Reinsurer's requirement of proof

Reinsurer's requirement of proof
Commercial Union Assurance Co plc and Others v NRG Victory Reinsurance Ltd, and Skandia International Insurance Corporation and Another v Same

THE repercussions of the Exxon Valdez disaster are still being felt in the marine insurance market. These proceedings, before the Court of Appeal in London, involved a dispute between the insurers of the vessel's oil cargo and the underwriters with whom they reinsured the risk.

In 1996, the insurers, following the commencement of proceedings by Exxon in Texas, entered into a settlement agreement in respect of the loss of the cargo arising from the grounding of the Exxon Valdez in Alaska in 1989. The insurers then claimed an indemnity under reinsurance contracts in relation to the sums paid under the settlement agreement.

In the dispute that followed between insurers and reinsurers, judgment was given by Mr Justice Clarke in the Commercial Court in London in favour of the insurers under a total of sixteen excess of loss reinsurance contracts. The reinsurers, NRG Victory Reinsurance Ltd, appealed against that decision.

When the case came before the Court of Appeal it was established that the reinsurers had not demonstrated an arguable defence that the insurers were not liable to Exxon in respect of the claim under the policy. It was noted that Mr Justice Clarke had been right to hold in principle that, if Exxon's original claim against the cargo insurers over liability for the loss of the cargo had proceeded to trial in Texas, and had it been the subject of a verdict against the insurers, then liability would have been established so as to render the reinsurers liable.

It would be quite impracticable, productive of endless dispute, and against the presumed intention of the contract of reinsurance, for an English court trying a dispute concerning reinsurers' liability to the reinsured not to treat the judgment of a foreign court as to the reinsured's original liability as decisive and binding, save within the most circumscribed limits.

Those limits were that the foreign court should in the eyes of the English court be a court of competent jurisdiction; that judgment should not have been obtained in the foreign court in breach of an exclusive jurisdiction clause or other clause by which the original insured was contractually excluded from proceeding in that court; that the reinsured took all proper defences; and that the judgment was not manifestly perverse.

However, in the absence of such a judgment, it was for the judge to form his own view of whether or not an arguable defence had been shown by the reinsurers that the insurers were not liable to Exxon under the policy according to the applicable law and rules of construction.

The managing partner of the Texas law firm which conducted the insurers' defence had testified that, if the action against the insurers had proceeded, it would have succeeded. He made his prediction based on the fact that the jury in Texas were likely to have been directed by a non-specialised judge in an area in which they lacked expertise, and that jurors were often unfavourable to insurers and biased against them when insurers were arguing for a limitation of cover.

The Court of Appeal noted that Mr Justice Clarke appeared to have equated this prediction with an actual verdict of the Texas court, and that he was wrong to have done so. A judgement of the court would have given rise to a source of obligation as between the insurers and Exxon, subject to any appeal, and conclusive as between the insurers and the reinsurers subject to a possible argument of perversity, if later study of the issues as deployed at trial and the form of any judgment or verdict realistically gave rise to such a plea.

Without it, if the insurers wanted to claim from the reinsurers, there was independent necessity to demonstrate legal liability which the affidavit of the insurers' Texas lawyer did not attempt to achieve other than by a prediction directed to considerations other than those of legal merit.

Payment had been made by the insurers pursuant to a settlement in which the insurers, no doubt for good and businesslike reasons, decided that they would not submit the points available to them to the decision of the court, but would rather reach a compromise.

It was in just such a position that the reinsurers, in response to the reinsureds' claim for indemnity, had the right to require the reinsured to show that it was legally liable to the original assured, unless there was in the reinsurance contract an effective Ôfollow the settlement' provision which precluded such right.

The Court of Appeal said there was evidence before Mr Justice Clarke which not only entitled but obliged him to assume that, under English law, the reinsurers would have an arguable defence that the insurers were not liable to Exxon under the insurance policy.

In summary, the Court of Appeal held that the judgment of a foreign court of competent jurisdiction as to an insurer's liability to an assured was binding on an English court dealing with the reinsurer's liability to the insurers, provided that the insurer had taken all proper defences in the foreign court and the judgment was not manifestly perverse or obtained in breach of a clause excluding proceedings in that jurisdiction.

But when an insurer paid money to an assured following the settlement of a claim, a reinsurer, faced with a claim for indemnity, could require the insurers to show that they were legally liable to the original assured, unless the reinsurance contract contained an effective Ôfollow the settlements' provision.

The Court of Appeal accordingly allowed the appeal of the reinsurers.
(The Times Law Reports)

Ship arrest lifted in Dubai

IN a case involving an attempted ship arrest, the Dubai Court of Cassation has dismissed a claim brought by an international bank against a United Arab Emirates trader on the ground that it did not have jurisdiction to hear the dispute.

