Weekly update. A Clyde & Co case on the applicable law of an arbitration agreement in an insurance policy. Sealion Shipping v Valiant

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1 Insurance and reinsurance 31 January 2012 Weekly update Welcome to the third edition of Clyde & Co s (Re)insurance and litigation caselaw weekly updates for These updates are aimed at keeping you up to speed and informed of the latest developments in caselaw relevant to your practice. Please follow this link for further details of the following recent cases: Contents Sulamerica CIA v Enesa Enghenharia A Clyde & Co case on the applicable law of an arbitration agreement in an insurance policy. Sealion Shipping v Valiant A case on the materiality of allegations of non-disclosure and the meaning of want of due diligence in a marine insurance context. Pacific Basin v Bulkhandling Handymax A decision on the meaning of exposed to acts of piracy in a marine insurance policy. International Energy Group v Zurich A case on recovery of payment from an insurer following the payment of a mesothelioma claim there the Compensation Act did not apply. West Tankers v Allianz The Court of Appeal decides whether a declaratory arbitral award can be enforced under section 66 of the Arbitration Act. Chantiers De L atlantique v Gaztranzport A Clyde & Co case involving an allegation that an arbitration award was obtained by fraud. The merged firm of Clyde & Co and Barlow Lyde & Gilbert

2 Sulamerica CIA v Enesa Enghenharia Applicable law of arbitration agreement in an insurance policy Clyde & Co (Peter Hirst and Richard Butt) for claimants The insurance policy in this case provided that it was governed exclusively by Brazilian law. In the event of a dispute, the parties undertook to seek to resolve the dispute by mediation prior to a reference to arbitration. The arbitration agreement in the policy provided (inter alia) that the seat of the arbitration would be London. Following a dispute between the parties, the insured commenced proceedings in Brazil seeking a declaration that it was not bound to arbitrate the dispute. The insurers obtained an interim anti-suit injunction restraining the insured from pursuing those proceedings. They sought to continue that injunction and Cooke J has now held as follows: (1) It was accepted by the insured that the law governing an arbitration agreement can differ from the law governing the rest of the contract in which it is found. The insured sought to argue that, as the policy was expressly governed by Brazilian law and the parties and the risk were situated in Brazil, the governing law of the arbitration agreement should also be the law of Brazil. That argument was rejected by the judge: it is clear to me that the law with which the agreement to arbitrate has its closest and most real connection is the law of the seat of arbitration, namely the law of England. Accordingly, the fact that there might be an issue as to its validity under Brazilian law was irrelevant since there was no such issue under English law. (2) The insured sought to argue that the right to arbitrate was conditional upon compliance with the mediation clause. That argument was rejected too. The judge held that there was no enforceable obligation to mediate in this case because the clause: (1) did not provide for an unequivocal commitment to engage in mediation (2) did not specify a clear mediation process (whether based on a model put in place by an ADR organisation or otherwise); and (3) did not deal with selection of the mediator. Nor was the clause a condition precedent to arbitration. (3) The arbitration agreement provided for a referral to arbitration where the parties fail to agree as to the amount to be paid under this Policy. Even on a narrow view of the words, a declaration of non-liability would amount to a dispute as to the amount to be paid under the policy, since the insurers were saying that none was due at all. (4) Finally, reference was made to the case of ACE v CMS Energy (see Weekly Update 31/08) and the difficulty of reconciling mandatory arbitration and exclusive English jurisdiction clauses. Cooke J held that the arbitration agreement here was mandatory and recognised that that meant there was very little left of the exclusive jurisdiction clause in favour of the courts of Brazil in the underlying policy. He concluded that The effect is, of course, to give priority to the arbitration clause over the exclusive jurisdiction clause but there is no other way of reconciling the two. Nor did it make any difference that a single judge of the Court of Appeal in Brazil had found that the insureds were not necessarily bound by the arbitration agreement under Brazilian law. Accordingly, the anti-suit injunction was continued. Sealion Shipping v Valiant Materiality of allegations of non-disclosure/ meaning of want of due diligence in marine insurance context Following a motor breakdown, vessel owners sought an indemnity under a Loss of Hire insurance policy (this was separate from the Hull and Marine policy for the vessel but responded in the event of an insured peril under the H&M policy). Insurers raised various arguments and Blair J has now held as follows: (1) Material non-disclosure: One prior hull claim was disclosed to insurers but not another one. The judge held that although it might be good broking practice to disclose such claims: the materiality of the hull incidents is linked to the extent to which they caused loss of hire. It was not material that there had been 10 days loss of hire in 2004 when the excess under the [relevant] 2008 policy was 21 days: The fact is that this was not a particularly long period of offhire, it was nearly four years previous to the placing of the policy with the defendant, it did not result in a claim, and it did not come close to the excess period. Furthermore, when the broker told the underwriter that there was an excellent hull record, that was held to have been a statement of opinion which, since it was made in good faith, was true (see section 20(5) of the Marine Insurance Act which provides that a representation as to a matter of expectation or belief is true if it be made in good faith ). (2) It had been appropriate in this case, where the original underwriter had since left the insurer, for his junior to give evidence of a telephone conversation which the original underwriter had had with the broker.

