Jurisdiction clauses and choice of law in direct actions

In significant decisions by the European Court of Justice (ECJ C-368/16) and the Danish Supreme Court (dated 9 October 2017) in a direct action brought in Denmark against a marine liability insurer, the validity of jurisdiction clauses and choice of law in such actions has been considered.

The case concerned damage which the tug “Sea Endeavour I” caused to the port installations owned by Assens Havn (the Port of Assens) in Denmark. The tug was entered for P&I risks with Navigators Management (UK) Limited (“Navigators”). The insurance policy was subject to English law and provided for the exclusive jurisdiction of the courts of England and Wales.

Direct action in Danish courts

The tug’s bareboat charterers went bankrupt and Assens Havn brought a direct action against Navigators before the Danish Maritime and Commercial Court. The Court held that the ­jurisdiction clause in the insurance policy was binding and that the Danish court therefore did not have jurisdiction. The ­decision was appealed to the Danish Supreme Court.

The third party claimant in a direct action is not bound by a jurisdiction clause in the insurance contract

The Danish Supreme Court held that the issue of whether the jurisdiction clause was binding on a third party claimant was a matter of interpretation of EU law and since the law was ­unsettled on this issue it requested the European Court of Justice (“ECJ”) to provide a preliminary ruling. 

The ECJ’s ruling

The ECJ based its ruling on Section 3 of Council Regulation (EC) No. 44/2001 (“Brussels I Regulation”) which concerns jurisdiction in matters relating to insurance.

Article 11(2) of Section 3, with references to Article 9 and 10 and ECJ case law, provides that a third party claimant is entitled to commence direct action against the liability insurer at the place either where the harmful event occurred, or where the insurer is domiciled or where the third party claimant is ­domiciled, provided that national law permits such direct action. Since the tug’s bareboat charterers had gone into ­bankruptcy Assens Havn had, as a matter of Danish law, the right to bring a direct action within the meaning of Article 11(2).

In deciding whether the jurisdiction clause in the insurance contract could prevent Danish courts from having jurisdiction under Article 11(2), the ECJ pointed out that Articles 13(5) and 14(2)(a) allow the parties to an insurance contract to derogate from the jurisdiction provisions of Section 3 of the Brussels I Regulation in insurance contracts covering liabilities arising from the use or operation of vessels.

Since the insurance contract in the present matter covered liabilities arising from the use or operation of vessels, the wording of Articles 13(5) and 14(2)(a) suggest that Section 3 could be derogated from by an express jurisdiction clause in the insurance contract.

However, the ECJ noted that Article 11(2), which regulates jurisdiction in direct actions, does not refer to Articles 13 or 14 and, accordingly, does not refer to the derogation from the jurisdictional rules by reason of express choices made in ­jurisdiction agreements. The Brussels I Regulation establishes a system in which derogations from the jurisdictional rules in matters of insurance are to be interpreted strictly. In a ­previous decision by the ECJ it was held that a beneficiary who had not expressly consented to a jurisdiction agreement between the insurer and the insured was not bound by the jurisdiction agreement. A third party claimant could be said to be even ­further removed from the contractual relationship than an insured beneficiary.

The ECJ therefore concluded that Articles 13(5) and 14(2)(a) must be interpreted as meaning that a third party claimant is not bound by a jurisdiction clause in the insurance contract between the insurer and the insured.

Danish Supreme Court ruling

Following the ECJ’s decision, the Danish Supreme Court again considered jurisdiction of the Danish courts under Article 11(2). The Court applied the ECJ ruling and held that Assens Havn as a third party claimant was not bound by the jurisdiction clause in the insurance contract.

The Danish Supreme Court also stated that that the direct action could be pursued in Denmark under Article 11(2) ­provided that there was a legal basis for a direct action under the national law applicable. Since in this case the bareboat charterer of the tug which caused the damage was declared bankrupt, there was a legal basis for a direct action under the Danish Insurance Contract Act section 95 provided that Danish law applied.

Since the liability insurers submitted that English law applied, the Danish Supreme Court had to consider the law applicable to the direct action. On this issue the Court decided the choice of law based on a test of “closest connection”. It emphasised that the damage occurred in Denmark, the ­harmful act was ­committed in Denmark, the injured party ­was Danish, and that the tortfeasor was the Swedish bareboat charterer which at the time of the incident was conducting business ­activities in Denmark. It stated that although the liability insurers Navigators were based in England and the law agreed for the insurance contract was English law, the direct action claim was most closely connected with Denmark. Therefore, Danish law was applied.

Since Danish law was the applicable law, the Danish Supreme Court found that direct action was “permitted” under Article 11(2) and that there was jurisdiction for the claim in Denmark.  

Observations

The ECJ decision is expected to have considerable significance for third party claimants who wish to bring a direct action claim in an EU/EEA state under liability insurances which contain exclusive jurisdiction clauses where jurisdiction is governed by the Brussels I Regulation or the parallel Lugano Convention 2007.

The decisions are expected to have considerable significance for third party claimants and liability insurers

It is however commonplace for insurance policies to ­contain arbitration clauses. The ECJ’s decision does not concern the effect of arbitration clauses, since arbitration is outside the scope of the Brussels I Regulation and Lugano Convention 2007, and the regulation of the validity of an arbitration clause in direct action claims will therefore be regulated by national law.

The Danish Supreme Court decision is also likely to have a significant impact on how other national courts in the EU/EEA area apply the jurisdiction provision relating to direct actions and choice of law under Article 11(2). 

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