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An eternal triangle at sea: Loss of insurance cover under a direct action in marine liability insurance.

Gregory Fossion
Thesis presented in view of obtaining the degree of Master of Laws in Maritime Law. Written and developed under the scientific conduct of Professor Dr. H. J. Bull.

List of abbreviations
BMC - Belgian Maritime Code - Loi du 21 aut 1879 contenant le Livre II du Code de Commerce. De la navigation maritime et de la navigation intrieure. - Wet van 21 augustus 1879 houdende Boek II van het Wetboek van Koophandel. Zeevaart en binnenvaart. - Decision of the Belgian Supreme Court - Arrt de la Cour de Cassation belge - Arrest van het Hof van Cassatie - Decision of the French Supreme Court, civil bench - Arrt de la cour de cassation, chambre civile - Decision of the French Supreme Court, commercial bench - Arrt de la cour de cassation, chambre commerciale International Convention on Civil Liability for Oil Pollution Damage Droit Maritime Franais International Convention on Liability and Compensation for Damage in Connection with the Carriage of Hazardous and Noxious Substances by Sea. Insurance Law Journal

Cass.

Cass. Civ.

Cass. Comm.

CLC

D.M.F. HNS Convention

I.L.J.

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Joint Consultation Paper The Law Commission Consultation Paper No. 152 and The Scottish Law Commission Discussion Paper No. 104 in a Joint Consultation Paper of 1998 on Third Parties (Rights Against Insurers) Act 1930, http://www.lawcomm.gov.uk/ Joint Report The Law Commission and The Scottish Law Commission (LAW COM No 272) (SCOT LAW COM No 184) Joint Report of 2001 on Third Parties (Rights Against Insurers) Act 1930, http://www.lawcom.gov.uk/ Marine Insurance Act of 1906 - Norwegian Insurance Contract Act: Act No. 69 of 16 June 1989 Relating to Insurance Contracts (Norway) - Forsikringsavtaleloven (Norge) - Norwegian Marine Insurance Plan of 1996 - Norsk Sjforsikringsplan - Norwegian Maritime Code - Lov om Sjfarten United Nations Convention on the Law of the Seas

MIA 1906 NICA

NMIP 1996

NMC 1994

UNCLOS

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Introduction
The aim of the study of the defences of the liability insurers is to analyse the rights of third parties under a direct action against liability insurers. As contrary as this first sentence of this thesis are the rules that apply to the direct actions: they claim both to protect the injured party and to avoid the insurance companies taking on the full liability of their members themselves. It is an eternal triangle between three players (and even four if we count the injured party's insurer) who know that they have rights and obligations towards each other, but that the exact scope of these rights and obligations are hazy. In this unclear situation every party tries to get the largest part of the cake and all have good arguments to claim it. The argument of the injured party is the right to full reparation of damages. Based on tort law they can claim reparation from the tortfeasor but due to the risk of insolvency or even fraud they prefer to address the insurer. The right of the injured party to claim directly from the insurer is based on statutes that arose in almost all jurisdictions beginning from the 1930's. Also international conventions as the CLC 1969 and the HNS convention recognise the right of direct action against the insurer. Apart from the international conventions that award a direct action in specific cases, the right of the third party is based on national law. A very important aspect of the analyses of the right to direct action therefore lays in the preliminary study of the rules of conflict of laws. (1.2) The importance of the determination of the applicable law will appear when we examine the different conditions for the right of direct action between the three major law systems. (1.3) A short title will also be needed to indicate the specific nature of marine liability insurance that is dominated by the P & I Clubs. (1.4) The fact that these clubs are mutual insurers has had a great influence on the development of shipping in general. The third parties unfortunately have not been spared from the consequences of this sui generis legal personality. The heart of the thesis will deal with the defences that the P & I Clubs can invoke against the statutory right to direct action. The first available defences are those that are available to the insured. As the accountability of the club is based on the liability of its members, case law and doctrine make the limitation of liability (2.2.2) and the arguments challenging the liability of the ship owner (2.2.1) also available to the insurer. This however creates the risk that the insured is found liable but that his insurer is not because the underwriter has successfully challenged the insured's liability. More discussion will arise when talking about the policy defences that can be opposed to a third party. One group contains the arbitration clause (2.3.1), the payment clause (2.3.2) and the limitation clause (2.3.3). These can be defined
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as procedural rules determined in the insurance policy. The different legal traditions will offer different views on whether or not to oppose these defences as pre-conditions to payment by the clubs. The question is whether they empty a statutory right of its content. The compulsory or voluntary character of the insurance and of the right to a direct action will indicate whether or not to maintain one or the other defence. The second group of contractual terms that prohibit insurance cover aim at more material problems. The wilful misconduct of the assured, non-payment of the premium, unseaworthiness of the vessel, etc. are actions or omissions by the insured that may make him lose the insurance cover. Can the behaviour of the insured be opposed to the third party who uses the same ground to claim damages? This discussion will be the subject of title 2.4.

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1 Direct action and marine insurance


1.1 Introduction
Before we can talk about the defences that the insurer can rely upon in a direct action, it is important first to analyse the right to a direct action. The basic idea of this right is to make liability insurance directly available for the ones to whom the insured is liable. Liability policies cover the cases where the insured is liable for damages he caused. The insured will be reimbursed for the losses and costs incurred when repairing the damages to the injured person. The payment by the tortfeasor was sometimes uncertain because of his uncertain financial situation. In the 1930's the Scandinavian legislators, as did the English, the French and others, gave a third party the right to claim directly against the insurer in the case of insolvency of the insured wrongdoer. The rationale behind this right was to protect the interest of the injured party. The insolvency of the insured should not have negative effects on the person whom he has already caused trouble to. But a second incentive is to be found in the economics of law: it is much more efficient to reduce the number of suits by giving the injured party the right to go directly against the insurer, who in the end is the one who has to pay. This idea is however only getting through in recent years in common law jurisdictions, where until recently a court decision was required before a direct action would be authorised. The conditions for the right to direct action in different jurisdictions are discussed under 1.3. The need for comparison between the solutions of different jurisdictions is set out under 1.2. As maritime adventures are always of an international character, the third parties suing the ship owners insurer will inevitably be faced with the problems of private international law. The importance of the analyses of conflict of law rules will be repeated throughout the thesis. The end of the first part of this work, title 1.4, will briefly indicate what form the direct action takes in the world of marine insurance. This world is dominated by the P & I Clubs, who sometimes are a little more reluctant to receive direct actions against them. The Clubs argue that their members only contract an indemnity cover, which does not contain a liability cover towards third parties. After the discussion on this specific policy, we will see how the legislator can protect third parties against the rules of the P & I Clubs, namely through mandatory law. The introduction of mandatory insurance aims to protect the injured party against the risk of insolvency of the wrongdoer or even against the opportunistic insurance policy providers escaping the indemnification of the
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injured party. Voluntary insurance on the other hand concentrates on the person contracting the policy. Also in voluntary insurance the third party can be protected, but this protection will be lesser. Prior to discussing these consequences the paper will present the idea of compulsory insurance in the last title of this first part.

