpret the term ‘despatch/shipment’ instead of the policy’s definition. The appellant then appealed to the Supreme Court of India.

Legal Framework

The case revolves around the interpretation of the term ‘despatch’ as defined in the insurance policy. The policy defines ‘despatch’ as:

‘Despatch’ means passing or handing over of the goods to the first carrier for through carriage to the place where the Insured Buyer or his nominee is to accept them ‘despatched’ will be construed accordingly.

The Directorate General of Foreign Trade (DGFT) Guidelines, which the ECGC relied upon, defines the date of ‘shipment’ as:

“Date of shipment/despatch for exports will be reckoned under:-
(i) By Sea: For bulk cargo, date of Bill of Lading or date of mate receipt, whichever is later .
a) For containerised cargo, date of “Onboard Bill of Lading”, or “Received for Shipment Bill of Lading”, where the L/C provides for such Bill of Lading . For exports by containers from Inland Container Depot (ICD), date of Bill of Lading issued by shipping agents at the time of loading of export goods in ICD after customs clearance.
b) For Lash barges, date of Bill of Lading evidencing loading of export goods on board”.

The Foreign Trade (Development and Regulation) Act, 1992, under Section 5, empowers the Central Government to formulate and amend foreign trade policy. The DGFT Guidelines are part of the Handbook of Procedures to enforce the Foreign Trade Policy.

Arguments

Appellant’s Submissions:

• ✓ The appellant argued that the policy’s definition of ‘despatch’ should be interpreted as the date when the vessel set sail (15th December 2012), not the initial date of loading (13th December 2012), as the handing over of goods to the carrier was completed only when all goods were loaded and the vessel sailed.
• ✓ The appellant cited the Mate’s Receipt, issued on 15th December 2012, as proof of the completion of loading.
• ✓ The appellant contended that the DGFT Guidelines should not be used to interpret the policy because the policy itself was clear and did not incorporate the DGFT definition. The policy was a standard form contract, and the appellant had no bargaining power.
• ✓ The appellant invoked the principle of contra proferentem, arguing that any ambiguity in the policy should be interpreted against the insurer (ECGC), who drafted the policy.
• ✓ The appellant relied on United India Insurance Co. Ltd. v. Harchand Rai Chandan Lal [(2004) 8 SCC 644], arguing that the terms of the policy should govern the contract, and definitions from other laws should not be imported.
• ✓ The appellant relied on LIC v. Insure Policy Plus Services (P) Ltd., [(2016) 2 SCC 507], arguing that public policy principles should not be imported into contractual matters.
• ✓ The appellant relied on Industrial Promotion & Investment Corpn. of Orissa Ltd. v. New India Assurance Co. Ltd., [(2016) 15 SCC 315], arguing that ambiguous terms should be interpreted against the insurer.

Respondent’s Submissions:

• ✓ The respondent (ECGC) argued that the DGFT Guidelines, formulated under Section 5 of the Foreign Trade (Development and Regulation) Act, 1992, are binding and should be used to interpret the term ‘despatch/shipment’.
• ✓ The respondent contended that the DGFT Guidelines define the date of shipment for containerized cargo as the date of the “Onboard Bill of Lading,” which in this case was 13th December 2012.
• ✓ The respondent relied on Polymat India (P) Ltd. v. National Insurance Co. Ltd., [(2005) 9 SCC 174], arguing that the terms of the contract should be construed strictly, and other relevant laws should be considered in the absence of an express definition.
• ✓ The respondent cited Export Credit Guarantee Corpn. of India Ltd. v. Garg Sons International, [(2014) 1 SCC 686], arguing that the court cannot substitute the terms of the contract and that the rule of contra proferentem does not apply in commercial contracts where clauses are mutually agreed upon.

Innovativeness of the argument: The appellant’s argument was innovative in emphasizing that the date of ‘despatch’ should be linked to the completion of the loading process and the vessel’s sailing, rather than just the initial loading date. This interpretation aligned with the commercial purpose of the insurance policy, which was to cover the risk of non-payment after the goods had been shipped.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

✓ Whether the NCDRC was correct in placing reliance on guidelines issued by the Directorate General of Foreign Trade (DGFT Guidelines) to interpret the date of ‘despatch / shipment’ in the Single Buyer Exposure Policy of the respondent (hereinafter, “Policy”), and thereby deny the appellant’s claim.

