SFG Insurance Company (Pvt) Ltd (In Liquidation) v Baobab Reinsurance (Pvt) Ltd and 2 Others

### Preamble
1
HH 449-18
HC 2202/15
---------


DISTRIBUTABLE

SFG INSURANCE COMPANY (PVT) LTD

(IN LIQUIDITION)

versus

BAOBAB REINSURANCE (PVT) LTD

and

TROPICAL REINSURANCE COMPANY LTD

and

GRAND REINSURANCE COMPANY (PVT) LTD

HIGH COURT OF ZIMBABWE

DUBE J

HARARE, 26 February, 17 & 18 May, 25 July 2018

Civil Trial

K Kachambwa, for the plaintiff

W P Zhangazha, for the defendants

DUBE J: The plaintiff’s claim against the defendants is for breach of a Facultative Reinsurance Guarantee Agreement by the defendants. It seeks payment from the first to third defendants in the sums of $ 691 892.21, $345946.12 and $ 518 919.18 respectively.

The plaintiff’s claim is based on the following synopsis. The plaintiff issued a payment guarantee in favour of the Zimbabwe Fertilizer Company Ltd (ZFC) in terms of which ZFC agreed to supply tobacco farmers who were members of the Zimbabwe Progressive Tobacco Farmers’ Union (ZPFTU) with tobacco inputs for the 2011 to 2012 farming season. This was on the understanding that if the farmers failed to repay ZFC for the inputs due and such amounts remained unpaid for thirty days, the plaintiff would guarantee payment of such amounts as surety and co-principal debtor to the farmers. The plaintiff undertook to pay the amount on demand by ZFC. The plaintiff issued a facultative reinsurance master slip in terms of which it transferred the risk under the ZFC guarantee agreement to the defendants in proportions. The defendants accepted the issued facultative reinsurance master slip and the reinsurance master slip which constituted the Facultative Reinsurance Guarantee Agreement, [hereinafter referred to as the Facultative Agreement]. The farmers defaulted. Sometime in 2012, ZFC demanded payment of US$1775 489.25 from the plaintiff. The plaintiff notified the defendants of the claim. The defendants have failed to pay the claimed amount.

The respondents deny liability for the claim and deny that they breached the agreement. They allege that it was the plaintiff which breached the agreement. Their defense is that the plaintiff breached its duty of legal care, disclosure and utmost good faith to the defendants.    They contend that the liability of the plaintiff to ZFC, if any, is due to its own fault.

The following issues were referred to trial,

What were the material terms of the Facultative Reinsurance Guarantee Agreement (the agreement) between the plaintiff and defendants?

Whether the  plaintiffs or  the defendants breached the terms of the agreement and

Should it be found that the defendants breached the terms of the agreement, whether the plaintiff is entitled to an award of damages against the defendants in the amounts claimed in the summons.

At the commencement of trial, the defendants admitted the quantum of $1775 489.25 claimed against each one of them but denied liability. The plaintiff called two witnesses. The first to testify is Charles Madeira, the plaintiff’s former chief executive officer. His evidence is as follows. Sometime in 2011 the plaintiff was approached by the ZPTFU which requested it to issue a payment guarantee to ZFC on the basis that if its members failed to pay for the fertilizer they obtained as inputs, the plaintiff would pay. It was made clear that the farmers did not have adequate security and it wanted an insurance guarantee. The guarantee was issued and the plaintiff bound itself as surety and co-principal debtor to the farmers. If the farmers failed to pay the credit on due date the plaintiff would pay the amount to ZFC. Plaintiff renounced the benefit of excussion. A tripartite agreement was entered into between the plaintiff, ZFC and ZPTFU which set out the terms regarding how agricultural inputs were going to be supplied to the farmers upon failure of the farmers to pay. The plaintiff would pay in accordance with the payment guarantee agreement. The plaintiff was to provide ZFC with a list of approved farmers who could collect inputs, provide disbursement vouchers and the names and specimen signatures of plaintiff’s officials who would be signing disbursement vouchers. The plaintiff performed its obligations in terms of the tripartite agreement. The plaintiff and defendants entered into the Facultative Agreement. The re-insurance slip constituted the re-insurance guarantee issued by re-insurers. A re-insurance slip was issued and accepted by the defendants. The Facultative Agreement constituted of three things, the facultative procedures, the reinsurance slip and the original policy, the payment guarantee to ZFC.