1.2 Applicable law


Most maritime cases have an international character. It is therefore not only necessary to determine which material law applies, but also which national law imposes its solution. The answer to this question can be found in the conflict of law rules, also called private international law. These rules are part of each national law system, but there are also international conventions regulating this subject to promote uniformity in international matters. To know which conflict of law rule applies, the judge will qualify the problems brought before him. Each qualification has its own conflict rules.1 The categories that are interesting to analyse in relation to this subject matter are tort law, contract law and more specifically insurance law. In respect of extra-contractual liability, the internationally accepted conflict rule is to apply the lex loci delicti commissi.2 The basis for this rule in the civil law countries is Art. 3 of the Code Civil.3 This rule has been followed on an international level e.g. in the Hague Traffic Accident Convention of 1971.4 5 In the case of contractual liability6 the terms of the agreement will determine when there is a basis for liability of one of the parties, its conditions and the consequences of it. The contractual freedom of the parties is the first instrument to determine this, but usually this does not regulate all possible problems. Second in line is the party's autonomy: the parties have the right to choose which national law will regulate their contractual relationship. In this way they not only determine the content of the contract by inserting specific terms, but also submit the whole of the contract to a national law. This is

See H., VAN HOUTTE, Internationaal privaatrecht. Leidraad en teksten bij de colleges, Acco, Leuven, 2002, p. 5-15. 2 Both civil and common law countries agree on this point. See Ch., SCAPEL, L'action directe contre les P & I Clubs, in Etudes de droit maritime l'aube du XXIe sicle, Editions MOREUX, 2001, p. 333. 3 Les lois de police et de scurit lient tout ceux qui resident sur le territoire franais, in France or in Belgium Wetten van politie en veiligheid verbinden allen die op het Belgisch grondgebied wonen, meaning that you cannot depart from this rule by agreement between the parties. 4 See H. VAN HOUTTE, op. cit., p. 64. 5 A specific problem for maritime law is the question of jurisdiction and applicable law when an accident took place on the high seas- on no territory at all. According to UNCLOS the flag of the vessel determines the 'nationality of the actions'. 6 Which cannot be insured against in land-based insurance law but can be in marine insurance.

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important when the strict contractual terms don't offer a solution7 and the judge or arbitrator has to find the solution in the national law applicable to the contract. If the parties do not specify the law that will solve disputes between them, or if the law does not allow them to make a free choice, it will be the conflict rules of the forum that determine the applicable law. In case of transportation contracts, the Rome Convention8 introduces the presumption that it is the domestic law of the carrier that applies. The general conflict rule for contract law is to submit the question to the law of the place of performance of the principle obligation of the contract. Under an international transportation contract the principle obligation per definition operates on a multitude of territories. Therefore the place of delivery is usually taken as a reference. But as different interpretations can be advanced, the French Cour de Cassation proposed to apply the lex locus delicti.9 This solution is not followed in other jurisdictions and is criticised in doctrine. But what law to apply to the direct action against the insurer? In this case the judge has the choice between the lex locus delicti and the lex contractus of the underlying liability issue and the law applicable to the insurance contract or lex assurandi. In the Hague Traffic Accident Convention, the lex assurandi comes last in the order of applicable laws. This convention cannot however be taken as an authority for the solution in marine insurance issues that traditionally propose different solutions. The answer will also differ between common and civil law. French jurisprudence10 and doctrine11 have agreed since the 1930's that the lex locus delicti governs the claim under a direct action. It is to be noted however that the choice of law has not always been made clear by French judiciary.12 The Irini M case13 provides a good example of the hesitation of the French Supreme Court to apply the lex locus delicti as the only applicable law. The lex assurandi always found its way through in some way or another, and this was the case in France.14 Before English Courts, English law is normally applied as
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When the parties didn't propose a solution or when their solution is supplemented by mandatory rules as it is the case for cargo and passenger liability. 8 This convention is a very broadly applicable instrument for trade within Europe. 9 See Cass. Civ. 1re, 21 avril 1972, Revue crit. DIP 972, 306, Note of P. Lagarde. 10 See Cass. Req. 24 fvrier 1936, D. 1 936-1-49, Note of Savatier. 11 See V., HEUZE and L., MAZEAUD, Trait conomique et pratique de la responsabilit dlictuelle et contractuelle, Sirey, 1931, n 2719, p. 961; Ch., JAMIN, La notion d'action directe, LGDJ, 1991, p. 84; Ch., SCAPEL, op. cit., 334. 12 See W., TETLEY, Marine insurance and the conflict of laws, in Marine insurance at the turn of the millenium, Intersentia, Antwerpen, 1999, p. 321-324. 13 Cass. Comm. 27 juin 1995, D.M.F., 1995, p. 530. And see P., SIMON, Du nouveau sur laction directe contre les P & I Clubs, in D.M.F. 1995, 525-529. 14 See P., SIMON, op. cit.; F., FOUCHIER, LAction Directe contre les P & I clubs, in D.M.F. 2000; B., HARRIS, The Fanti and The Padre Island decisions, D.M.F., 1990 and dALES, T., Lexonration de la responsabilit du transporteur international de marchandises par voie
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being the lex assurandi or as being the legal basis for the claim (1930 Act). In Australia the basis for the liability indicates the applicable law.15 In the case of carriage of passengers the lex contractus of the contract of carriage will be the one that determines whether or not and under what rules the passenger has a direct action.16 Another advantage of these international conventions establishing a right to direct action is that a country like Greece which does not recognise the right to direct action still has to accept it under the scope of the international conventions.17 But for example the Athens Convention on passenger and luggage liability does not contain any provision on direct actions yet. Until now the convention only indicated which law to apply, but the projects that are subject to discussion in the legal committee of the IMO are aimed to include compulsory insurance with a right to direct action.18 If such provisions were introduced the preliminary discussion on the applicable law would disappear.

