The Insolvency Exception
Importance of Jurisdiction and Law
On February 8 2002 the Norwegian Supreme Court handed down a decision in a case where an injured third party, the Norwegian government, filed a direct action against the tortfeasor's protection and indemnity (P&I) club. The court's decision underlines the importance of procedural rulings on law and jurisdiction, given the significant difference between English and Norwegian law on the question of direct action against an insurer when the assured is insolvent.
The bulk carrier Leros Strength sank off the western coast of Norway in 1997, polluting the shoreline with heavy fuel oil and other substances. At the time, the Norwegian government arranged and paid for the oil spill clean-up and then commenced recovery proceedings against the owners of the Leros Strength and their English P&I club. As the owners were soon found to be insolvent, direct action against the P&I club was the only available course of recovery for the Norwegian government. Were Norwegian courts to reject the direct action, English courts would then have jurisdiction and English law would most probably apply. In a similar case, the House of Lords had already rejected an attempt to strike down a P&I club's 'pay-to-be-paid' rule,(1) with the result that under English law no compensation is available from a club if the member has not first covered the claim in question.
Under Norwegian law direct action against an insurer is governed by Sections 7(6) and 7(8) of the Insurance Contracts Act of June 16 1989. The act came into force on July 1 1990 and dramatically changed existing law by generally granting third parties a right of direct action against liability insurers. The Norwegian Supreme Court unanimously decided in Skogholm(2) that P&I insurance is 'liability' and not 'indemnity' insurance.
While the Insurance Contracts Act is a mandatory law, it specifically permits those in the business of marine insurance to contract out of direct action provisions. A P&I club will for instance have exercised this right by using pay-to-be-paid rules, non-Norwegian exclusive choice of law provisions, and/or clauses stating simply that the act shall not apply. In short, Norwegian clubs have generally avoided the effects of Section 7(6) through their freedom of contract.
However, Norwegian law does not allow P&I clubs to insulate themselves completely from direct action. In sharp contrast to English law, a right of direct action is mandatory under the Insurance Contracts Act when the assured is insolvent. The Norwegian Supreme Court had taken up the issue earlier in the Skogholm Case and decided that any rule in the insurance contract "that has the effect that a claimant's claim must be decided in a certain fashion (eg. by judgment or a settlement approved by the club) before such a claim can be forwarded against the insurer, will be invalid".(3) This view was later approved by the legislators.(4)
Thus, under Norwegian law any club rule or provision that has the effect of barring a third party from a direct action against the P&I club is invalid when the assured is insolvent. It is the claimant's duty to prove that the assured is insolvent - that is, that the following is true:
- The debtor (ie, the assured) is unable to meet his or her current obligations as they become due;
- The value of the debtor's total assets are less than its liabilities; and
- The debtor's economic difficulties are of a permanent character, and not merely temporary.
If the member is not indisputably insolvent, as in the Leros Strength Case, then the claimants must wait for the normal winding-up procedure before commencing a direct action.
Importance of Jurisdiction and Law
Given this critical difference between English and Norwegian law, procedural questions of jurisdiction and law are extremely important for those seeking to make, or clubs seeking to avoid, a direct action claim following an assured's insolvency.
When a direct action claim comes before a Norwegian court, the first question to be considered is whether jurisdiction exists. The Insurance Contracts Act does not by itself establish jurisdiction over a P&I club. Rather, jurisdiction must be established independently under the Norwegian rules on civil procedure. If all matters in relation to the claim are purely Norwegian (ie, the claim can be properly characterized as domestic), then a Norwegian court will have jurisdiction.
However, if the claim is a multi-country factual situation (ie, with international character), then the question of jurisdiction will be decided by Norwegian rules on conflict of law.
The question of jurisdiction is more involved for foreign P&I clubs than for Norwegian clubs, as was the case in Leros Strength. Norwegian courts considering whether direct action can be made against a foreign P&I club must first determine whether the case properly falls within the scope of the Lugano Convention.(5) If the convention applies then the assured may sue the insurer "in the courts for the place where the harmful event occurred" (Article 9). The same rule applies for a direct action brought by the injured party, provided that "such direct actions are permitted" (Article 10(2)).
It was this latter provision that the Supreme Court interpreted in Leros Strength, stating that lex causae (ie, the law of the country that, according to Norwegian rules, shall govern the substantive matter in question) shall govern the question of direct action. Therefore the ruling court must first decide on lex causae before deciding on whether direct action is allowed.
Should the claim fall outside the scope of the Lugano Convention or any other multilateral or bilateral treaty on jurisdiction to which Norway is a party, the jurisdiction question will be governed by the domestic Norwegian rules on jurisdiction, which were developed before the Lugano Convention. These rules essentially correspond to the same principles as the Lugano Convention.
Unfortunately, the final decision in Leros Strength will never be handed down because the Supreme Court rejected the appeal and remanded the case for a new judgment after finding that the Court of Appeal had applied the law incorrectly. In the interim, the parties settled the case.
The Insurance Contracts Act provides that the insurer is protected by any defence that would have been available to either the assured, if the claimant was claiming against him or her, or to the insurer, if the assured were claiming under the insurance policy.
Parties involved in a direct action against an insurer must appreciate the importance of a Norwegian court's rulings on jurisdiction and applicable law. Where the assured is insolvent, Norwegian law is more amenable to a direct action claim than English law.
For further information please contact Gaute Gjelsten or Trond Eilertsen at Wikborg, Rein & Co by telephone (+47 22 82 75 00) or by fax (+47 22 82 75 01) or by email ([email protected] or [email protected]).
(1) The Fanti and Padre Island  2 Lloyd's Rep 191 (HL).
(2) Rt 1954 p1002 (the Norwegian Supreme Court's Decisions 1954 p1002).
(4) See also NOU 1987: 24, p159.
(5) The Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters, Lugano, September 16 1988.