UK: Aviation Reinsurance: Jurisdiction And Binding Settlements

Last Updated: 25 January 2008
Article by Daniel Spendlove, Chris Chapman and Anthony Hobkinson

In a recent case the Court of Appeal considered the requirements for a settlement to be binding. The case demonstrates some of the real practical difficulties that can be encountered by London market reinsurers in cross-jurisdictional aviation insurance claims where the original policy and reinsurance contract are both subject to foreign law and jurisdiction. Reinsurers often face difficult decisions when deciding whether to recognise the jurisdiction of the foreign court, and the case is a reminder of the subsequent problems reinsurers can face in contesting a default foreign court judgment where they have chosen not to make an appearance. The decision is also a reminder of the importance of keeping very clear records of settlement discussions if they are to be relied upon in the defence of a subsequent claim.

Background

KNIC (an insurer incorporated in the Democratic People's Republic of Korea (the DPRK)), insured a Korean airline, Air Koryo, under an Aviation Hull & Liability Policy covering third party liability. KNIC were in turn reinsured under an Aircraft Third Party Liability Reinsurance Contract in respect of Air Koryo's legal liability to third parties including property damage. Both the reinsurance contract and the underlying policy were subject to the law and jurisdiction of the DPRK.

Following the crash of an Air Koryo helicopter, a successful claim was brought against Air Koryo in the DPRK. Damages of NKW 7.6m were awarded (equivalent to about 45 million Euros at the time) which Air Koryo duly paid.

Air Koryo subsequently recovered approximately NKW 7.3m from KNIC, and KNIC attempted to recover this sum from its reinsurers. KNIC initiated proceedings in the DPRK against the lead reinsurer both on its own behalf and as the representative of the other reinsurers, and was awarded the sum of 43,454,383 Euros. When reinsurers declined to honour the judgment of the DPRK court, KNIC brought enforcement proceedings in England. Reinsurers raised a number of defences - which KNIC attempted to strike out by way of summary judgment - including:

  • That there was a defect in the judgment of the DPRK court arising out of the use of representative proceedings; and
  • That on 23 December 2005 a settlement agreement had been reached between KNIC and reinsurers, by which all rights and obligations under the reinsurance contract had been discharged, and the DPRK Court should have been informed about this.


At first instance Steel J held that:

  • KNIC had brought the representative proceedings in the proper manner, and there was therefore no defect in the judgment of the DPRK court; and
  • No settlement had been reached between KNIC and reinsurers at the 23 December 2005 meeting.


To read our Law Now on the first instance decision, click here.

Requirements for a binding settlement

The Court of Appeal endorsed Steel J's ruling that a binding settlement had not been reached in the December 2005 meeting. In reaching its decision, the court had regard to:

  1. The fact that, at the 23 December meeting, there did not appear to be any discussion about the period within which payment of the claim was to be received.
  2. The absence of any kind of written note or record of a compromise. The court said that, given the fact that the parties were highly suspicious of each other, it would have expected the leading reinsurer's representative or its solicitors to have recorded the compromise, either at the meeting or afterwards.
  3. The nature of the correspondence passing between the parties following the meeting. This correspondence made no mention of a settlement agreement. The court noted that there were several examples of correspondence that "cried out" for a reference to a settlement agreement; however there were no references.


The Court of Appeal distinguished between a binding settlement agreement and what it called an "arrangement" - or a non-binding expression of intent - that might be expected to later reach a settlement (in this case an agreement to settle in a certain currency).

Summary judgment - the need to have evidence

The Court of Appeal also made some interesting comments on the circumstances when it is appropriate to order summary judgment.

The reinsurers argued that the judge at first instance should have allowed for the likelihood of additional evidence relating to its defence being available at trial; for example, certain witnesses could have been called to verify the discussions in the 23 December meeting. The Court of Appeal disagreed. It said that, although a party opposing summary judgment might assert that further evidence will emerge, it must go a step further than this and substantiate its assertion by describing the nature of the evidence, its source, and its relevance to the issues (especially when that evidence is, or can be expected to be, within the possession of that party). It cannot simply "play for time" in the hope that further evidence will materialise.

In addition, the reinsurers attempted to rely on certain comments in their pleading to verify the circumstances and terms of the settlement that they claimed had been reached. The Court of Appeal refused to follow this. The court said that a statement of truth in a pleading does not have the same status as a statement of truth in a witness statement, as it was not a personal verification of the alleged facts.

Comment

The Court of Appeal's decision raises serious issues for London market reinsurers of international aviation risks. In circumstances where reinsurers are confident that they are protected by a settlement agreement, and are faced with the prospect of contesting what they may regard as a spurious claim in a foreign and perhaps unfriendly jurisdiction, what should they do? Here, reinsurers maintained a 'hands off' approach in respect of the proceedings in Korea, no doubt regarding their prospects of contesting the enforcement of any judgment as being better than contesting the claim in Korea. The judgment records that they viewed the claim, KNIC and the Korean judicial authorities with suspicion.

The case still has some way to run and the reinsurers may ultimately succeed on other grounds. Nevertheless, it should be noted that the Court of Appeal was not overly sympathetic to the reinsurers' challenge on the basis that a settlement had been concluded but not brought to the attention of the Korean courts. The case also illustrates the perils of relying upon evidence served by way of pleadings rather than by way of witness statements. The Court of Appeal made it clear that signing a statement of truth in pleadings does not have the same effect as signing a statement of truth in a witness statement.

In addition, the decision provides useful guidance on when summary judgment may be ordered when further evidence is anticipated. The general message is that, if further evidence is likely to materialise, and a party opposing summary judgment wishes to rely on such evidence, it must explain to the court in very clear terms what the evidence is, and why it might be relevant.

Finally, the court considered in some detail the context of settlement negotiations in determining whether a settlement had in fact been reached. It concluded that the tone and nature of the negotiations was not consistent with a settlement having been reached. This highlights the importance of recording in writing key discussions (such as settlement negotiations), in case a dispute on the issue later arises.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 23/01/2008.

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