1.3 Conditions for a direct action


1.3.1 Origins in the code civil Direct action is a concept that finds its origin in civil law. The lawmakers found it necessary to give special rights to protect third parties (C) who have to suffer from a problem that finds its cause in a different relationship between his debtor and a person with whom he has no contractual relationship. In some cases the debtor (B) of C creates a special contract with another person (A) to escape his liability towards C. For these kinds of situations the law introduced the actio pauliana.19 The fraudulent contract will, in that case, not be opposable to C, who will get his payment. The action introduced by the third party is no real direct action, as he is not claiming to get a payment from A. The main difference with a direct action is that it challenges the existence of the relation between A and B and does allow the third party to acquire rights based on the contract.20 In another hypotheses, B will have an outstanding claim against A which he does not pursue. In this case the creditors of B can introduce an action on his behalf against A to force his payment.21 This will create a solvency with B
maritime : consquences sur lassurance, 1999, http://perso.wanadoo.fr/karine/memoires/indexmem.html 15 See W., TETLEY, op. cit., p. 321. 16 See P.-Y., NICOLAS, Le transport maritime de passagers: responsabilit et assurance, D.M.F. 1999, p.863. 17 See K., SPAIDATIOTIS, Marine insurance law in Greece, http://www.maritimeadvocate.com/. 18 For the discussions and the developments on the draft protocol for the Athens convention, see http://folk.uio.no/erikro/WWW/corrgr/index.html. 19 Article 1167 of the Code Civil. 20 See VAN GERVEN, W., Algemeen Deel, 1969, BBPR, Story. 21 Article 1166 of the Code Civil.

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who then can be forced to pay by C. However, this action oblique has an inconvenience in that all creditors benefit from it even if they did not act.22 Therefore, in some cases, this will result in no benefit at all for the one introducing the action based on Art. 1166 CC.23 After those two general articles, the lawmaker tried to solve the problems that were still open: the person that acts against A should be paid immediately himself and he should benefit first from his efforts. However, no general right for such a direct action could be introduced in the law. As a matter of fact, article 1166 and 1167 CC and the equivalent provisions in other legal systems are derogations from a much more important general principle: the privity of contract. The Latin adagio Res inter alios acta...24 expresses this same idea: a person who is not party to a contract cannot benefit from it nor can he be burdened by a contract to which he is not a party.25 Going further than what had already been attributed to the third parties would be breaking down the very fundament of contract law. But the idea of a direct action was not abandoned even if it has been awarded only to a very strict number of cases. The most important ones are; the direct action by an owner against an sub-contractor,26 the direct action by subcontractors against those responsible for a yard27 and the right of direct action against the insurer by the injured party in certain specific cases.28 The idea has been defended as being a derogation from the principle of privity of contract but a derogation that represents a remedy to the negative effects of this theory. In all the above-mentioned cases, and not least in case of insurance contracts, lawmakers considered the idea of reparation of damages more important than the idea of privity of contract.29 The French Supreme Court allows the right to a direct action in insurance law based on Art. L 124-3: Lassureur ne peut payer un autre que le tiers ls tout ou partie de la somme due par lui tant que ce tiers ne sest pas dsinteress, jusqu concurrance de ladite somme, des consquences pcuniaires du fait dommageable ayant entran la responsabilit de lassur.30

See Y., LAMBERT-FAIVRE, Droit des assurances, Dalloz, Paris, 2001, p. 505. See B., STARCK, Droit civil. Obligations, Librairies Techniques, Paris, 1972, p. 775-780. 24 Art. 1165 of the Code Civil. 25 See J., ADAMS, and R., BROWNSWORD, Key issues in contract, Butterworths, London, 1995, p.125. 26 Article 1753 of the Code Civil. 27 Article 1798 of the Code Civil. 28 This provision can be found in the several basic insurance acts in the world, even if the conditions can differ strongly. 29 See F., FOUCHIER, op. cit., p. 4. 30 Freely translated as: The insurer can only pay part or the whole of the due by him to the third party himself, as long as this third person has still an interest in the financial consequences of the cause of the damages that led to the liability of the assured.
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In its decision the Cour de Cassation held that the obligation for the insurer to preserve damages only in the interest of the victim, has the consequence that the third party who has the legal interest must also have the right to a direct claim for that sum.31 French jurisprudence sets very limited conditions for the right to direct action: the third party must prove its interest before the court and prove that its claim falls under the cover of the policy.32 The interest to claim damages comes down to proving that one is either the injured person suffering the loss or the person surrogating to the rights of the injured party.33 In a recent decision of the Cour de Cassation it was decided that the wrongdoer does not necessarily need to be condemned for his actions to make the insurer liable.34 Establishing this liability is of course still necessary when one wants to pursue the decision against the insured. In that case, the insurer and the insured are jointly liable. They are held in solidum because they extinguish the same debt, even if the cause of this debt towards the injured party is different.35 In Belgium, where the civil code is founded on the French one of 1804, the solution proposed to third parties has enjoyed a different evolution. In Belgium a special law was introduced in 1937, adding a 9 in article 20 of the mortgages law.36 This new paragraph introduced a privilege for the injured person as a remedy for the negative aspect of the action oblique as described above.37 This solution is thus an intermediary solution between privity of contract and direct action. Under this law the action of the third party against the insurer is the action proper to the insured exercised by the third party. The third party has no personal right to claim against the insurer. This had farreaching consequences for the procedures introduced against the underwriter.38 Since 1993 a new article 147, 3 has come into force in the law on land-based insurance contracts. This article suspends the application of article 20, 9 of the mortgage law for land-based insurance contracts. This caused a problem in Belgium as article 20, 9 of the mortgage law seemed not to be applicable to marine insurance, the law of 1992 having a general scope of application. This