The plaintiff’s witness insisted that the plaintiff provided the defendants with adequate information. The defendants did not cancel the reinsurance agreement because the plaintiff never breached the agreement. ZFC demanded payment when the farmers failed to pay for the inputs and it informed the defendants. The parties engaged Millenium Risk Insurance to quantify the loss and the parties agreed to roll over the amount owing in order to try and recover what was outstanding from the farmers. The plaintiff was placed under liquidation in 2013 and the liquidator demanded payment from the defendants. The witness refuted that plaintiff should have first pursued debt collection before the defendants were asked to pay. He denied that the tripartite agreement or the Concept Paper was part of the Facultative Agreement or that security was a term of the agreement. The concept paper was never the basis upon which the defendants entered into the Facultative Agreement. He stated that the email he wrote to which was attached the prosperity policy was merely a discussion document and was not the basis upon which the defendants entered into the Facultative Agreement. The discussion in the Concept Paper was never turned into an agreement. If the defendants wanted the Concept Paper to be part of the Facultative Agreement, they should have endorsed this on the master slip as they had done with the terms of payment. Mr. Madziva maintained his version under cross examination. He was steady and was not shaken under cross-examination. He remained relaxed throughout the proceedings. I found him to be credible.

Bernard Mudariki was called as the plaintiff’s second witness. He is a debtor’s controller at ZFC. His testimony is as follows. ZFC was approached by ZPTFU which requested it to provide inputs on credit to its members. The farmers did not have security in the form of immovable property. What ZFC wanted to ensure was prompt payment upon default by the farmers. It did not want to chase up farmers. The plaintiff was brought in as a guarantor and a payment guarantee agreement was entered into between the plaintiff and ZFC. A tripartite agreement was entered into with ZPTFU and the plaintiff and a payment guarantee agreement entered into by between the plaintiff and ZFC.

ZFC’s obligations were to lodge stop orders and supply the various inputs to farmers. ZFC would receive a list of the farmers from plaintiff and it would verify their identities, grower’s numbers and verify whether the letter from the plaintiff was signed by the correct person. The farmer would provide a signed stop order form which would be send to the Ministry of Agriculture for registration. Once registered, the forms would be taken to the Tobacco Industry Marketing Board (TIMB). ZFC would then give out the inputs. There was no date specified in the agreement when ZFC was supposed to lodge stop orders with TIMB. This was done at least a month before the start of the 2011 -2012 tobacco selling season. ZFC fulfilled its obligations to lodge stop orders and supply tobacco inputs. Some farmers defaulted. A demand was made to plaintiff for the balance of the amount outstanding.

It was suggested to the witness in cross-examination that ZFC made errors which resulted in farmers not submitting stop orders to TIMB. His response was that the process involved movement of documents from one office to another and as a result some documents could have been lost in transit. ZFC had put in place adequate measures but errors could occur. Only 19 farmers out of 4000 farmers failed to lodge stop orders. The errors were deducted from the claim. He insisted that the fact that stop orders were submitted late did not cause the loss. After the default, the plaintiff failed to pay and ZFC obtained default judgment against it. The witness gave clear and straightforward evidence of how stop orders were processed. I found him to be honest. He conceded the shortcomings of the system. He testified well.

The defendants called Mr. Sizwe Gwasira representing the first defendant, Mr. Tinashe Marufu and Mashava Madiro for the second and third defendants who adopted Mr. Gwasira’s evidence. It will not be necessary to summarize their evidence. Mr. Gwasira’s testimony is as follows. He is the Head of Claims of the first defendant. The defendants entered into the Facultative Agreement based on the Concept Paper which formed the basis of the agreement. The plaintiff breached the terms of the concept paper such as security, use of one auction floor and engaging a risk management company. The plaintiff also breached the requirement to pursue debt collection after payment. The plaintiff should not have settled the claim against ZFC and conceded a default judgment. The terms of the reinsurance guarantee agreement included the re-insurance slip, the payment guarantee, the tripartite agreement and the Concept Paper. The facultative reinsurance procedures were merely guidelines and the defendants were not bound by them. He conceded that he was stating for the first time that the concept paper was a term of the Facultative Agreement and that it had been breached by the plaintiff. He agreed that the Concept Paper contained two distinct policies being the payment guarantee and the field to floor policy.