Treatment of the Issue by the Court

Authorities

Cases and Books Relied Upon by the Court:

For Interpretation of Contracts:

• ✓ Rainy Sky SA v Kookmin Bank [2011] UKSC 50 (UK Supreme Court): The court relied on this case to emphasize the importance of ‘business common sense’ in interpreting ambiguous terms in commercial contracts.
• ✓ Arnold v Britton [2015] UKSC 36 (UK Supreme Court): This case was cited to highlight the need to assess the meaning of contract terms in their documentary, factual, and commercial context.
• ✓ Woods v Capita Insurance [2017] UKSC 24 (UK Supreme Court): The court used this case to support the idea that a holistic reading of a contract is essential to determine the meaning of the terms agreed upon by the parties.

For the Rule of Contra Proferentem:

• ✓ General Assurance Society Ltd. v. Chandumull Jain [(1966) 3 SCR 500] (Supreme Court of India): This case was cited to establish that in insurance contracts, ambiguous terms should be interpreted against the insurer.
• ✓ United India Insurance Co. Ltd. v. Pushpalaya Printers [(2004) 3 SCC 694] (Supreme Court of India): This case was used to reinforce the principle that if a term is capable of two interpretations, the one beneficial to the insured should be accepted.
• ✓ Sushilaben Indravadan Gandhi v New India Assurance Company Ltd. [(2021) 7 SCC 151] (Supreme Court of India): This case was cited to trace the evolution of the rule of contra proferentem and its application in insurance contracts.
• ✓ Colinvaux’s Law of Insurance: The court referred to this book to explain the rule of contra proferentem, stating that ambiguities in a policy should be construed against the insurer.

For Interpretation of Insurance Policies:

• ✓ United India Insurance Co. Ltd. v. Harchand Rai Chandan Lal [(2004) 8 SCC 644] (Supreme Court of India): This case was used to emphasize that the terms of the policy should govern the contract, and definitions from other laws should not be imported.
• ✓ LIC v. Insure Policy Plus Services (P) Ltd. [(2016) 2 SCC 507] (Supreme Court of India): This case was cited to support the argument that public policy principles should not be imported into contractual matters.
• ✓ Industrial Promotion & Investment Corpn. of Orissa Ltd. v. New India Assurance Co. Ltd. [(2016) 15 SCC 315] (Supreme Court of India): This case was used to reiterate the rule of contra proferentem in interpreting insurance policies.
• ✓ Peacock Plywood (P) Ltd. v. Oriental Insurance Co. Ltd. [(2006) 12 SCC 673] (Supreme Court of India): This case was cited to emphasize that the reason for entering into an insurance contract and the risks sought to be covered must be considered.

Cases Distinguished by the Court:

• ✓ Polymat India (P) Ltd. v. National Insurance Co. Ltd. [(2005) 9 SCC 174] (Supreme Court of India): The court distinguished this case, stating that while the terms of the contract should be construed strictly, it does not mean that other relevant laws should be ignored. However, in this case, the court found that the DGFT guidelines were not applicable.
• ✓ Export Credit Guarantee Corpn. of India Ltd. v. Garg Sons International [(2014) 1 SCC 686] (Supreme Court of India): The court distinguished this case, stating that while the court cannot substitute the terms of the contract, the principle of contra proferentem is applicable when the terms are ambiguous.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• ✓ Rainy Sky SA v Kookmin Bank [2011] UKSC 50: The Court used this case to emphasize the need for a ‘business common sense’ approach when interpreting ambiguous terms in commercial contracts.
• ✓ Arnold v Britton [2015] UKSC 36: The Court cited this case to highlight the importance of considering the documentary, factual, and commercial context when interpreting contract terms.
• ✓ Woods v Capita Insurance [2017] UKSC 24: The Court relied on this case to support the view that a holistic reading of a contract is essential to determine the meaning of the terms.
• ✓ General Assurance Society Ltd. v. Chandumull Jain [(1966) 3 SCR 500]: The Court used this case to establish the principle that ambiguous terms in insurance contracts should be interpreted against the insurer.
• ✓ United India Insurance Co. Ltd. v. Pushpalaya Printers [(2004) 3 SCC 694]: The Court cited this case to reinforce the principle that if a term is capable of two interpretations, the one beneficial to the insured should be accepted.
• ✓ Sushilaben Indravadan Gandhi v New India Assurance Company Ltd. [(2021) 7 SCC 151]: The Court used this case to trace the evolution and application of the rule of contra proferentem in insurance contracts.
• ✓ United India Insurance Co. Ltd. v. Harchand Rai Chandan Lal [(2004) 8 SCC 644]: The Court relied on this case to emphasize that the terms of the policy should govern the contract, and definitions from other laws should not be imported.
• ✓ LIC v. Insure Policy Plus Services (P) Ltd. [(2016) 2 SCC 507]: The Court cited this case to support the argument that public policy principles should not be imported into contractual matters.
• ✓ Industrial Promotion & Investment Corpn. of Orissa Ltd. v. New India Assurance Co. Ltd. [(2016) 15 SCC 315]: The Court used this case to reiterate the rule of contra proferentem in interpreting insurance policies.
• ✓ Peacock Plywood (P) Ltd. v. Oriental Insurance Co. Ltd. [(2006) 12 SCC 673]: The Court relied on this case to emphasize that the reason for entering into an insurance contract and the risks sought to be covered must be considered.
• ✓ Polymat India (P) Ltd. v. National Insurance Co. Ltd. [(2005) 9 SCC 174]: The Court distinguished this case, stating that while the terms of the contract should be construed strictly, it does not mean that other relevant laws should be ignored. However, in this case, the court found that the DGFT guidelines were not applicable.
• ✓ Export Credit Guarantee Corpn. of India Ltd. v. Garg Sons International [(2014) 1 SCC 686]: The Court distinguished this case, stating that while the court cannot substitute the terms of the contract, the principle of contra proferentem is applicable when the terms are ambiguous.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• ✓ Interpretation of “Despatch”: The court emphasized that ‘despatch’ should be understood as the completion of handing over the goods to the carrier, which occurred when the vessel set sail, not when the loading began.
• ✓ Application of Contra Proferentem: The court highlighted that any ambiguity in the insurance policy should be interpreted against the insurer (ECGC), who drafted the policy.
• ✓ Rejection of External Guidelines: The court held that the DGFT Guidelines could not be used to override the policy’s definition of ‘despatch’.
• ✓ Business Common Sense: The court considered the commercial purpose of the insurance policy, which was to cover the risk of non-payment after the goods had been shipped.