Cass. civ. 14 juin 1926, DP 1927, p. 57. See F., FOUCHIER, op. cit., p. 5 33 See Cass. 1re Civ., 15 janvier 1991, RGAT 1991, 405, relying on L 124-3 of the French code des assurances. 34 Cass. 1re Ch. Civ., 7 novembre 2000, R.C.A. 2001, n 29. 35 See Y., LAMBERT-FAIVRE, op. cit., p. 508-511. 36 Law of 16 December 1851 on privileges and mortgages. 37 See S., ROLAND, Les droits de la victime d'un accident vis--vis de l'assurance et la responsabilit de l'auteur du dommage, R.H.A., 1977-1978, p.105. 38 See i.a. Cass., 8 mei 1971, A.C. 1971, 886; Antwerpen, 25 juni 1980, R.H.A. 1981, 451-456 (Simone); Gent, 23 oktober 1985, R.H.A. 1985, 16-22 (RN 7, Mauricette); Antwerpen, 16 maart 1993, R.H.A. 1994, 429-453.
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error has been corrected by the law of 16 March 199439, which specifies that the insurance law of 1992 is not applicable to marine insurance. A claim from the injured party against the insurer still has to be based on the mortgage law. 1.3.2 Scandinavian view on direct action But how has the idea of a direct action been seen and developed in the "Scandinavian law", and more specifically in the domain of insurance? As a starting point, we have to go back to 1927, when the resembling Insurance Contract Acts40 for Scandinavian countries came about. The analysis of the Norwegian act will immediately sketch the current situation for Sweden and Denmark as the reform of their new insurance contract Act is not yet completed. The basis for insurance law remained the freedom of contract, with a limited amount of mandatory rules. The provisions in the act were mainly directory and could be set aside by the insurance policy. Provisions on the right to a direct action can be found under part II E of the ICA 1927 on liability insurance. Section 95, 3 of the Act in Norway and Sweden says: Where an insured, who has been declared bankrupt or placed in insolvent liquidation, possesses a claim against the insurer for an indemnity which he may not collect without the assent of the injured party, the latter shall be entitled, in the event payment of such sum is not received by him for the estate in bankruptcy or estate in liquidation, to have the claim of the insured awarded to him. This section is said to lay down the right to a direct action for injured third parties. Although the text does not say that the provision is mandatory, the case law has defended and reaffirmed this idea. The Norwegian Supreme Court has defended this point of view in the Skogholm case.41 In Sweden the ICA 1927 is still applicable and the solution thus remained unchanged since the Skogholm-decision. In this country the conditions to have a right to direct action still are: manifest insolvency of the insured tortfeasor; possession of a claim of indemnity;42 payment is not received and the claim is to be assigned to the third party. It is interesting to notice that if the judiciary

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B.S. 4 Mai 1994. The Swedish ICA of 1927 and the Norwegian and the Danish ICA's of 1930, further referred to as ICA 1927. 41 ND 1954, p. 445 (NH) 42 A legal liability, no matter of what nature (strict, negligence or vicarious)

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prefers to defend the third party,43 the legislative work in preparing a new insurance code takes the opposite direction.44 The Danish Code is also a little more severe to the third party as it requires the injured party to have established the liability of the insured preliminary to the introduction of the direct action. The establishment of the liability can either be through a court ruling or through an agreement between the injured party and the wrongdoer. Again in Denmark, the Courts seem to be more open towards third parties than the legislator. The new Insurance Contract Act No. 69 of 16 June 1989 and more specifically its sections 7.6-7.8 confirmed Norway's strong protection of the third party. The insolvency of the insured is not a requirement anymore to get a right to direct action, at least against large-scale commercial entities.45 Through this law the Norwegian legislator moves away from the common law and approaches a civil law solution. With their new Insurance Contract Act of 1995, Finland also chose the direction of the Norwegian model, without copying it fully. 1.3.3 Direct action in Common Law In common law systems direct action against the insurer has been recognised since the 1930's. Within this legal system many different approaches can be distinguished by the conditions under which the rights are transferred. The discussions between the different countries also lead to developments throughout time. A recent example of this is the new draft bill proposed by the English and Scottish Law Commissions jointly. The first step in this process was the publication of a joint consultation paper (further referred to as J.C.P.) in 1998.46 This paper presents the present regulation and the practice in relation to direct action against insurance companies. On the basis of the J.C.P. and guided by the multitude of reactions from the professionals, the joint commission proposed a draft bill as a part of their joint report.47 These instruments will be useful for the analyses of the

See the Deger, ND 1996 p. 1 (HVS). See S., JOHANSON, Third party claim under marine insurance. The Swedish approach, in Simply: Scandinavian Institute of Maritime Law Yearbook 1999, Oslo, 1999, p. 157-174. 45 Compare 7-6 with 7-6 of the Norwegian ICA of 1989. 46 The Law Commission Consultation Paper No. 152 and The Scottish Law Commission Discussion Paper No. 104 in a Joint Consultation Paper of 1998 on Third Parties (Rights Against Insurers) Act 1930, http://www.lawcomm.gov.uk/ 47 The Law Commission and The Scottish Law Commission (LAW COM No 272) (SCOT LAW COM No 184) Joint Report of 2001 on Third Parties (Rights Against Insurers) Act 1930, http://www.lawcom.gov.uk/.
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present situation, which is still governed by the 1930 Act48 with its later amendments. Under the 1930 Act the transfer of rights to the injured person arises only when the insured is in one of the enumerated insolvency events.49 Moreover the injured person can only get payment if the insured can recover his loss himself. Therefore the liability of the insured has to be established before suing the insurance company.50 The explanation for this is found in the indemnity clause of the insurance policies. Lord Denning underlined that the essence of this clause is that the insured must prove his loss.51 Only when liability has been established, will the loss follow and the insurer can be held liable under the policy. The third party only establishes liability for these purposes once the amount52 (as well as the existence) of the liability has been ascertained. The English case law decided that the liability could be established by judgement, an arbitral award or through an agreement. Only then is the third party entitled to enforce his rights, and only then is the insured entitled to make a claim on the insurance policy. The J.C.P. of 1998 recognises that the situation under Scottish law is identical.53 Although the present thesis will focus on the defences that an insurer can invoke, it is important to indicate the negative consequences these preconditions have for the injured third party. This is especially important as the English legislator is preparing to make changes to the existing situation. The first problem is the multiple proceedings: in order to obtain a judgement under the 1930 Act, the third party has to spend considerable time and money to establish both the insolvency and the liability of the insured. Even after he has done so, he will not be certain to obtain direct payment from the insurer and has to engage in more effort to obtain policy information.54 Under the English Companies Act,55 it is possible that the third party will have to restore