He agreed that the Concept Paper required a response and that it was a discussion which required Mr. Tarupiwa to review and call back Mr. Madziwa. Mr. Pawandiwa responded and rejected the loan guarantee policy but accepted the field to floor insurance. He does not know what happened concerning the discussion on the Concept Paper after Mr. Pawandiwa’s rejection email. There is no further communication on file. He did not work in the underwriting departments and is not privy to the discussion that took place if any, concerning to Concept Paper. He assumed that further discussion took place as the first defendant signed the reinsurance slip. He accepted that there is no evidence of any discussion before the court and he does not know what discussions took place. He agreed that the Concept Paper was not specifically drafted for the ZFC transaction but was drafted in general for other discussions.

The witness agreed under cross examination that there were contradictory terms between the tripartite agreement and the Concept Paper. He testified that it was an oversight that the terms were contradictory and that there is no evidence that the Concept Paper was part of the Facultative Agreement. It was an omission not to cancel the agreement on the basis of breach. The payment guarantee and the tripartite agreement did not contain any provision requiring security as criteria.  He agreed under cross examination that in the absence of the alleged breach, the defendants ought to have paid the sum claimed. When it was put to the witness that the email he sought to rely on referred to the second policy, thus the field to floor policy and not the guarantee policy, he failed to answer the question. When questioned why the defendants had failed to cancel the agreement if the plaintiff was in breach, the witness’ response was that there was an omission to do so. He accepted that the reinsurance slip, tripartite agreement and the payment guarantee did not contain any term dealing with security. The witness gave the impression that he was developing his case as the trial progressed. He did not impress as a truthful, honest and credible witness.

What were the terms of the Facultative Reinsurance Guarantee Agreement, the Facultative Agreement?

The plaintiff’s first witness testified that the Facultative Agreement constituted of the facultative procedures, the reinsurance slip and the original policy being the payment guarantee to ZFC. The plaintiff denied that it breached any of the terms of the Facultative Agreement. It refuted that the plaintiff should have first pursued debt collection before the defendants were asked to pay and that security was part of the agreement between the parties. It maintained that there was no term obliging it to use of one auction floor or that it breached terms regarding the engagement of a risk management company. The defendants’ key witness testified that the re-insurance slip, the payment guarantee, the tripartite agreement and the Concept Paper constituted the Facultative Agreement. He maintained that the plaintiff breached terms related to security, duty to do debt collection, use of one auction floor and engagement over a risk management company to be engaged.

The reinsurance slip deals with the risk sought to be insured. The reinsurance slip referred to the risk or construction as the payment guarantee. The reinsurance slip constitutes the reinsurance guarantee and is subject to the same terms and conditions of the original policy issued by the reinsured. The reinsurance slip has no other terms. It makes no reference to the Concept Paper or the tripartite agreement.

The payment guarantee was entered into between the reinsured and the insured and constitutes the risk as is clear from the reinsurance slip at p 12 of exhibit 1 which states that the payment guarantee constitutes the risk and that the payment guarantee is the original policy. The plaintiff bound itself as surety and co-principal debtor to the farmers. If the farmers failed to pay on due date, the plaintiff would pay the amounts due to ZFC. The defendants regarded the payment guarantee as a “loan guarantee policy” in an email from Mr. Pawandiwa. It appears that the defendants considered the payment guarantee as the policy as well. It is clear from the reinsurance slip that the payment guarantee constitutes the risk and that the payment guarantee is the original policy. I did not believe Mr. Gwasira when he said that they did not regard the payment guarantee as a policy when the first defendant’s underwriter Mr. Pawandiwa considered it to be so. I find therefore that the payment guarantee is the original policy and constitutes part of the Facultative Agreement.