3 Nevertheless, that evidence had not proven inducement (even assuming that there had been a material nondisclosure). (3) The policy contained a so-called Inchmaree clause, which provided cover for breakdown of machinery so long as this did not result from wear and tear or want of due diligence by the insured. The insured sought to argue that the insurer must prove recklessness, rather than just negligence, by the insured to fall within want of due diligence. The insured s argument was that insurance policies are intended to protect insureds even in the event of their own negligence and the policy cannot grant an indemnity with one hand and take it away with the other. That argument was rejected by the judge. Marine insurance policies are different from property insurance. It is the negligence of specified persons (eg the crew and master) which is covered, and not the negligence of the insured itself. Nevertheless, on the facts, the insurers were unable to prove that the insured had been negligent. (4) Aggregation: The judge held that a practical approach must be taken to causation. The insurers had sought to argue that there had been three separate breakdowns, when substitute motors also failed. However, the judge found that one thing led to another. The insured had reasonably tried to deal with the initial breakdown by installing a substitute motor and when that failed, another motor was installed (which also failed): So, in my view, in principle the whole period counts. Nor could the insurers claim a discount because certain repairs unconnected to the breakdown would have had to be carried out at the same time as the breakdown repairs (they had sought to argue that a certain period of downtime would therefore have occurred anyway). COMMENT: This appears to be quite a generous decision for the insured. In general, prior losses of the type for which insurance is being sought will be material (even if they did not result in a claim under a policy). Similarly, although it can be hard to distinguish between a statement of fact and one of opinion, the representation that there was an excellent hull record could arguably be viewed as a representation of fact (although - and this was not discussed in the judgment - it may be that the judge felt that the use of the term excellent was more of a subjective assessment). Pacific Basin v Bulkhandling Handymax Meaning of exposed to acts of piracy in a marine insurance policy Teare J s decision in this case was reported in Weekly Update 40/11. A term in a charter provided (broadly) that a vessel should not be required to continue to take a route if it appeared in the reasonable judgment of... the Owners that the vessel and her cargo may be, or are likely to be exposed to certain defined War Risks (including piracy). The owners refused to proceed via Suez and the Gulf of Aden on account of a risk from pirates. An arbitral tribunal held that the charterer should bear the extra costs of that decision and the charterer appealed pursuant to section 69 of the Arbitration Act 1996 (ie an appeal on a point of law). Teare J held (inter alia) that the award should be remitted to the arbitrators to determine whether a 1 in 300 chance of being hijacked by pirates was a serious risk of exposure to piracy. However, since that decision, a dispute arose between the parties as to the meaning of exposed to acts of piracy. Did it mean (as the charterer contended) being in contact with pirates or being exposed to acts of piracy having an actual effect on the vessel (including actual and failed attempts by pirates to attack the vessel) or did it mean (as the owners contended) merely being exposed to the risk of piracy. Teare J held (having regard to the rest of the clause and the Oxford English Dictionary) that the phrase exposed to War Risks should properly be construed as referring to a situation which is dangerous...thus the question to be addressed by an owner or master, when ordered to go to a place, is whether there is a real likelihood that the vessel will be exposed to acts of piracy in the sense that the place will be dangerous on account of acts of piracy (thus agreeing with the owners). The charterer also argued that remission to the arbitrators would serve no useful purpose, since the arbitrators could not properly find that there had been a real likelihood that the vessel would be exposed to acts of piracy where the owners case had been that there was about a 1 in 300 chance of hijack. That argument was also rejected by the judge. Whilst a bare possibility is not a real likelihood, the judge did not know how the 1 in 300 figure had been assessed and the outcome of the remission was not inevitable.