Third Parties (Rights against Insurers) Act 1930 of 10th July 1930, Cf. Annex Section 1, (1) and (2) of the 1930 Act. 50 Post Office v. Norwich Union Fire Insurance Society LTD [1967] 2 QB 363. 51 Lord Denning in the Post Office case, referring at p. 373 to the following obiter dicta of Devlin J in West Wake Price & Co v Ching [1957] 1 WLR 45, 49. 52 In Cox v Bankside [1995] 2 Lloyds Rep 437, judge Philips J. decided that the liability is also deemed to be established when the third party was awarded an interim payment against the insured. 53 J.C.P. para 4.8 and 4.9. 54 Cf. Infra : Defences. 55 Companies Act 1985.
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a dissolved company in order to establish its liability in order to be entitled to a direct action against the insurer.56 The commission, in the Joint Report of 2001, proposes to remove the requirement to establish the insureds liability prior to the proceedings against the insurer, firstly to help the third party and lower the judicial costs and also because the intention of Parliament has to be followed.57 All consultees supported the idea to solve the problem in a single set of proceedings. It will not be required to join the insured in the proceedings under the draft bill. The advantage of still doing so is that the insured will also be bound by the judgement (and will only be bound if he has been joined). 58 Although all well know that the American legal system also is based on the Common law tradition, it is difficult to discuss its position towards direct action under present title. The reason for this is the diversity of direct action statutes throughout America because this is a matter that is of the jurisdiction of States.59

1.4 Direct action in marine insurance


1.4.1 P & I Clubs The country where we ended the study of the conditions for the right to a direct action was also the country where the specific issue of marine insurers liability arose. The ship owners joined forces to cope with the high risk of maritime adventures in so-called P & I Clubs. The P & I Clubs covered and still cover those risks that are not covered under the Hull and Machinery insurance policies. As the solution of the ship owners was to form mutual insurance, the Clubs always enjoyed a special legal statute. This specific character was already expressed in the name of the insurers: Protection and Indemnity Clubs. The idea was to protect the members of the Club and to indemnify them for the losses they suffered,60 as long as this happened within the scope of the Club Rules. The refund is linked to the

For more information on these problems, Cf. J.C.P. 1998, para 4.10 - 4.54. Three factors suggest this: (1) the absence of any reference to the moment when liability is established in the 1930 Act itself; (2) the absence of any reference to the requirement in the history of the Bills reading in Hansard; (3) the fact that the 1930 Act was modelled on the Workmens Compensation Act 1906 which expressly provides for the insureds liability to the third party to be litigated between the insurer and third party. That the 1930 Act was modelled on this earlier legislation is clear from the wording of the two Acts. It was also stated in Parliament (Parliamentary Debates (HC) 29 April 1929, vol 231, col 130). 58 For more information on the draft, Cf. Joint Report 2001, Part 3. 59 See M., MAGINNIS, J., COT, Direct action statutes and P & I insurance, in MLA special report, 2001, http://www.mlaus.org/ 60 See S., HAZELWOOD, P & I Clubs: law and practice, LLP, London, 1994, p. 275.
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payment of a premium and since it concerns mutual insurers, the members will share the extra expenses at the end of the year. The appearance of the 1930 Act61 was a complete change of philosophy for the insurance market: the insurance proceeds should now be considered to be accorded to the insured or even directly to the injured party, but always for the benefit of this injured party.62 The P & I Clubs saw the danger of the 1930 Act, especially when thinking of the single ship-companies that were more likely to become insolvent. As an answer they claimed that the 1930 Act was not applicable to them, as the members of the associations had no insurance contract with the club in the meaning of Art. 1 of the 1930 Act. An argument that was accepted before the courts is that in an insurance contract sensu stricto the cover cannot be at the discretion of a committee in the insurance company.63 This argument was set aside after some years and the P & I Clubs are now considered to be insurance companies falling within the scope of the 1930 Act.64 However, the Club rules include special policy terms that are again supported by their specific protecting and indemnifying character.65 These terms are not normally found in land-based insurance policies and thus form the specificity of marine liability insurance in relation to the right to direct action. 1.4.2 Voluntary and compulsory liability insurance Unlike the compulsory liability insurance for motor vehicles that almost every country knows, there is no general obligation for ship owners to take out liability insurance. Although the idea of insurance emerged on the sea, we can now see that every motor vehicle, whether it is a bus, a truck or a car needs to take out insurance and that there is no such a general obligation for ferries, vessels or boats. Although no general obligation exists, the idea of compelled insurance has found its way into maritime law in more specific international conventions. The first provisions on compulsory insurance were introduced as an exemption in the Convention on Liability of Operators of Nuclear ships.66 The real breakthrough of compulsory insurance has happened within the IMO.67 The idea was first introduced in the CLC in 1969, reaffirmed in its later version and
And in Scandinavia the Insurance Contract Act of 6 June 1930. See S., HAZELWOOD, ibidem. 63 See S., HAZELWOOD, op. cit., p. 276 and the references made there. 64 Under other statutes they still enjoy a special treatment. 65 Cf. Infra. 66 Signed in Brussels in 1962. 67 See E., RSAEG, Compulsory marine insurance, Simply 2000.
62 61

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also taken over in the HNS convention of 1996. The discussion on mandatory insurance within the IMO now concerns the convention on liability for wreck removal, on death and injury of passengers, on bunker fuel oils68 and in connection with crew claims.69 In the LLMC convention of 1996, no mention on compulsory insurance has been made. According to Prof. Rsaeg this is due to the fact that this convention only regulates the limitation of liability and doesnt deal with the basis of the liability. The same author indicates that the draft of one general convention on maritime liability is not realistic. The discussions in the legal committee of the IMO resulted in Resolution A.898(21), urging all ship owners to take similar security. This proves the common intention of all member states to go in this direction. Also in the EU we can find support for the idea that all ship owners should be insured. In their liability convention for inland transport, which includes transport over waterways, provisions on compulsory insurance are included. These instruments expressing the involvement of national governments in the idea of compulsory insurance finds it origin in the new insurance philosophy that liability insurance is taken out to protect third parties.70 But the introduction of compulsory liability insurance is of great importance in the setting of the present thesis. The P & I Clubs fear that compulsory insurance and an express direct action clause will extend their exposure to liability and would be a threat to their existence. The most important fear lays in the risk that through compulsory insurance the P & I Clubs would loose the ability to invoke some71 policy defences against the third parties. This problem will be illustrated in part two.

2. Limitations to the direct action


2.1 Introduction
After the discussion on the applicable law to direct actions and, the presentation of the conditions that need to be fulfilled in several important
68 Article 7 of the bunkers convention of 23/03/2001 introduced compulsory insurance only for vessels carrying over 1000 tons of oil but this convention has not yet entered into force. See P., Griggs, International Convention on Civil Liability for Bunker Oil Pollution Damage. Article 7 (10) of this convention also provides the injured party with a right to direct action. Cf. Annex 69 See E., RSAEG, ibidem. 70 For other advantages and reasons to promote compulsory insurance see E., RSAEG, op. cit. and from the same author: The impact of insurance practice on liability conventions, in Legislative approaches in maritime law. Proceedings from the European Colloquium on Maritime Law: Lysebu, Oslo, 7-8 December 2000. Marius No 283, Oslo, 2001. 71 In E., RSAEGs view no policy defence is strong enough to empty out the third partys right to direct action.