The tripartite agreement is the agreement entered into between the plaintiff, ZFC and the ZPTFU in favor of ZFC in terms of which ZFC agreed to supply tobacco farmers who were members of the (ZPFTU) with tobacco inputs. The agreement did not involve the defendants. There is nothing to suggest that the tripartite agreement constitutes part of the facultative agreement.

Facultative procedures are issued by the Insurance Council of Zimbabwe and are procedures that govern the facultative reinsurance guarantee. For example, clause 2 of the procedures governs requests for guarantees which are to be made by way of reinsurance slip which constitutes the reinsurance guarantee. Facultative procedures therefore constitute part of the facultative reinsurance guarantee agreement because they govern the procedures to be followed in such an agreement.

The Concept Paper contained two distinct policies being the Payment Guarantee and the Field to Floor Policy. It was send to the defendants with a note and the defendants were required to look at it and resort back to Mr. Madziwa. The defendants’ witness agreed that the Concept Paper was a discussion paper which required a response and that Mr. Tarupiwa was required to review it and call back Mr. Madziwa. His testimony is that Mr. Pawandiwa responded and rejected the Loan Guarantee Policy but accepted the Field to Floor Insurance. The defendant’s witness does not know what happened concerning the discussion on the Concept Paper after Mr. Pawandiwa’s rejection email. There is no further communication on file and he is not privy to the discussion that took place if any, concerning to Concept Paper. He assumed that discussions took place as the first defendant signed the reinsurance slip. There is no evidence of any discussion over the concept paper before the court .What is clear is that the Concept Paper was not specifically drafted for the ZFC transaction but was drafted in general for other discussions. Since the Concept Paper called for discussion it could not automatically be part of the Facultative Agreement as it was. Because Mr. Tarupiwa initially rejected the loan guarantee policy it means that the concept paper was merely a discussion paper whose terms were subject to approval. I do not agree with the defendants that the concept paper was a term of the facultative agreement.

The defendant’s witness conceded that there were contradictory terms between the tripartite agreement and the Concept Paper. The defense witness’s concession that the payment guarantee and the tripartite agreement did not contain any provision requiring security as criteria is properly made. Whilst the issue of security appeared in the concept paper, it was not included in the reinsurance slip, payment guarantee or tripartite agreement. The defendants’ witness gave contradictory evidence as regards the purpose of the Concept Paper.  On p 27 the Concept Paper provides that transportation of the crop would be organized by the plaintiff in liaison with ZPTFU. The tripartite agreement stated that it was the responsibility of the farmer to organize delivery of the product. The other point is that the Concept Paper states that it would be the responsibility of the farmers and SFG to lodge the stop orders. In terms of the tripartite agreement, the stop orders would be lodged by ZFC. He wants the court to believe that this was through oversight. That cannot be possible if the two constitute one agreement.

The proposals contained in the Concept Paper were not taken on board as evidenced by the terms of the tripartite agreement. The terms related to the limit of inputs, the risk management form, the farm level and ward committee and the use of one floor which were part of the concept paper. These terms were not captured in the re-insurance slip, payment guarantee or the tripartite agreement. The evidence actually reveals that one part of the concept paper was actually initially rejected. This shows that there was a discussion over the concept paper which led to some of its terms being adopted and others rejected. It is unlikely that the parties would enter into a contract with such contradictory terms. There are contradictions between the concept paper and the Facultative Agreement. Concept Paper states that the inputs would be advanced and received by farm and level committees. The tripartite agreement on the other hand states that the inputs would be advanced to individual farmers. If the parties had wanted to incorporate its terms into to re-insurance contract they would have stated so and would not have cherry picked some terms of the contract and left some. The defendants would not have signed a re-insurance slip with contradictory terms. Mr. Gwasira’s explanation for the contradictions lacks conviction. I do not believe that the defendants would through oversight fail to recognize such glowing contradictions. The court cannot imply new terms in a contract which terms are in conflict with the written and express terms of the contract.