The bank filed an action against the trader and a number of other companies he owned in Ajman, who also had business in Dubai, including vessels registered in the trader's name. The basis of the claim was that the bank had loaned the trader money which he had failed to pay, to carry out a number of business transactions. The bank asked the court to enforce the mortgage it had secured against one of the vessels owned by the trader. It filed an action before the Dubai court and obtained an order for attachment against the trader's assets, including bank accounts, the mortgages of vessels and assets of the trader's companies in Dubai and Ajman.

The trader objected to the arrest proceedings and claimed that, as he was domiciled in Ajman, the action should be filed there and not in Dubai. The Dubai court of first instance accepted the trader's submission, and therefore lifted the arrest previously made over the vessel. The bank appealed to the Dubai Court of Appeal.

The appeal court reversed the first instance court's ruling confirming the attachment made against the vessel and against the trader's assets, on the grounds that one of the trader's companies was domiciled in Dubai, and on the basis of the settlement agreement previously reached between the parties to reschedule the payment of the debt assigned in Dubai. The trader appealed to the Dubai Court of Cassation on this issue. But the appeal court held that the Dubai court had no jurisdiction in the main action on the ground that the trader was domiciled in Ajman, and the action should be filed there and not in Dubai.

In the Court of Cassation it was held that the Dubai court did not have jurisdiction to hear the matter. The action should have been filed in Ajman, where the trader's business was based and where he was domiciled. The court based its judgment on the premise that, according to the UAE law of procedure, an action should be filed at the defendant's place of domicile.

Furthermore, in commercial transactions, an action should be filed at the place where the contract was executed or implemented in full or in part. With regard to claims against companies, the court said these should be filed at the company's place of business. In this case, the trader's business and domicile was in Ajman and, even if he had other businesses in Dubai, the Dubai court would not have jurisdiction to hear the matter.

The court further held that, even if the vessel concerned was mortgaged and an order of arrest was granted by the Dubai court, this did not give the Dubai court the jurisdiction to hear the main action. The mortgage was registered against the vessel in Ajman and thus only the Ajman court would have jurisdiction to hear the case, irrespective of the fact that the arrest was granted in Dubai.

The Court of Cassation therefore dismissed the case and lifted the arrest proceedings ordered against the vessel.
(Al Tamimi, Dubai)

Usual marine insurance rule applicable
J A Chapman v Kadirga Denizcilik Ve Ticaret AS and Others

THE usual rule in marine insurance recognised in the Marine Insurance Act of 1906 - that a broker could recover premiums earned from an assured even if it had not paid them to the insurer - was not to be displaced unless the court was satisfied that the parties clearly intended otherwise. That was the conclusion reached by the Court of Appeal in London in this case when dismissing an appeal by Kadirga Denizcilik Ve Ticaret AS and three Turkish shipowners against the decision of Mr Justice Thomas entering judgment against them for the balance of claims made by the broker, JA Chapman & Co Ltd.

The owners had instructed Chapman to effect marine insurance, and Chapman made claims in respect of the premiums payable under the policies. The question on appeal was whether Chapman, as opposed to the underwriters, had the right to recover the premiums even if the premiums had not been and might never be paid, at least in full, by Chapman to the underwriters.

The Court of Appeal held that it was accepted that, in general, it was the broker and not the insurer which had the right to recover premiums earned from the assured. Moreover, as a general rule, the broker could recover premiums even if it had not yet paid them to the insurer. Custom and practice was placed on a statutory footing by the Marine Insurance Act 1906.

The shipowners argued that the general practice recognised by Section 53 of the act did not apply because, on the proper construction of the policies, it was "otherwise agreed". In particular, they relied on the payment of premium warranty in the policies.

The Court of Appeal noted that, whilst it was true that Section 53 did not deal expressly with the rights and liabilities between brokers and assureds, it was common ground that it was the general rule that the broker had a cause of action in its own right against the assured in respect of unpaid premiums.

It was also noted that, unless otherwise agreed, the broker, by virtue of Section 53(2), had a lien on the policy for the amount of the premium and its charges in respect of effecting the policy.

The Court of Appeal noted that the concept of the broker acting as dual agent or as an independent intermediary provided a useful starting point for considering the words "unless otherwise agreed". If one recognised that the relationship between the parties in the ordinary case where the rule operated without question was between parties with independent rights and obligations, clear words were required to bring about a fundamental change in that relationship and in the status of the broker.