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maritime jurisdictions and having presented the specific marine insurers that are the P & I Clubs, the time has come to proceed to the core of this thesis: the arguments that the P & I Clubs can use to oppose third parties. Firstly there are the defences that the tortfeasor himself can invoke against the injured person. These defences concern the rules that lead to the liability of the insured, i.e. the liability that the insurer promised to cover. Title 2.2.1 will discuss whether or not the underwriter can re-litigate on the liability of his member. This title will however not go into the material analysis and discussion of the Hamburg rules, Hague Visby rules or other more specific international or national instrument determining the liability of ship owners. Title 2.2.2 will further discuss the possibility for the P & I Clubs to rely on the legal limitation of liability that is granted to ship owners. Secondly, are the defences that are based on the insurance contract. Here we can clearly distinguish between two groups: those terms that can be seen as contractual preconditions for the right of direct action to exist and then the defences that limit the scope of the insurance cover. Under the first, more formal group, we will concentrate on the arbitration clause, the payment clause and the limitation clause. They are analysed under 2.3. Title 2.4 gives a short overview of the material arguments to deny insurance cover, namely: wilful misconduct of the assured, non-payment of the premium, unseaworthiness of the vessel, agreed deductibles, ... This distinction will have especially clear consequences in France.72

2.2 Defences of the tort feasor


This title will present the first defences that the insurer can use to oppose third party. It concerns the defences proper to the tortfeasor in whose rights the insurance company is surrogated. The idea is that the third party cannot have more rights against the insurer than those he had against the wrongdoer. Direct action is accepted to help the injured party to get payment for the damages he suffered, but it is not the goal to give him more than that. The first limits are of course related to the proof of liability of the tortfeasor. The second type of defence that the insurer can rely on is the right to limitation of liability of the ship owner that is accorded to him through different legal bases. 2.2.1 Liability rules The first limitations to the right to get payment from the tortfeasor are the tort law rules or liability rules. The right under the direct action is fundamentally based on the rights the injured party has against the wrongdoer. The right against the insurer is therefore equally limited by the rules that establish one's
72

Cf. infra.

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liability. As expressed under 1.2.2, the legal liability of the tortfeasor has to be established. This means that the proof of negligence must be brought before the court, except in the cases where the ship owner is made strictly liable.73 The statutory excuses for the ship owners liability are also available for the insurer: force majeure or act of god and the exceptions for damage caused by fire or management of the ship under transportation contracts.74 This follows from the construction of subrogation itself: transfer of rights and obligation from one party to another. The insurance company is not defending a separate liability, but is only covering the very liability of the ship owner. It is undisputed that the insurance company will not have to pay in the cases where the insurer was not found liable. The condition has been referred to above as the legal liability. It is not enough that there is an appearance of liability or feeling of responsibility with the insured, but the liability of the tortfeasor has to be established by law. Under title 1.2.1 the first important issue of the applicable law has been discussed. The most important conclusion to remember about the conflict of laws at this stage is that the insurance contract has no influence on determining the liability of the insured when the action is directed against the insurer.75 The question of whether the insured needs to be condemned before a court or arbitration tribunal before the third party can claim anything from the insurer has arisen. This discussion has been introduced above under 1.3.3 and I will therefore not repeat it here. The important thing to repeat at this stage is that the liability of the wrongdoer can but does not have to be judicially established in order to obtain the right to act directly against the insurance company. The next question in relation to a possible judicial decision is whether the court has to follow the decision against the insured when deciding upon the liability of the insurer. Of course the basic rule remains that the court is not bound by the ruling of another court. At least this is the rule in the civil law countries. In this legal tradition, the addressed court is completely autonomous from the decision of another court, even if that court is higher in hierarchy, as long as it does not concern the very same case.76 In the situation before us, the court will actually be free, as the parties before the court are not the same. The problem that the facts brought before the court are the same, does not concern the judge who has to decide on a different issue between other parties.

Cf. supra. Section 3 MIA 1906, stating that the insurance company will only indemnify when the insured is liable. 75 For the outcome of the influence of the insurance contract and its governing law on the contractual defences, Cf. Infra. 76 In the situation of a pending case, one of the two courts will have to be declared incompetent in order not to get two decisions on one same case. The same applies if one court has already sentenced on a case. The second court will be incompetent on the basis of the authority of a judicial decision.
74

73

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This means that the first court can find the insured liable even if he tried to prove that he has showed due diligence. The second court that must decide whether his insurer shall pay directly to the injured party can see the same man as not being negligent and therefore his insurance company will not be liable. Two courts may as a matter of fact, interpret and weigh the very same legal arguments in a different manner. This is certainly true if the case against the insurance company is brought before a different court than the one that ruled over the case between the insured and the injured party. This is a dangerous situation, but one that will not easily be encountered. Most of the courts still try to give homogenous interpretations of the basic legal principles and will in practice also refer to other judgements even if they have to build up their own argumentation to support this. Moreover the Ministry of Justice or a specific organ77 under its competence will watch over the coherency in the decisions rendered by the judges.78 The same idea applies in the Scandinavian legal systems. The Deger case, rendered in 1996 before the Appeals Court of Gteborg is an illustration hereof.79 The review of the facts by the Supreme Court was due to the specific developments of the case. The cargo on the vessel was damaged due to bad stowage on a voyage between the ports of Aarhus in Denmark and the port of Sydney in Australia. The liability was first admitted before an Australian court in 1974. The London Arbitration tribunal decided in the same way in 1985, but as the time-charterer was bankrupt, he assigned his rights under the insurance policy to the injured party. The direct action from the cargo owners against the P & I club was brought before the Swedish court 22 years after the facts and a new study and argumentation on them was thus not illogical. The solution finally rendered, was again, to the benefit of the injured party. Under English law the situation seems to be very different at first sight. Here, the judicial decisions are based on case law. The judges will refer to former decisions to support their judgements and arguments and have to follow precedents. However the Common Law system does not impose a requirement compelling judges to follow all decisions that have been rendered in situations that seem rather similar. The seized court can find the decision rendered upon the liability of the insured as being incorrect and can just as easily come to a different decision. Theoretically, the court deciding on the liability of the insurance company could come to the conclusion that the insured is not liable legally towards the injured party, whereas the same tortfeasor has been sentenced to damages in an earlier decision. In practice the situation will be solved in the same way as set out above: the judge will be entitled to examine