Both the tripartite agreement and the concept paper cannot be part of the Facultative Agreement because they contradict each other. The concept paper states that inputs would be advanced and received by farm and ward level committees whilst the tripartite agreement states that inputs would be advanced to individual farmers. It provides that transport would be organized by the plaintiff and the tripartite agreement says it is the responsibility of the farmer to organize delivery of the product. The concept paper also states that stop orders would be lodged by the plaintiff and the farmer and the agreement states that they would be lodged by ZFC.

The defendants failed to state in their plea and summary of evidence that the Concept Paper formed part of the terms of the Facultative Reinsurance Agreement. It is not mentioned at all in the plea and summary of evidence of the defendants. This defense only emerged at trial when the defendants were cross-examining the plaintiff’s first witness. The concept paper only emerged for the first time in Mr. Gwasira’s evidence. A late bid to amend its pleadings to include allegations of breach of the terms of the concept paper hit a brick wall. The inescapable conclusion is that the defense based on the concept paper was introduced at the trial as an afterthought. By incorporating the concept paper into “the agreement”, the defendants hoped to slip in issues not covered by the agreement. The contradistinctions between the concept paper and the rest of the papers show clearly that it was never intended that that it be part of the reinsurance contract. The defendants failed to call Mr. Tarupiwa, who reportedly is still with the first defendant to tell the court what transpired after they received the concept paper and what terms were adopted. Ms Kalinde was also not called to say whether or not they discussed the Concept Paper with the plaintiff’s first witness. The defendant’s witness just assumed that there was a discussion over the concept paper because the re-insurance slip was signed. No evidence was led to support the fact that the Concept Paper forms part of the Facultative Agreement. I am unable to find that the concept paper was part of the Facultative Agreement between the parties.

What this analysis shows is that the Concept Paper and the tripartite agreement do not form part of the Facultative Agreement. Only the payment guarantee, reinsurance slip and the facultative procedures are the documents that constitute the Facultative Agreement between the Parties.  All the above referenced documents do not make any reference to the Concept Paper or terms relating to security, debt collection, use of one auction floor or the risk management company to be engaged.

The defendants were required to prove their case on a balance of probabilities. A court considering a civil case is required to consider the probabilities of the case. It must weigh the probabilities arising from the facts of the case, evidence led and all surrounding circumstances of the case. The party with the onus must show that the probabilities of the case heavily favor its case. The probabilities must be of such a force as to convince a court to find in its favor.

A re-insurance contract is an insurance contract whereby a primary insurer transfers the risk he has undertaken in whole or part insurance to another insurer (the reinsurer). The primary insurer becomes the reinsurer and the insurer to whom the risk is ceded is the reinsurer, see MFB Reinecke et al General Principles of Law. This case involves a re-insurance contract. The reinsurers are the defendants whilst the plaintiff is the reinsured.

What happened in this case is that the defendants have pleaded one case, tried to introduce an amendment, failed, and canvassed a different case at trial. In Keavney and Anor v Msabaeka Bus Services (Pvt) Ltd 1996 (1) ZLR 605 (SC) @ 608 B, the court stated as follows:

“A pleader cannot be allowed to direct the attention of the other party to one issue and then at the trial attempt to canvass another. The failure, in this case, to plead the real defence suggests one or other of three possible explanations:

Sheer idleness and incompetence on the path of the pleader.

A deliberate and unconscionable attempt to avoid attracting an onus before of adducing evidence.

That the defense was an afterthought on the part of the defendant.”

Despite the court having rejected the defendant’s attempt to introduce a defense based on the concept paper, the defendants at the trial,  still led evidence on the aspects they had  sought to introduce thorough the amendment. That is tenacious of the defendants. The purpose of pleadings is to alert the other party of the case that he is being called upon to answer. A person pleading a case should not be allowed to direct the other party in one direction only to shift goal posts at the trial or after evidence in the trial has been led. Sufficient facts on the defenses relied upon must be pleaded to enable the court to control and manage the case. A case that is premised on matters not pleaded is destined to fail. Where a court has disallowed an amendment to pleadings, the party failing to amend its pleadings is barred from leading evidence and relying on the aspects excluded from the trial. The pleadings differ significantly on the terms of the Facultative Agreement from the evidence led by the defendants. This factor has a bearing on the probabilities of the defendant’s case.

