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Broad Interpretation of Settlement and Jurisdiction Provisions

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Amy Edwards

Senior PSL - Litigation

London

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24 November 2014

Two recent rulings in the long-running insurance dispute Starlight Shipping Company v Allianz Marine & Aviation Versicherungs AG & ors [2014] EWCA 1010, 18 July 2014 and [2014] EWHC 3068 (Comm) 26 September 2014, provided clarity on aspects of the interpretation of settlement agreements. The Court of Appeal has confirmed that the ruling in Fiona Trust v Privalov [2007] Bus LR 1719, that fine distinctions between words such as "under" or "in relation to" should no longer be made in relation to arbitration agreements, applied equally to jurisdiction agreements and settlement clauses. The words "full and final settlement" pointed to the intention of the parties that all claims in relation to the loss of the vessel should be included in the settlement. A further ruling by Flaux J found that the settlement agreements also covered any claims against third parties (such as employees, individual underwriters, legal advisers). The ship owner's claims in Greece against these third parties therefore breached the settlement agreement, and therefore the third parties were entitled to a decree of specific performance and damages.

This is the resumption of the appeal from Burton J in the Alexandros T [2012] 2 All ER (Comm) 608 granting summary judgment to Company Market Insurers (CMI) and Lloyd's Market Insurers (LMI) against the ship owners and associated companies (together, the owners) for declarations, damages and indemnities in respect of the owners' proceedings in Greece seeking damages from the insurers, despite proceedings for sums due under the relevant insurance policies being settled as long ago as December 2007 and January 2008. The owners' application to stay the proceedings failed before Burton J but, on appeal, this court stayed the English proceedings pursuant to Article 27 of Council Regulation 44/2001 (EC). The Supreme Court lifted that stay and will accordingly proceed to decide the rest of the owners' appeal.

After a ship sank, ship owners Starlight commenced English proceedings against various insurers (the Insurers) in 2006 (the 2006 proceedings) for breach of insurance policies that contained English exclusive jurisdiction clauses. The proceedings were settled in 2007 and 2008, culminating in settlement agreements, followed by Tomlin Orders which stayed the 2006 proceedings "save for the purposes of carrying into effect the terms agreed between the parties".

In 2011 Starlight and the managers (OME) commenced Greek proceedings against the insurers. Although the claims were for breaches of the Greek Civil and Criminal Code, the factual allegations were "entirely familiar" to the English action and arose out of the alleged manner in which the insurers handled Starlight's claim with respect to the lost ship.

The insurers responded by, inter alia:

·         issuing applications in the 2006 English proceedings, seeking summary relief for declarations and damages against Starlight and OME (the latter subsequently having been added as a third party); and

·         issuing fresh English proceedings (the 2011 proceedings), without prejudice to their applications under the 2006 proceedings, with a variety of causes of action, including breach of the jurisdiction clauses in the policies, breach of the terms of the settlement agreement and declarations that the settlement agreements (which included indemnity provisions) settled all claims against them.

Burton J granted summary judgment to the insurers. However, the Court of Appeal stayed both these proceedings, holding that it was bound to do so by virtue of Article 27 Brussels Regulation, but expressed no view as to the correctness or otherwise of Burton J's decision to grant summary judgment. The insurers appealed to the Supreme Court which lifted the stay. This Court of Appeal judgment examines Burton J’s decision, not on jurisdictional grounds this time, but on the merits.

Greek claims fell within the settlement provision and the indemnity provision of the Settlement Agreements

The Court of Appeal found that the Greek claims were clearly brought in relation to the loss of the vessel, and so fell within the indemnity and settlement provisions of the settlement agreements. It was the obvious intention of the parties that the settlement provision and the indemnity provision should "march together" and also, ever since the decision of the House of Lords in Fiona Trust v Privalov [2007] Bus LR 1719, fine distinctions between words such as "under" or "in relation to" should no longer be made. Although the Fiona Trust case related to an arbitration agreement, the Court of Appeal stated that the same principle should apply to jurisdiction agreements. Likewise, settlement clauses are analogous to both arbitration and jurisdiction clauses and should therefore be given a sensible commercial meaning; the words "full and final settlement" point to the intention of the parties that all claims in relation to the loss of the vessel should be included in the settlement.

