UK: Insurance and Reinsurance Review of 2013

Our Annual Insurance and Reinsurance Review summarises the key case law developments in insurance and reinsurance throughout the year. Please note that some cases covered in this review may be subject to further appeal.

In our 2013 review, we look at the following cases:

LAW AND JURISDICTION

Starlight Shipping: Supreme Court considers Articles 27 and 28 of the Judgments Regulation (EC Regulation 44/2001) in deciding whether to stay English court proceedings

Starlight Shipping co v Allianz Marina & Aviation Versicherungs AG¹

The Supreme Court has lifted the stay imposed by the Court of Appeal in proceedings instituted to enforce a settlement agreement containing an English court exclusive jurisdiction clause on the basis that, contrary to the Court of Appeal ruling, those proceedings did not fall within Article 27 of the Judgments Regulation. Article 27 obliges a court in a Member State to stay proceedings involving the same parties and the same cause of action already pending in another Member State, in this case, Greece. The Supreme Court noted the purpose of Articles 27 and 28 of the Judgments Regulation to avoid, as far as possible, inconsistent judgments. However, regarding Article 27, it was necessary to consider the object and cause of action of the claims rather than the end result sought by the parties in each jurisdiction. In doing so, the defences to the claims raised by the parties must be ignored. As such, it found that the object and causes of action in the two jurisdictions were different.

The Supreme Court declined to stay the English proceedings under Article 28, where the court second seised has a discretion to stay "related" actions as it held that, in this case, the court was first seised. Regarding Article 28, it was necessary to consider the 'proceedings' and not the 'issues' to determine the court first seised. Had the English court been second seised, it would, in any event, have declined to exercise its discretion to stay for a number of reasons, including the existence of the clause in the settlement agreement conferring jurisdiction on the English courts.

Background

Starlight was the former owner of the vessel Alexandros T, which sunk off the coast of South Africa in May 2006, with the loss of many lives. In August of that year, Starlight (and others) commenced proceedings (the "2006 Proceedings") for the loss against their Lloyd's and company market insurers (described in the case as the "LMI" and the "CMI" defendants), who denied the claim, alleging amongst other things that the vessel was unseaworthy with the insureds' knowledge². The dispute was hard fought, and particularly notable for the way in which insurers were alleged to have procured evidence in support of their unseaworthiness case. Starlight asserted that the allegations made by the insurers in their defence of the claim were based on false evidence obtained from the ship's bosun, and that the insurers had made 'significant payments' to the bosun in connection with this.

The parties entered into settlement agreements shortly before the trial began. The settlement agreements were in the form of a Tomlin Order and the 2006 Proceedings were stayed, save for the purposes of enforcing the terms of the settlement agreements. The settlement agreement with the CMI was expressly subject to "exclusive" English jurisdiction, whereas that concluded with the LMI was simply stated to be "subject to English law and the jurisdiction of the High Court of London".

Some three years later, in April 2011, Starlight (and others) then brought claims against the insurers in the Greek courts under the Greek Civil and Criminal Code. The basis of the Greek claims was in effect tort, akin to the torts of defamation and malicious falsehood in English law.

The insurers responded in two ways. On the one hand, they sought to invoke the Tomlin Order which included provisions for Starlight to indemnify the insurers in relation to any fresh proceedings which it or its associated companies might bring against the insurers. On the other hand, and without prejudice to their right to relief under the Tomlin Order, they initiated new English proceedings for relief and damages for breach of the exclusive jurisdiction clauses within the settlement agreements.

First Instance Decision

Commercial Court, 19 December 2011

At first instance, the English Court gave summary judgment for the insurers and refused to stay the English proceedings under Article 28 of the Judgments Regulation. In reaching its decision, the Court considered several issues.

First, the Court rejected Starlight's argument that the Greek proceedings were not "in relation to the loss of the Alexandros T" or "under" the policies and rather claims for bad faith brought under the Greek Criminal Code, which therefore fell outside the ambit of the previous settlement agreements. The Court found that the so-called "fraud exemption" in Satyam Computer Services Ltd v Unpaid Systems Ltd³applied only to claims unknown at the time of the settlement. In this case, Starlight not only knew of the claims it was now asserting but had attempted (unsuccessfully) to introduce them to the English action three years earlier.

Secondly, having determined that the subject matter of the Greek claims fell within the settlement release, the Court held that it was also a breach of those agreements for Starlight to bring the said claims by way of litigation in Greece since the parties had agreed in the settlements to exclusive English jurisdiction (this was expressly so in the case of the CMI settlement agreement, but also held to be so in the case of the LMI settlement agreement which was construed by the court as conferring exclusive jurisdiction to the English courts).

Thirdly, the Court held that it was unnecessary for the insurers to rely upon fresh English proceedings to enforce the settlement agreements since the Tomlin Order gave the Court jurisdiction to order the relief sought by the insurers.