In the present case, the existence of a premium warranty clearly founded an argument that it was inconsistent with the operation of the general rule and thus was a clear indication of an agreement ousting the general rule. But the policy had to be read as a whole. The other clauses, including the broker's cancellation clause, clearly suggested that the ordinary rule was to apply.
(The Times Law Reports)

Forwarder bound by charter arbitration clause
Handelsveem BV v Annico Maritime Inc SA

THE Supreme Court of the Netherlands has confirmed a ruling of the Dutch Court of Appeal that a receiver under a bill of lading who, on taking delivery, acts on account of the charterer, is bound by the terms of the charter party, including the arbitration clause.

The dispute had its origins in a cargo shipment on board the Enarxis from China to the Netherlands under a voyage charter party concluded between Chinagro BV as charterer and Annico Maritime as owners. The charter party contained a London arbitration clause.

Bills of lading were issued to the Chinese shippers and endorsed by them in blank. These bills of lading did not refer in any way to the charter party. They did not contain a relevant jurisdiction or arbitration clause.

At the discharge port of Flushing, the bills of lading were surrendered to Annico (or so it was assumed in these proceedings) by Handelsveem which, in its role as receiving freight forwarder appointed by Chinagro, took delivery of the cargo in its own name. The reverse sides of the bills of lading showed the signatures of the Chinese shippers, Chinagro, and Handelsveem. The cargo was damaged and Handelsveem sued Annico in the Dutch courts for $2.5m.

The governing law on issues of title to sue and jurisdiction was Dutch. It had been established between the parties that Handelsveem , although acting in its own name, was in fact a freight forwarder for Chinagro itself. Annico invoked the arbitration clause in the charter party on the basis that Handelsveem could have no other rights than its principal Chinagro.

The first instance court found against Annico on the jurisdiction issue, since the judge refused to distinguish between the issue of jurisdiction on the one hand and title to sue on the other hand. Once it had been established that Handelsveem, under Dutch law, had title to sue because it surrendered the bills of lading in its own name, it could claim delivery of the cargo on the basis of the terms of those bills of lading, which did not contain an arbitration clause or any reference to the charter party.

On appeal, this decision was reversed. The appeal court took the view that a receiver under a bill of lading who on taking delivery acts on account of the charterer is bound by the terms of the charter party, including the arbitration clause, so that the Dutch courts had no jurisdiction to hear the claim of Handelsveem against Annico.

Handelsveem then appealed to the Supreme Court of the Netherlands, which decides only questions of law, and not questions of fact. In cases where certain facts are disputed between the parties, the Supreme Court will base its decision on factual assumptions.

In this case, various assumptions meant that the issue was defined in its greatest simplicity: if a receiver under a bill of lading acts in its own name, but on account of the charterer, can the charter party terms then be invoked against it? Handelsveem argued that they could not. Handelsveem, after all, was not a party to the charter containing the arbitration clause, and would therefore not be able to claim against Annico in London arbitration.

Handelsveem further argued that it did not act as a representative or agent of Chinagro, but in its own name on the basis of the endorsed bills of lading which it had physically surrendered to Annico when taking delivery of the cargo, again in its own name. According to Handelsveem, it was not relevant whether there was any material transaction on the basis of which Chinagro handed over the bills of lading to Handelsveem. What mattered was that Handelsveem, on the basis of the bills of lading endorsed in blank, could exercise the rights defined in those documents and did in fact exercise them in its own name, so that the charter party was not relevant.

The attorney-general, in his opinion in the Supreme Court, took the position that the arguments raised by Handelsveem should fail. For a number of reasons he felt that Handelsveem should not have a different position vis a vis Annico than its principal Chinagro.

The Supreme Court confirmed the appeal court decision, finding that the Dutch courts have no jurisdiction. The judges came to the conclusion that Chinagro had only handed over the bills of lading, endorsed in blank, to Handelsveem in order to enable Handelsveem to take delivery for Chinagro, albeit in its own name. In those circumstances, the court found that Handelsveem could only obtain from the bills of lading such rights vis a vis Annico as Chinagro itself, as charterer, could have invoked at the time of presentation thereof. This was not changed by the fact that Annico, for its part, had to regard Handelsveem, which acted as the lawful and regular holder of the bills of lading, as the party exclusively entitled to take delivery of the goods.

A receiving freight forwarder which surrenders a bill of lading to the carrier in its own name, but at the undisclosed instruction and for account of the charterer, must be identified with that charterer in respect of the application of the provisions on title to sue and the relation between bills of lading and charter parties in the Dutch civil code.

For those reasons, it followed that Annico could not only invoke the arbitration clause in the charter party against Chinagro, but against Handelsveem also.
(Report by M van Leeuwen)

Negligence was proximate cause of sinking
Waterwell Shipping Inc and Another v HIH Casualty and General Insurance Ltd

THESE proceedings before the Supreme Court of New South Wales concerned a $1.2m claim by Waterwell Shipping Inc and Export Finance Insurance Corporation, respectively the owners and mortgagees of the Alpha Kilimanjaro, against HIH, the insurers, in respect of the sinking of the vessel at Mombasa in 1994.

