Financing under export credit insurance is a special kind of trade financing. The general trading structure is that the exporter (i.e., the seller) buys this from an insurance company for exporting its goods and services. The exporter then transfers the interest earned from the insurance to a bank in the form of an indemnity transfer agreement to be signed by three parties, i.e., the exporter, the insurance company and the bank. The bank then signs a financing agreement with the exporter and provides short-term trade capital. Under this transaction structure, when a loss within the coverage of insurance liability occurs, the insurance company will pay the full amount of the claim that should go to the exporter directly to the bank in accordance with the indemnity transfer agreement.
Based on the above arrangement, there are two legal relationships under the export credit insurance financing. One is the creditor and debtor relationship between the exporter and the bank as they have signed a financing agreement, and the other is the contractual relationship between the exporter and the insurance company as they have signed an agreement.
Among such financing disputes, the exporter’s repayment obligation usually is not the focus of the dispute.
However, in such disputes the exporter usually has lost solvency or even lost contact, while the conflict in the case usually occurs between the bank and the insurance company. Specifically, whether the bank has the right to require the insurance company to pay the insurance claims directly to the bank to compensate for losses on the loan. Its essence lies in who should take the exporter’s credit risk.
Through the analysis of a large number of cases, we believe that the focus is mainly on jurisdiction issues, whether banks have claims over the insurance companies and the latter’s exemption from false trades.
Case jurisdiction. Due to the particularity of financing under export credit insurance, the parties that sign the indemnity transfer agreement usually would agree on arbitration clauses. When a dispute arises and the bank simultaneously sues the exporter and the insurance company as defendants in court to claim responsibility for repayment, a dispute over jurisdiction will follow. In practice, most courts believe that the terms of the arbitration clauses agreed by the parties are true and do not violate the law, and that the arbitration agreement is true and effective. Therefore, the plaintiff will be dismissed and the parties concerned will be required to resolve the dispute through arbitration, and the case will not be substantively tried.
Claim rights. Whether the bank has the right to claim is at the core of such disputes. The key issue is the recognition of the transfer of claims and whether the insurance contract has the effect of a debt payment guarantee.
With regard to the recognition of the transfer of claims, the indemnity transfer agreement usually stipulates two types of claims, i.e., direct bank claims and banks entrusted by exporters to claim for compensation. But there are tight restrictions over the procedures that must be performed for each type of claim, such as the signing of documents and obligations of notification. The bank does not naturally entitle the right to claim compensation from the insurance company when signing the indemnity transfer agreement, which only changes the recipient of the payment of the indemnity under the insurance contract. Its legal nature lies in fulfilment to the third party. Therefore, if the bank fails to perform the corresponding procedures in accordance with the agreement, the transfer of the claimant will not be triggered.
According to the results of previous rulings, more courts and arbitral institutions have adopted the above viewpoints, arguing that the bank can only obtain the right to claim after it confirms the choice between “claim on behalf of the exporter” and “direct bank claim”, and fulfil the corresponding document-signing procedures and notification of obligations in accordance with the agreement. If the bank has no right of claim, it has no right to claim payment obligations from the insurance company.
Whether the insurance contract has the effect of guarantee. Some banks in the arbitration practice claim that the insurance contract constitutes a guarantee for the payment of the exporter’s debt in the financing contract, and the insurance company shall bear collateral liability when the exporter is unable to pay off the loan. Therefore, they believe they have the right to claim. Despite such arguments, it should be recognized that the insurance relationship and the debt relationship are independent legal relationships. The insurance company assumes the insurance liability according to the contract, which is not directly related to how the exporter conducts financing business with a bank. In other words, only under the premise that the exporter completely fulfils its obligations under the sales contract and the insurance contract, will the insurance firm be liable for damages within the scope of the insurance liability. Credit insurance itself is not a guarantee of debt payments.
Insurance company’s exemption from false trade. The insurance contract is subject to the principle of maximum good faith. The fact that the sales contract is true, legal and effective is the primary prerequisite for the insurance company to assume insurance liability. Among export credit insurance financing disputes, a fake trade will directly cost the exporter the claim qualification of the insured, and the bank’s claim would be even further out of the question. In litigation practice, banks generally bear the responsibility of proof of the authenticity of a trade under a financing agreement. If a bank cannot carry out the burden of proof on trade authenticity, it must bear the legal consequences of the unfavorable evidence.
As export credit insurance is a special type of financing, it is favoured by exporters and banks as it enables a quick return on the exporter’s capital, convenient transactions and insurance payments. However, the insurance company’s payment is not unconditional, and the bank should not overly rely solely on this as risk control measures for a transaction.
Yang Guang is a partner and the director, and Xue Yuan is an associate, at Lantai Partners
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