Appeal

Court of Appeal, 20 December 2012

The insureds appealed, arguing that the English proceedings should be stayed under Article 27 of the Judgments Regulation, as the Greek Court was the court first seised of the proceedings. The Court of Appeal held for the insureds.

The Court of Appeal stated that it was clear from the authorities that if a cause of action in one Member State is a "mirror image" of a cause of action in another Member State, the cause of action will be regarded as the same and the second action must therefore be stayed, applying Article 27 of the Judgments Regulation.

The Court of Appeal considered that the key assertion in the Greek proceedings was that the claims were non-contractual claims while the key assertion in the insurers' newly issued proceedings in the English courts was that the non-contractual claims had already been resolved by the settlement agreements. Therefore, the Court of Appeal held that there was an identity of issues between the proceedings and, as there was considerable risk of inconsistent judgments if one set of proceedings was not stayed, it was bound (as the court second seised) to stay the English proceedings under Article 27 of the Judgments Regulation. The summary judgments granted at First Instance were set aside. The Court of Appeal made no final determinations on Article 28 of the Judgments Regulation. It was left to the Greek courts, as the courts first seised, to determine whether the English exclusive jurisdiction clauses under the settlement agreements should be adhered to, and whether the Greek proceedings should be stayed.

Supreme Court

Supreme Court, 6 November 2013

The insurers appealed the decision of the Court of Appeal and the insureds cross-appealed on the point of Article 28 of the Judgments Regulation. The Supreme Court considered the position under Articles 27 and 28 of the Judgments Regulation.

In relation to Article 27 of the Judgments Regulation, the Supreme Court stated that the essential question was whether the English and Greek proceedings were mirror images of one another and thus legally irreconcilable (in which case Article 27 would apply) or whether they were not incompatible (in which case it would not apply). The analysis of the Supreme Court was to disregard any defences raised to the claims and consider only the claims themselves; comparing the cause and the object underlying the claims to see whether they were the same.

In the leading judgment of Lord Clarke (with which the majority of the Supreme Court agreed), the new English proceedings were described as being brought under three heads, namely an indemnity claim, a claim under the exclusive jurisdiction clauses, and a claim under the release provisions of the settlement agreements. The Supreme Court determined that the legal basis for the English proceedings was contractual as opposed to the Greek proceedings which were tortious. Therefore, Article 27 of the Judgments Regulation was found not to be applicable to the English proceedings.

The Supreme Court noted that where the insurers sought a declaration of non-liability through the English proceedings, this would in effect be a mirror image of the Greek proceedings and the Supreme Court would refer the question to the CJEU as to whether those declarations involve the same cause of action as the Greek proceedings. In any event, the insurers abandoned any claim for such declarations and no referral was required to be made to the CJEU.

In relation to Article 28 of the Judgments Regulation, the Supreme Court noted that only those courts other than the court first seised have discretion to stay. It was not in dispute that the English and Greek proceedings were related. The issues the Supreme Court considered were whether the English court was first seised and, if it was not, how the discretion should be exercised. The Supreme Court found that the English court was first seised through the 2006 Proceedings⁴ either to the extent that they were unstayed or whether they remained stayed, and nothing had occurred subsequently from which it could be inferred that the English court was no longer seised.

The Supreme Court also rejected Starlight's argument that the Greek proceedings were new claims and thus new proceedings. The Supreme Court held that it was only necessary to consider the 'proceedings' and not the 'issues' in relation to claims in the context of Article 28 of the Judgments Regulation. To the extent that the English and Greek proceedings were related, the English court would be considered the court first seised in this case.

The Supreme Court further considered the issue of discretion under Article 28 of the Judgments Regulation on the assumption that the English court was second seised. On the facts of the case, given the close relationship between the claims in England and the subject matter of the claims in Greece, the fact that issues in the English proceedings raised contractual questions under English law, and the English proceedings were more advanced than the Greek proceedings, the Supreme Court found that it would refuse a stay under Article 28 of the Judgments Regulation. Lord Clarke also confirmed that, when dealing with Article 28, an exclusive jurisdiction clause in favour of the court second seised would be "likely to be a powerful factor in support of refusal of a stay".

On a procedural note, the Supreme Court also confirmed that the English courts are not required to consider an application for a stay made under the Judgments Regulation where the application is not made in accordance with the requirements of English civil procedure, e.g. if it is made late.

Arbitration clause found to be effective despite an exclusive jurisdiction clause for the courts of Kenya

British American Insurance (Kenya) Ltd v Matelec SAL & Anor⁵Commercial Court, 29 October 2013

The High Court decided that despite an inconsistent provision in a single contract of insurance and reinsurance which seemingly granted exclusive jurisdiction to the courts of Kenya, a London arbitration clause was binding on the parties.

