Norwegian Supreme Court clarifies time bar rules applicable to direct actions against P&I insurers

The dispute arose out of an incident in China in 2007 during which the capesize vessel “Mineral Libin” made contact with another vessel and a buoy when berthing. The vessel had been chartered in a chain of charterparties which included a charterparty between SwissMarine Services S.A. (“SwissMarine”) and Transfield ER Cape Limited (“Transfield”). SwissMarine had P&I/CLH cover with Assuranceforeningen Gard – gjensidig (“Gard”) and Transfield had similar cover with Skuld Mutual Protection and Indemnity Association (Bermuda) Ltd and Assuranceforeningen Skuld (Gjensidig) (jointly “Skuld”).

The head owners brought an unsafe port claim against the head charterers which was passed down the charter chain to SwissMarine, who in turn passed the claim on to Transfield. In the summer of 2010, SwissMarine commenced arbitration proceedings against Transfield alleging a breach of the unsafe port warranty in the charterparty. In its defence, Transfield argued that the incident was instead caused by an error in navigation by the master and/or the pilot.

In October 2010 Transfield became insolvent and went into liquidation proceedings. Shortly thereafter, SwissMarine notified Skuld of its intention to bring a direct claim against them under the Norwegian Insurance Act for the purposes of enforcing any award obtained against Transfield in the arbitration. The arbitration proceedings continued in the meantime and SwissMarine obtained an award in its favour in July 2016.

SwissMarine then commenced direct action proceedings against Skuld in Norway in September 2016. Skuld argued that the direct action was time barred.

Supreme Court decision

Before turning to the relevant time bar rules, the Supreme Court made some general comments and observations about direct actions against P&I insurers. It confirmed that the pay-to-be-paid rule, which was a central feature of P&I insurance and required the assured to discharge its liability to the third party claimant before seeking indemnification from its insurers, was to be upheld under Norwegian law. This effectively means that there is no right to a direct action, unless the assured is insolvent.

This is because section 1-3 (2) of the Insurance Contract Act allows marine insurers to contract out of all provisions of the Insurance Contract Act except as provided in section 7-8 (2). Section 7-8 (2) provides that section 7-6 (1), which contains the right to a direct action, is among a few provisions that nevertheless apply if the assured is insolvent:

“In the event that the assured is insolvent, the provisions of sections 7-6 and 7-7, cf. section 8-3, second and third paragraphs, shall apply.”

The first issue before the Supreme Court was whether the applicable time bar was to be governed by section 8-6 of the Insurance Contract Act, which provides that time bar for a direct claim shall follow “the same provisions as for the liability of the assured”. The charterparty was subject to English law and so the claim under the charterparty was subject to a six year time bar. SwissMarine had commenced direct action proceedings five years and 11 months after the insolvency of Transfield.

The Supreme Court held that the provisions listed in section 7-8 (2) were mandatory in case of insolvency of the assured and since section 8-6 was not one of the listed exceptions, it was possible to contract out of section 8-6. Additionally, the Supreme Court found that Skuld had in fact contracted out of section 8-6 in its Rule 47 which provides that the Insurance Contract Act “shall not apply”.

The Supreme Court therefore found that the applicable time bar period was to be determined in accordance with the ordinary rules in the Norwegian Time Bar Act. However, it did not rule on the question of whether to apply the rules in the Time Bar Act for contractual claims pursuant to sections 3 and 10 No. 1 or the rules for non-contractual claims pursuant to section 9. The reason it did not was because it would not make a difference in this case since the time bar period would in both instances start to run from the same point in time, namely when the claimant obtained the “necessary knowledge” about the direct claim and the debtor.

The Supreme Court found that SwissMarine could not have obtained the necessary knowledge about the direct claim before it had come into existence, i.e. before Transfield was declared insolvent in October 2010. Based on the facts of the case, it then went on to find that SwissMarine could not have obtained the necessary information to commence direct action proceedings before 15 November 2015, being when the Master’s statement was submitted in the arbitration as this was the point at which SwissMarine could have expected a favourable outcome in the arbitration.

Therefore, the Supreme Court held that the direct action was not time barred when SwissMarine brought direct action proceedings against Skuld on 13 September 2016.

Comment

The decision is a welcome clarification of the applicable time bar rules in direct actions under Norwegian law. It has long been subject of debate whether the applicable rules are those in the Insurance Contract Act or in the Time Bar Act and so the Supreme Court’s guidance now clarifies this issue.

The Supreme Court’s assessment of the time when “necessary knowledge” under the Time Bar Act exists is in line with the traditional understanding of this criteria. The decision shows, however, that claimants cannot necessarily wait until they have a final and unappealable judgment or award in respect of the underlying claim. It is therefore important to act swiftly if the debtor becomes insolvent and, if necessary, either obtain a time extension to the applicable time bar or commence proceedings.

It remains to be clarified, however, whether the rules for contractual claims (sections 3 and 10 No. 1) or non-contractual claim (section 9) apply under in the Time Bar Act.

Since the Supreme Court concluded that SwissMarine’s direct claim against Skuld was not time barred, it was not necessary to consider the second time bar issue before the court. This was whether the direct action brought by Gard against Skuld in respect of a claim which had been subrogated from SwissMarine was time barred, since subrogation was made after the direct action proceedings were brought by SwissMarine. Therefore, the contentious issue of whether a time barred claim can be resurrected if it is subrogated and brought by the subrogated party, is still to be decided.