P&I Clubs must expect direct action claims in Norway
In its decision from 2018, the Norwegian Supreme Court prepared the ground for quite wide ranging jurisdiction for the Norwegian Courts for direct action claims against Norwegian P&I Clubs and Norwegian liability insurers in general. In a recent decision in the same case complex, the Agder Court of Appeal applied the Supreme Court’s guidelines confirming that Norwegian P&I Clubs must expect direct action claims being made against them in Norway – in the event that the assured is insolvent. The decision from the Court of Appeal may be subject to appeal and the decision therefore not yet legally binding.
The Court of Appeal’s decision is part of a case complex related to a claim that arose out of a collision in Indonesian waters between two foreign-owned and foreign-registered vessels, the MV «Stolt Commitment» and the MV «Thorco Cloud».
The starting point under Norwegian insurance law is that a third party may bring a claim for compensation directly against the insurer (direct action).
This right of direct action is mandatory in the event that the assured is insolvent, meaning it cannot be departed from, if doing so would result to the detriment of the injured party. A practical consequence of this rule enabling direct action claims, is that so-called «pay to be paid» clauses will be held to be invalid if the assured is insolvent and the third party liability claim is brought before a Norwegian Court.
However, in order to bring a direct action claim before a Norwegian court, the court must have jurisdiction to hear the matter.
Jurisdiction on the basis of the Lugano-convention article 11.2
In short, the jurisdiction of Norwegian courts is regulated by the Lugano Convention in respect of cases falling within its scope, which in practice corresponds to EU law (Brussel I 2001). The Lugano Convention article 11.2 allows jurisdiction for direct action claims only «where such direct actions are permitted«.
Jurisdiction before the Norwegian courts for a direct action claim is therefore conditioned upon Norwegian law (or another law permitting direct action) governing the claim in question (lex causae).
In its decision in the same case complex in 2018, the Supreme Court prepared the ground for quite wide-ranging jurisdiction for Norwegian courts in matters regarding direct action claims. The Supreme Court confirmed that the question of choice of law is determined on the basis of Norwegian private international law, which – in short – prescribes that unless there is Norwegian legislation or judicial practice prescribing the choice of law, then it will depend on which country the matter is most closely connected to, based on an overall assessment.
In the recent Court of Appeal-decision, the Court of Appeal reached the conclusion that a direct action claim against a Norwegian P&I-insurer was connected most closely to Norway, even though the claim arose out of a collision in Indonesian waters between two foreign-owned and foreign-registered vessels. The Court of Appeal emphasized the fact that the Norwegian P&I-insurer is subject to Norwegian regulatory requirements and supervision. It was also emphasized that the P&I insurance agreement was subject to Norwegian law and legal venue in Norway. According to the Court, the P&I insurer was well aware of the risk of exposure to direct action claims.
Insolvency as a prerequisite for seizing jurisdiction?
Another interesting aspect of the Court of Appeal’s decision, is that the Court was of the opinion that the insolvency-criteria should be considered as a prerequisite for jurisdiction. This means that, in the opinion of the Court of Appeal, it will be necessary to consider the insolvency-issue specifically in each particular case in order to establish jurisdiction in Norway on basis of the Lugano Convention article 11.2.
A similar rule cannot be derived from the Court of Appeal’s decision for cases that fall outside of the Lugano Convention. Under the normal Norwegian insolvency rules, there is no basis for a preliminary determination of the insolvency issues. Consequently, where the claimant is not based in, and the claim lacks sufficient connection to the Lugano Convention area (essentially the EU and Norway, Iceland and Switzerland), insolvency will be considered a substantive issue which will only be considered during the hearing without preventing jurisdiction from being seized.
In the particular case, the defendant company was not an isolated SPV, but an integral part of the Stolt-Nielsen Group which between 2015-2018 at any time had between USD 300-500 million available in cash and credit facilities. The Court of Appeal therefore came to the conclusion that the assured was not insolvent at the time of commencing legal proceedings– meaning that Norwegian Courts did not seize jurisdiction in the particular case.
According to the Norwegian Dispute Act section 21-2, Norwegian Courts shall establish the facts upon which the case shall be determined – here the insolvency issue – based on a free evaluation of the relevant evidence.
The point of departure under Norwegian law is that the injured party has the burden of proof regarding the insolvency of the assured. This starting point applies regardless of whether one consider insolvency as a prerequisite for jurisdiction or as a substantive requirement. However, in its decision the Court of Appeal specified that insolvency as a prerequisite for jurisdiction only requires a certain probability of insolvency. The claimant does not have to prove that it is more likely than not that the defendant is insolvent.
Moreover, as the assured is or has been a member of the P&I club in question, the club may easily be seen by the Court to be closer to the assured than the injured party. This may result in the burden of proof being shifted to the club – and in particular if the club does not present information and documentation that would appear to be available to the club or which the club could obtain more easily than the injured third party.
Norwegian Courts will base its insolvency-evaluation on an overall assessment taking into account a number of facts and circumstances. How to best «secure evidence» will vary from case to case. The collection of financial statements, annual reports etc. will of course be valuable evidence. If this is difficult, a «Financial Intelligence Report» or similar documents would normally carry weight. However, insolvency may from time to time be difficult to prove, for example if the assured refuses to cooperate. Difficult situations may arise if the insolvent assured receive financial contributions from the insurer with the purpose of defending the claim in foreign jurisdictions.
Additionally, under Norwegian law, the parties to legal proceedings have a duty of transparency and disclosure, meaning that they shall ensure that the factual basis of the case is properly and completely explained, cf. the Dispute Act sec. 21-4.
On that basis, we are confident that if the assured or the P&I insurer do not cooperate or contribute with information and transparency in relation to the insolvency-assessments, Norwegian Courts will draw an adverse inference from the lack of cooperation.