Background

The Claimant, British-American Insurance (Kenya) Limited ("BAIC"), an insurance company carrying on business in Kenya commenced two arbitration claims against the Defendants, Matelec SAL, a Lebanese company and Thika Power Limited, a Kenyan company, for an order under the Arbitration Act 1996 appointing an arbitrator, and an injunction to prevent the Defendants commencing proceedings other than by way of arbitration under the contract. The contract in question was agreed by the parties to be a single document which constituted both a contract of insurance for cargo and delay startup, and a contract for reinsurance of that risk. Under the reinsurance contract BAIC only retained 5% of the risk. The combined document did not make clear which clauses referred to which contract, solely the insurance contract, solely the reinsurance contract or both.

Due to regulatory concerns by the Kenyan insurer the original policy document was issued with a law and jurisdiction clause which simply stated "Kenya". The representative of BAIC had removed the detailed Swiss Re wording which had previously been present and replaced it with the single word.

Less than two months later and following a concern raised in relation to having Kenyan governing law in the contract, an endorsement was agreed. The policy was amended to (i) be governed by English law; (ii) give the Kenyan courts exclusive jurisdiction; and (iii) have London as the arbitration seat.

A dispute arose as to whether the amended arbitration provision was binding on the parties to the insurance contract, the reinsurance contract or both. The Court needed to resolve the apparent inconsistency between a clause giving exclusive jurisdiction to the Kenyan courts, and an arbitration clause with London as the seat.

General principles

The Court was clear that when deciding how to interpret a commercial contract,

"the aim is to ascertain what a reasonable person would have understood the parties to have meant by the words they used, with such reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract."

Each party put forward quite different meanings which they said should be attributed to the words. Accordingly the Court had to consider the commercial consequences flowing from each interpretation. This process involved looking both at the contract as a whole, but also the commercial rationale for the contract itself, and deciding which meaning made most commercial sense. The Court was mindful of the principle that when confronted with inconsistent provisions it must conscientiously and fairly reconcile them, if at all possible. Finally, as the document in question was not drafted "as a coherent whole" the Court must be willing to reject parts of the document.

Decision

The Court found that the reasonable person would, having decided that the governing law amendments introduced by the endorsement would apply to both contracts, be reluctant to find that the amendment relating to arbitration would only apply to the reinsurance contract. The Court was influenced by the apparent commercial desire to ensure that the two contracts would be identical, as evidenced by the incorporation of both the insurance and reinsurance contracts in a single document. On a commercial interpretation as to the effect of the endorsement, there was no delineation between the two contracts, and it made sense that the parties would wish for all disputes to be decided under an identical regime. No weight was placed on the fact that one insurer was based in Kenya in part because, by the very nature of a marine insurance contract, investigation would be required throughout various parts of the world. Given, also, that arbitration clauses are common in commercial insurance contracts and London arbitration would have commercial advantages, in particular an expert tribunal and a substantial degree of privacy, a reasonable observer would have identified no compelling reason overall for the insureds to want disputes to be resolved in the Kenyan courts, rather than by London arbitration.

Although the endorsement referred to exclusive court jurisdiction, while at the same time contemplating that disputes would be resolved by arbitration, the Court found no great difficulty in reconciling the two apparently conflicting provisions. A reasonable observer would conclude that the exclusive jurisdiction provision was not intended to prevent the amended arbitration provision from being effective in either the insurance or reinsurance contract; it simply specified which court would have jurisdiction if court proceedings were in fact brought as to the merits. As a practical reality, arbitration clauses do not always prevent one side from bringing such proceedings.

Accordingly, relief was granted to BAIC and the parties were bound to arbitrate any claims in London.

Key points

The Court confirmed that when dealing with inconsistent contractual provisions it will adopt the most commercially sensible interpretation (Rainy Sky SA v Kookmin Bank⁶). Accordingly, if there is not clarity in the wording of a contract, when a dispute arises the court will look at a number of the wider factors in deciding how to interpret the words. The court will not determine a construction which would damage the parties, but it will be willing to go to the margins of what can conscientiously and fairly be done to reconcile the words used (Pagnan SpA v Tradax Ocean Transportation SA⁷).

Commentary

If parties intend to use a single document to encompass both a contract for insurance and reinsurance, and want different provisions to apply to each one, this must be clearly and expressly shown. To prevent a dispute arising in relation to law and jurisdiction, or dispute resolution, parties need to ensure that these are clearly drafted to prevent any ambiguity arising.

To read this Report in full, please click here.

Footnotes

1 [2011] EWHC 3381 (Comm); [2012] EWCA Civ 1714; [2013] UKSC 70. We commented previously on the First Instance and Court of Appeal decisions between the insurers and the insured in our annual reviews of 2011 and 2012.

2 Unseaworthiness with the privity of the assured, to which see s39(5) Marine Insurance Act 1906.

3 [2008] EWCA Civ 487

4 The 2006 Proceedings had not been dismissed as the parties had not filed any consent order for dismissal after payment of the settlement amounts. The CMI settlement agreement contained a provision for filing such a consent order but this was not carried out. The LMI settlement agreement did not contain any such provision.

5 [2013] EWHC 3278 (Comm)

6 [2011] 1 WLR 2900

7 [1987] 2 Lloyd's Rep 342

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