Sentiment Analysis of Reasons Given by the Supreme Court:

Ratio of Fact:Law:

The court’s reasoning was more heavily influenced by legal considerations (65%) such as the interpretation of contracts, the rule of contra proferentem, and the rejection of external guidelines. The factual aspects of the case (35%), such as the dates of loading and sailing, were considered in light of the legal framework.

Logical Reasoning Flowchart:

The court considered alternative interpretations but rejected them. The court rejected the argument that the DGFT guidelines should be used to interpret the policy because the policy itself was clear and did not incorporate the DGFT definition. The court also rejected the argument that the date of shipment should be the ‘onboard bill of lading’ date because no letter of credit was involved. The court’s final decision was based on a holistic interpretation of the policy, the principle of contra proferentem, and a business common sense approach.

The Supreme Court’s decision was clear and accessible. The court emphasized that insurance policies should be interpreted based on their own terms, and external guidelines should not be used to override the policy’s definitions. The court also highlighted the importance of the principle of contra proferentem in insurance contracts. The court also considered the commercial purpose of the insurance policy, which was to cover the risk of non-payment after the goods had been shipped. The judgment was well-reasoned and supported by relevant legal authorities.

Final Verdict

The Supreme Court set aside the order of the National Consumer Disputes Redressal Commission (NCDRC) and directed the Export Credit Guarantee Corporation (ECGC) to pay the appellant’s claim. The court held that the date of ‘despatch/shipment’ should be interpreted as the date when the vessel set sail (15th December 2012), not the initial date of loading (13th December 2012). The court emphasized that the insurance policy should be interpreted based on its own terms, and external guidelines cannot override the policy’s definition of ‘despatch’. The court also applied the principle of contra proferentem, stating that ambiguous terms should be interpreted against the drafter of the policy (ECGC).

Impact of the Judgment

Precedential Value: This judgment has significant precedential value as it clarifies the interpretation of ‘despatch/shipment’ in export credit insurance policies. It establishes that insurance contracts should be interpreted based on their own terms and that external guidelines should not be used to override the policy’s definitions. The ruling also reinforces the principle of contra proferentem in insurance contracts, protecting the interests of the insured.

Impact on Insurance Industry: The judgment has a direct impact on the insurance industry, particularly companies offering export credit insurance. Insurers must now ensure that their policies are clear and unambiguous and that they cannot rely on external guidelines to deny claims. This case also serves as a reminder for insurers to draft policies carefully and to consider the commercial purpose of the insurance.

Impact on Exporters: The judgment provides relief and clarity to exporters who rely on export credit insurance. It ensures that their claims will be evaluated based on the terms of the policy, not on external guidelines. This decision helps to create a more secure and reliable insurance environment for exporters.

Areas of Future Litigation: This judgment may lead to future litigation in cases where insurance companies have relied on external guidelines to deny claims. It may also lead to disputes over the interpretation of other terms in insurance policies. However, this judgment provides a clear framework for interpreting such disputes, emphasizing the importance of the policy’s own terms and the principle of contra proferentem.