This role can also be taken by the Supreme Court. We have to notice however that in the case of marine insurance the issue often is of a transnational nature. Therefore the court that decided on the liability can be in another country than the court before which the insurance company is brought. 79 ND 1996 p. 1-11 (HVS)
78

77

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the liability of the tortfeasor before establishing the insurers even if reference is made to a former decision on the question. In the United States, the solution will again depend on the applicable state law. The statutes will always be inspired by the special interests of the companies active in each region: Puerto Rico and Louisiana are traditional maritime jurisdictions protecting the claimant. Under New York jurisdiction, the insurer will be protected. For the present issue of liability rules applicable in a direct action, this special protection will be reflected through the power of the final judgement against the insured. A suit under the Californian direct action statute requires a final judgement in such a way that the insurer is estopped from re-litigating on the res iudicata.80 The jurisdictions that are more favourable to the insurer will, on the other hand, permit the insurer to reconsider the liability issue and thus escape from its liability towards the third party. A solution to the problem of possible contradictory decisions can be found in suing the tortfeasor and his insurance company in joint liability before one court. The possibility has been explicitly mentioned in the NICA81 and this possibility is also offered in Icelandic law.82 An action in joint liability is often used in practice.83 This solution has many advantages: limiting the costs, as you do not have to sue both the wrongdoer and the insurer in different actions, you also win time to get damages and the insured might also be better defended as the interest84 of both the insured and the insurer will be represented by one lawyer. In the case where the injured party sues both the insured and his insurer, but before two different courts in different jurisdictions, the second court can but doesnt have to refer his case to the first court because of the close connection. (concordance samenhang) This can benefit by giving a homogenous character to the solution to the pending problem. We can thus see that in the action against the insurer the judge must establish the liability of the insured, independently from an eventual decision against the latter. If the insurer can prove that there was no negligence by the ship owner or by the people, for whom the ship owner is responsible,85 he will not have to pay damages to the third, injured party. This payment will however still be due
See N., FOSTER, Marine Insurance: Direct Action Statutes and Related Issues, U.S.F. M.L.J., Vol. 11 (1998-99) No.2, p. 280. 81 Section 7.6, al. 3 NICA. 82 Section 19.1 of the Icelandic Civil Procedure Act. 83 See F., FOUCHIER, op. cit., p. 3. 84 There still remains a danger of conflicting interests between the insurer and insured, e.g. when the insured wouldn't be entitled to indemnification under the policy. 85 In maritime law it is characteristic that the ship owner has a considerable vicarious liability, in order to ensure the payment of damages caused by the operation of his vessel. In the same way as for a direct action, the injured party will not have to file a suit against a person that will not be solvent.
80

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in the situation where the law, applicable to the incident has imposed a strict liability on the ship owner. Strict liability is imposed through several international conventions: The oil pollution liability convention, the convention on transportation of hazardous and noxious substances, the bunkers convention and the Athens convention relating to the carriage of passengers and their luggage by sea. Although the purpose of this title is not to go into specific liability regimes, it is important to know of their existence. They can give rise to specific problems when handling the insurance claim, and the injured party must be aware of these. The major problem is in the case of collisions. As few problems can arise when one party is clearly responsible, so many can arise in cases where both parties are to blame. The applicable law will determine how the situation will be resolved. In this paper I will limit myself by saying that the American judges will often propose a different solution to other countries. No matter what the nature of the liability is, once established, the insurer can still escape from it by proving that the accident or the damage founding their cause is a force majeure-event or is an Act of God. In case of contractual liability the insurer has a similar, extra chance to escape liability by proving that the actual cause of the damages lays in the management of the vessel or is caused by fire.86 2.2.2 Limitation of liability The second restriction to the right to get damages from the insured is the set of rules on limitation of liability. It would seem logical that the injured party is entitled to full compensation of the incurred damage. This is the rule to apply in land-based tort law. In contractual land-based law, the contractual freedom allows the parties to agree on the damages to be paid in certain circumstances, however law restricts the parties autonomy and other restrictions can be imposed by the public order. In maritime law, apart from the contractual terms that parties can agree upon, laws and conventions allow ship owners to limit his liability. The limitation of liability has been granted in different domains, as there is collision liability, cargo liability, passenger liability, oil pollution liability, environmental pollution liability, 87 In case of contractual and third party material liability, section 172 and 175 NMC apply under Norwegian law. For passenger claims and personal injury claims, section 175 NMC comes into play alone. In transportation contracts,
86 87

Article IV, 2 (b) of the Hague-Visby Rules. Section 172 and following and section 191 in the NMC. The concept has been recognised as a general principle in liability of the ship owner through the convention on limitation of liability for maritime claims of London, 19 November 1976.
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the limitation of liability will be calculated per package or per kilo of cargo, whichever gives the highest value.88 After applying this rule, the ship owner is still entitled to call on the global limitation of section 172 NMC. The aim of the present thesis is not however to go into detail about the limitation of liability. The question of importance in relation to limitation of the ship owners liability is whether the insurance company can use this right against the injured party, claiming directly against them. Limitation of liability has been granted to ship owners because of the high amounts of damages that they risk becoming liable for: loss of life or personal injury, damage to or loss of cargo, damages to or total loss of a vessel etc. The lawmakers were afraid to push the ship owners to bankruptcy by exposing them to an unlimited liability. With all the credits that are still open due the operational life of a vessel, the bankruptcy could result in no payment of the injured party at all. If this is the argumentation that applies to the limitation of liability of ship owners, we have to search for the argument that would allow the insurer to be able to limit his liability towards the injured party. Their cover under direct action is allowed in cases of manifest insolvency of the insured. However it is unlikely that the insurance company or the P & I club would go bankrupt after paying damages to the injured party. The argument of limited capacity of the insurance market has not been withheld in either of previous studies on this topic.89 This could have been the reasoning followed by the American judges up until 1986. In the Cushing case of 195290 the judges of the Supreme Court first decided on the procedural matter. They denied the P & I underwriters the right to rely on the ship owners right to limitation of liability, vested in 46 USC 181 et seq. On the basis of this decision the 5th Circuit Court confirmed the personal character of the right to limitation of liability. The Limitation of Liability Act, 46 USC 181 et seq. is available only to the owner of the vessel and the vessels demise charterer. In a direct action suit against the P & I underwriter, the insurer cannot invoke the right as he lacks ownership interest.91 The Nebel Towing decision of 196992 caused unexpected exposure of liability to foreign P & I clubs in the US as they were expecting to rely on the ship owners limitation of liability through the right of subrogation. The solution then presented was to insert a clause in the P & I policy that indicated a limited