The Court of Appeal rejected the owners' argument that the Fiona Trust principle was not universal and should not apply to settlement agreements (relying on Barclays Bank plc v Nylon Capital LLP [2011] EWCA Civ 826; [2012] Bus LR 542 in which Fiona Trust was distinguished). Barclays was about a clause requiring an expert to determine the allocation of partnership profits; any other dispute would have to be determined by the English courts in any event. In these circumstances, the rationale of Fiona Trust (that sensible businessmen would not want their disputes to be determined partly by arbitration and partly by another tribunal such as the court) did not apply because the parties had expressly agreed that such a division was to occur.

It followed that the Greek proceedings fell within both the settlement provision and the indemnity provision and Burton J's decision was upheld.

Greek claims fell within the exclusive jurisdiction clauses in the Settlement Agreements

The Court of Appeal ruled that it followed from the fact that the Greek claims fell within the settlement and indemnity provisions of the Settlement Agreement, that the Greek claims also fell within the exclusive jurisdiction clause of the settlement agreements. The Fiona Trust decision must apply to jurisdiction clauses just as much as arbitration clauses. The Greek claims should, therefore, have been brought in England.

Claims for damages for breach of jurisdiction clause do not infringe EU law

The owners argued that these claims for damages interfered with the jurisdiction of the Greek court to determine its own jurisdiction and, if appropriate, the merits of the owners' claims, relying on Turner v Grovit [2004] 2 Lloyds Rep 169. The Court of Appeal found this reliance to be misplaced because Turner v Grovit related to anti-suit injunctions, not damages. The vice of anti-suit injunctions is that they render the mechanisms which the Brussels Regulation provides for dealing with lis alibi penden and related actions ineffective. There is no infringement of EU law, nor is there any need for a reference to the Court of Justice of the European Union on this point.

 

Summary judgment for damages (to be assessed) for breach of the jurisdiction provisions

The Court of Appeal ruled that the owners are acting in breach of the jurisdiction provisions, and Burton J was right to give judgment for damages to be assessed pursuant to CPR Part 24 (noting that damages were awarded in similar circumstances in Ellerman Lines Ltd v Read [1928] 2 KB 144). The owners' breach of contract was in the bringing of the claims. Whether they succeed in Greece or would have failed in England is irrelevant.

Settlement agreements cover claims against third parties

In the same Greek proceedings, Starlight and OME also sued, not only the named Insurers and Underwriters, but also their employees, individual underwriters, a law firm and individual lawyers and a firm of loss adjusters, including more named individuals (Third Parties). Flaux J had to decide whether these claims also breached the settlement agreements.

 

Under the two main settlement agreements Starlight and OME agreed to receive a sum in full and final settlement of all claims against the Underwriters. Underwriters was defined as a list of named insurance companies and Lloyds syndicates.

Starlight and OME argued the claims against the Third Parties were not covered because they, the Third Parties, did not fall within the definition of Underwriters.

 

Who was covered by the settlement?

Flaux J answered the question, firstly, by a process of contractual construction:

·         The definition of "Underwriters" was to be considered, but was not decisive.

·         Applying the Supreme Court's analysis in Rainy Sky v Kookmin Bank [2011] UKSC 50, it would be contrary to business common sense for the insurers to have signed up to an agreement, leaving themselves exposed to claims from these Third Parties (such claims would inevitably be made as indemnity claims if the Third Parties had incurred liability to Starlight and OME). This cannot have been what was intended.

·         The wording of general release "full and final settlement of any and all claims" was intended as a "clean break" – there was a clear objective intention of general release.