Whether plaintiff breached the terms of the agreement

The defendants allege that the plaintiff breached the duty of good faith at the stage of pre-contractual disclosure by failing to disclose all material facts and underwriting information which disclosures would have enabled the defendants to calculate the risk and determine whether to take on the risk. They contend that the Concept Paper was the proposal and that it went beyond a mere discussion paper and that the plaintiff breached the terms of the concept paper such as security, use of one auction floor, debt collection and engagement of a risk management company. The allegations are all based on the terms of the Concept Paper which is not part of the agreement between the parties. A Concept Paper is purely a discussion paper. It is an invitation to do business. It can only be part of the contract that eventually ensues between the parties where its terms are discussed and agreed on, incorporated and its terms endorsed. Where the terms that the parties eventually agree on are different from those in the Concept Paper, it cannot be said to be part of an agreement that subsequently ensues.

Having found that the Concept Paper was not part of the agreement with the defendants, its terms  cannot be said to have been breached .Security is not stated  as a term of the re-insurance slip, the payment guarantee, facultative procedures or even the tripartite agreement. None of the documents which form part of the Facultative Agreement show a term related to security or that the plaintiff was required to pursue security against the farmers first before payment. The issue of security only arose when the defendants were asked to pay. The defendants failed to advance the type of security requested. The defendant’s witness Mr. Gwasira could only say that the plaintiff knew the security requested. If indeed security was a term of the agreement or was required to be given and indeed given, Mr. Gwasira would be able to identify such security. The conclusion is that security was not part of the agreement and was never requested.

The term regarding the risk management firm is part of the Concept Paper. It does not form part of any document constituting the Facultative Agreement. There was no requirement in terms of the Facultative Agreement for the plaintiff to supervise the risk management firm monitoring distribution. It has not been shown that the plaintiff failed to supervise tithe evidence led reveals that the parties together engaged Millenium Risk Insurance to quantify the loss and that the parties agreed to roll over the amount owing in order to try and recover what was outstanding from the farmers in the following season. If there was agreement over its operations, I fail to see where the breach arises from. The defendants contended that they were only required to pay upon the plaintiff instituting debt collection measures against the farmers. The defendants have failed to show a term of the agreement requiring debt collection on the part of the plaintiff. The plaintiff was a co-principal debtor and renounced the benefit of excussion and hence          the defendants could not demand debt collection first before payment. However, the plaintiff commenced the process of debt collection through the 2012-2013 roll over. The term regarding the use of one floor is a term of the Concept Paper but is not captured in the re-insurance slip, payment guarantee or facultative procedures. The reinsurance slip, payment guarantee and tripartite agreement do not provide for use of only one auction floor. The terms regarding the alleged breach are part of the Concept Paper and contradict the terms of the Facultative Agreement. They cannot be implied into the agreement. I am not convinced that the plaintiff failed to monitor and limit the risk or breached  any key warranties it  made to the defendants at the time of the underwriting entitling the defendants to repudiate the contract.

The defendants have failed to show that any of the terms of the documents that formed the Facultative Agreement were breached. If the plaintiff had breached the terms of the Facultative Agreement, the defendants would have cancelled the agreement much earlier on. The plaintiff performed its part of the agreement as it paid its premiums. The defendants refused to meet the claim until the plaintiff instituted debt collection against the farmers. They failed to pay the amount claimed within 14 days of the claim and hence breached the agreement. The plaintiff has proved its case on a balance of probabilities. The plaintiff is entitled to the order sought.	In the result, the plaintiff’s claim succeeds.

Accordingly, it is ordered as follows,

The 1st , 2nd and 3rd are to pay the following amounts to the plaintiff

The 1st defendant is to pay $691 892-24.

2nd defendant is to pay $	345 946-12

3rd defendant is to pay $518 919-18.

Interest on each amount above shall be calculated at the prescribed rate of interest from the date of issue of summons to the date of payment in full.

Costs of suit.

Dube, Manikai and Hwacha, plaintiff’s legal practitioners

Chinongwenya and Zhangazha, defendant’s legal practitioners