After arrival at Mombasa with a cargo of prawns and fish, the vessel's accomodation section was fumigated for cockroaches, following which the vessel was shut down and secured. The starboard suction valves, however, were left open and a wall of the outer starboard sea suction strainer box failed as a result of corrosion. Seawater entered the vessel, flooding the bilges and engineroom, and the vessel eventually sank.

In the ensuing dispute, the issues to be decided were whether the sinking was caused by negligence within the meaning of the Institute Fishing Vessel Clauses, if so whether the negligence was the proximate cause of the loss, and if so whether the loss resulted from want of due diligence within the provision of the clauses.

The Supreme Court of New South Wales found that good practice required that sea suction valves in a dead ship be closed, and that applied to fishing vessels irrespective of whether or not they were undergoing fumigation. The failure to close the valves, which resulted in the sinking of the vessel, was held to be negligent, and the sinking of the vessel was proximately caused by that negligence.
(Lloyd's List Law Reports)

Admiralty jurisdiction
Shipping Financial Services Corporation v William J Drakos, Duke Pertroleum Transport Corporation and OMI Petrolink Corporation

THIS dispute before the United States Court of Appeals for the Second Circuit had its origins in the subcharter of the Rich Duke, and turned upon the right to assert federal maritime jurisdiction over the alleged breach of a charter party brokerage contract.

In 1984, LQM Associates acted as a broker between the Japanese owner of the Rich Duke and Duke Petroleum Transport Corporation. As a result of these services, Duke signed a twelve-year charter party, one of the conditions of which obliged it to buy the vessel at the expiration of the charter in mid-1998. The price was set in the contract as $2m.

Ultimately, the parties anticipated that the vessel would be worth between $20m and $25m in 1998. So what was good news for Duke was bad news for the shipowners, who were allegedly engaged in activities aimed at frustrating Duke's operation of the vessel and encouraging the vessel's return to them prior to the 1998 expiration of the charter party.

In 1994, Shipping Financial Services Corporation (Shipping Services), a shipbroking company formed by one of the principals of LQM, allegedly helped William J Drakos obtain a fifty per cent interest in the Rich Duke charter. Due to difficulties encountered in operating the vessel, Duke and Drakos allegedly asked Shipping Services to find a subcharter for the remaining years of the original charter.

Shipping Services believed the Gulf of Mexico lighterage trade offered the best prospects. In June 1995, with the authority of both Duke and Drakos, Shipping Services contacted OMI Petrolink Corporation, which operated lightering vessels in the Gulf, about the possibility of entering into a subcharter. OMI said it wasn't interested in chartering the vessel.

While Shipping Services continued to explore other subchartering options, OMI entered into a subcharter with Duke and Drakos through OMI's broker, thereby causing Shipping Services to lose an anticipated commission.

In February 1996, Shipping Services filed a breach of contract/unjust enrichment suit in the federal court against Drakos and Duke, claiming admiralty jurisdiction. The district court ruled that the charter party brokerage agreement allegedly formed between Shipping Services and Duke/Drakos did not come within admiralty jurisdiction because the preliminary contract doctrine precluded such jurisdiction. Shipping Services duly appealed, and the case was heard on appeal by the US District Court for the Southern District of New York.

On appeal, Shipping Services referred to the decision in the 1991 case of Exxon Corp v Central Gulf Lines, in which the court allowed Exxon's claim for payment as a direct supplier under a marine fuels contract to come under admiralty jurisdiction, but denied jurisdiction over the claim involving Exxon as agent.

Shipping Services argued that, under Exxon, the court was obligated to look at the nature and subject matter of the brokerage agreement in determining whether it had admiralty jurisdiction, rather than foreclosing jurisdiction simply by applying the preliminary contract doctrine. Such analysis, argued Shipping Services, would have revealed that the brokerage agreement was maritime in nature and thereby qualified for admiralty jurisdiction.

The appeal court pointed out that, while Exxon plainly discouraged per se exclusions to maritime claims, it stopped short of entirely eliminating the preliminary contract doctrine. It was held that Shipping Services had failed to show that its brokerage agreement was sufficiently maritime in nature to come within the maritime jurisdiction.

The appeal court found that Shipping Services had failed to establish maritime jurisdiction under either the Exxon nature and subject matter test, or the preliminary contract doctrine. It could therefore not enjoy the benefit of bringing the case in federal court. The district court ruling was duly affirmed.