·         The parties were legally advised when they entered into the settlement agreement, and would be taken to have understood that settling with one joint tortfeasor meant settling with them all. Neither of the exceptions to this rule applies: (1) Starlight and OME could have insisted on an express reservation against the Third Parties, but had not done so; (2) the wording was of general release, not a mere "covenant not to sue".

·         The applicability of the joint tortfeasor rule was further support for a construction of the settlement agreements that construed "Underwriters" as including the Third Parties.

In any case, regardless of construction, the joint tortfeasor rule would have had the same effect anyway – ie by settling with the Underwriters, Starlight and OME would have been taken to have settled with anyone jointly liable with them, namely the Third Parties. It was irrelevant that Greek law had no equivalent to the English Law concept of joint tortfeasors.

Therefore, the settlement agreement had been breached vis-à-vis the Third parties too, and the Third Parties were entitled to declaratory relief to that effect.Sanctions for breach of the settlement

 

 

 

 

 

 

Flaux J stated that a "full and final" settlement release is a continuing promise to accept the settlement sum and not to sue in return. Such a promise can be enforced by a decree of specific performance. Whilst an anti-suit injunction is inconsistent with EU law (West Tankers), such a decree is not as it does not usurp the jurisdiction of another Member State court, it merely "assists" the other court. Such an order would provide clarity to the Greek court on the English law position. Another reason for exercising the court's discretion to grant decree of specific performance is that damages was an inadequate remedy for breach of the settlement agreements.

The court ordered Starlight and OME to:

·         do "all such things and sign all such documents as necessary to carry the settlement into effect" including a "Receipt and Recognition of the Release Agreement" to be signed by the assureds, or on their behalf by the court;

·         pay more money into an "indemnity" fund to cover the insurers' costs relating to the Greek proceedings, and any liability to the Third Parties. This was to support the indemnity obligation in the settlement agreements.

Third Party claim for damages

Some of the Third Parties sought damages to reflect their costs (of GBP 225,000) incurred in the Greek proceedings.

Flaux J allowed this on three separate bases:

·         Under the Contract (Rights of Third Parties) Act 1999, which allows a third party to enforce a term provided certain requirements are met. Flaux J ruled they were met as:

o    The definition of Underwriters included these Third Parties – thus a benefit was purported to be conferred on them; and

o    The Third Parties were therefore expressly identified as a class.

·         As damages in lieu of an injunction, that would otherwise be available were it not for the ECJ's ruling in West Tankers; and

·         Insurers could claim damages on their behalf. This was a rare example of a contracting party being allowed to recover a third party's loss, on the basis that there was an intention to benefit those servants and agents (applying St Martin's Property Corporation v Sir Robert McAlpine [1994] 1 AC 85, and Offer-Hoar v Larkshore [2006] EWCA Civ 1079).

Comment: The Court of Appeal ruling is helpful in its confirmation that the reasoning from Fiona Trust applies just as much to jurisdiction provisions as it does to arbitration clauses. This makes it very difficult for a party to argue that claims related to an agreement containing an exclusive jurisdiction clause can be brought elsewhere. The Court of Appeal's finding that a claim for damages for breach of a jurisdiction clause is not a breach of EU law is also another boost for the efficacy of English law governed English court jurisdiction clauses.

Flaux J's decision confirms how important it is to give full consideration to who is covered by a settlement agreement. The rule about settling with joint tortfeasors means that settling with some means that all are covered, unless there has been an express reservation of rights, or the settlement is construed as a "covenant not to sue" rather than a release. The wording of general release in this case, against a backdrop of the joint tortfeasor rule, gave Flaux J the confidence to construe the settlement agreements in such a way as to include the Third Parties.

Flaux J's ruling also shows a willingness to make robust orders to enforce a settlement, even where a Member State court is also involved. Whilst Flaux J acknowledges that an anti-suit injunction is a step too far as far as EU law is concerned, the alternative sanctions of a decree of specific performance, and a damages award are available.