4 International Energy Group v Zurich Recovery from insurer following payment of a mesothelioma claim where the Compensation Act does not apply A victim of mesothelioma was employed by the insured for 27 years and exposed to asbestos during the whole of that period (which included a 6 year period during which the insured was covered under an Employers Liability policy with the insurer). The insured settled a claim from the employee. The insurer argued that the insured was entitled only to a proportion of its outlay, corresponding to the proportion which the period for which the insurer was on risk bore to the whole period of the employee s exposure to asbestos. Crucially, in this case, the Compensation Act 2006 did not apply because the insured s liability to the victim was governed by the law of Guernsey. The Compensation Act 2006 reversed the House of Lords decision in Barker v Corus and so that decision still applied in this case. Barker had held (broadly) that an employer was only liable for his proportion of loss where more than one employer had exposed an employee to asbestos. In this case, there had only been one employer, but Cooke J held that that made no difference and so the liability of the insured to [the employee] incurred in any one policy year is an aliquot share of the total damages suffered by reference to the relevant time of exposure during the policy year, as compared with the total exposure during the period of employment. Accordingly, the insured was only liable for 6/27ths of the settlement amount. West Tankers v Allianz Whether a declaratory arbitral award can be enforced under section 66 of the Arbitration Act Section 66 of the Arbitration Act provides that the court may give leave to enforce an arbitration award in the same manner as a court judgment (and judgment may be entered in the terms of the award). The issue in this case was whether an award which was not for any monetary amount, but was instead purely declaratory, could be enforced under section 66. Charterers insurers had sought to bring a subrogated claim against ship owners. Arbitrators held that the owners had contractual immunity and so were under no liability to the insurers. The owners sought to enforce the declaratory award under section 66. Although this would usually be a pointless exercise (since the parties are already bound by the award), in this case the owners perceived a possible advantage in having the award in the form of a judgment, in light of an earlier jurisdictional battle between the parties. Toulson LJ (giving the leading judgment) confirmed that I cannot see why in an appropriate case the court may not give leave for an arbitral award to be enforced in the same manner as might be achieved by an action on the award and so give leave for judgment to be entered in the terms of the award. However, he cautioned that this should not be a rubber-stamping exercise. An order would not be made if there was a serious question raised as to the validity of the award or there was some other reason which led the court to find that it was not in the interests of justice to make the order (eg because it was unnecessary). However, in this case, insurers had only challenged the court s jurisdiction to make the order and not whether it had been appropriate to do so.

5 Chantiers De L atlantique v Gaztransport Allegation that arbitration award was obtained by fraud Clyde & Co (Ben Knowles and Gildas Rostain) for claimants The claimant applied under section 68(2)(g) of the Arbitration Act on the ground that the award was obtained by fraud. The case essentially turns on its particular facts. The judge found that the defendant had deliberately decided not to disclose certain information and had sent a deliberately misleading letter. However, that was not in itself sufficient to demonstrate that the award had been obtained by fraud. On the facts, Flaux J decided that even if the true position had been disclosed to the tribunal, in all probability that would not have affected the result of the arbitration. Furthermore, any complaint about nondisclosure should have been raised before the arbitrators and it was too late to raise that complaint before the court. It is worth mentioning that the ICC arbitration here had been conducted in accordance with civil law arbitration procedure (and was based on the IBA rules). There was no duty under those rules to disclose relevant documents (as there would have been had the arbitration been conducted in accordance with English procedure). Flaux J therefore cautioned that In these circumstances, the court must be careful not to import into its assessment of [the defendant ] s conduct and the serious allegations of concealment...english law concepts of the duty of disclosure. COMMENT: It is worth bearing in mind that even if you have an English law contract, if the arbitration is governed by ICC rules, English procedural rules will not apply (and hence you will not receive the type of disclosure which you would normally expect under the English rules) Further information If you would like further information on any issue raised in this newsletter please contact: Nigel Brook nigel.brook@clydeco.com Clyde & Co LLP The St Botolph Building 138 Houndsditch London EC3A 7AR T: +44 (0) F: +44 (0) Further advice should be taken before relying on the contents of this summary. Clyde & Co LLP accepts no responsibility for loss occasioned to any person acting or refraining from acting as a result of material contained in this summary. No part of this summary may be used, reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, reading or otherwise without the prior permission of Clyde & Co LLP. CC January 2012