Section 280 NMC See E., RSG, op. cit., Marius No 283, Oslo, 2001. 90 Cushing v. Maryland Casualty Co., 1952 AMC 1803 5th Cir. 91 See R., LEMON, Limitation of liability to that of the ship owner, http//www.mlaus.org/. 92 Olympic Towing Corp. v. Nebel Towing Co., 419 F.2d 230 (5th Cir. 1969), 1:634.
89

88

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liability towards the ship owner,93 which they could then invoke against the third injured party. The Nebel Towing decision was finally overruled and the effect of the clause was recognised in the Crown Zellerbach case of 1986.94 The Zellerbach decision concerned a collision between the first of 15 barges pushed by the tugboat FR Bigelow and the Crown Zellerbach water intake structure located at Baton Rouge in Louisiana. The accident was caused due to the fog and heavy rain over the Mississippi River. The Crown Zellerbach Co. filed a suit against the tugboat FR Bigelow and Ingran, the bareboat charterer. The prime insurer of Ingran, Cherokee Insurance Company and the London Steam Ship Owners Mutual Insurance Association, in their capacity as excess P & I insurers were included in the action at a later stage. The procedural issue before the Circuit Court concerned whether the limitation of liability under a direct action against the liability insurer was in conformity with the Louisiana Direct Action Statute or not. A different solution from the Nebel Towing case was justified because the legal question was different. In the latter the insurer could not rely on the statutory right of limitation of liability of the ship owner, following the Cushing doctrine. The statute only grants the right to the ship owner. A policy clause linking the insurers obligation to the limited liability amount of the ship owner was considered void on the basis of the Louisiana Direct Action Statute.95 The question in the Zellerbach decision was slightly different: the P & I underwriter is claiming only that, as prescribed by the Louisiana Direct Action Statute, the terms of its own insurance policy limit maximum liability to the dollar amount for which the ship owner-assured would be liable upon successful maintaining the right to limit its liability.96 In doing so the underwriter does not claim the personal right of the ship owner to be transferred to him, but only limits his liability to what he has promised to the ship owner under the insurance contract. The limit for the insurers liability resides thus in the insurance contract according to the American vision of this defence.97

93 Even if in the relation between the insurer and the insured this clause would be of no utility, as the insured can only recover up to the sum of what he actually paid to the injured party. 94 Crown Zellerbach Corp. v. Ingram Industries, Inc., 783 F.2d 1296 (5th Cir. 1986) (en banc), 17:271. 95 The statute simply voids any policy clause which conditions the right of the injured person to enforce against the insurer its contractual obligation to pay the insureds debt upon, as prerequisite, the obtaining by the injured person of a judgement against the insured. Hidalgo v. Dupuy, 122 So.2d 639, 644-645 (la. App. 1960), quoted in Nebel Towing, 1969 AMC at 1579, 419 F.2d at 237. 96 See Crown Zellerbach Corp. v. Ingram Industries, Inc., 783 F.2d 1296 (5th Cir. 1986) (en banc), 17:271 at 1746-1477. 97 For more details on the validity and the interpretation of the so-called Crown Zellerbach clause and the qualification of the clause in the SP-23 form, see R., LEMON, op. cit.

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In other countries, the solution has always been to allow the insurer to rely on the right of limitation of liability, granted to the ship owner. The argument for this is that the insurer surrogates in the right of the insured. The third party should not get more rights against the insurer than those he had against the tortfeasor. The French Cour de Cassation98 supported the right to limitation of liability under a direct action on the text that led them to accept the right to direct action itself. Art. L124.3 of the code des assurances99 refers to the consequences of the liability of the assured. As the liability of the assured is limited and the third party is not entitled to more rights from the direct action than those he would have had under a claim against the tortfeasor, the judges concluded that the limitation of liability also applied to the direct action against the underwriter.100 The final way to limit the amount that the insurer will pay to the injured party is to argue on the method of determining the loss incurred by the third party. Simply not accepting the amount that the injured party claims will be the first argument after trying to avoid liability. I put this as the last in the row of defences concerning the right to limit ones liability because it is usually not referred to as a limitation of liability in a technical sense. In practice it has the same result: one will have to pay less money to the claimant.

2.3 Policy defences


Under this title I will discuss the defences that the insurer can invoke against the injured party and that are based on the insurance policy.101 Even if the direct action tries to break through the negative consequences of the privity of contract it will not give more rights to the third party than to the insured. Therefore the insurer can invoke some of the following policy defences against the injured party who surrogates in the contractual rights of the assured. The legislator has however limited this possibility and in that way turned the liability insurance to the benefit of the person to whom the insured is liable. The difference between voluntary and compulsory insurance will enter into play at this particular stage as this character of the insurance expresses the legislators will to protect the third party.

Cass. civ. 14 juin 1926, DP 1927, I, p. 57. Cf. 1.3.1: interest in the financial consequences of the cause of the damages that led to the liability of the assured. 100 See F., FOUCHIER., op. cit., 4. 101 The right of a victim against the insurer, even though it has an independent and direct nature, derives its source and finds its limits in the insurance agreement concluded between the insurer and the assured freely translated from Cass. Civ., 16 fvrier 1937, D.H. 1937, p. 204.
99

98

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The 1930 Act expressly indicates what can and what can not be done: the happening of one of the insolvency events enumerated in the Act cannot be the ground to avoid the insurance contract or alter the rights of the third party.102 All agreements between the insured and the insurer that defeat or defect the rights of the third party will also be void if they are agreed on after the liability and the insolvency have occurred.103 This Section 3 of the 1930 Act has however been used as an argument a contrario to support all other kinds of restrictions and limitations to the rights of the third party. Let us now look at some specific clauses and how they are received before the courts in several jurisdictions. This title will discuss the defences and under title 2.4 the more general limitations are discussed. Under the term defence I qualify the arbitration clause, the pay to be paid clause and the clauses on the limitation period. These clauses operate as a defence against the third party receiving any payment at all. They are not legal, but contractual pre-conditions to the right of direct action. In some jurisdictions these kinds of clauses may be void as they try to avoid mandatory rules, intended to protect a third party.104 2.3.1 Arbitration clause The first defence, based on the insurance policy, that can block a direct action is the arbitration clause. Through this clause the parties to the insurance contract take away the jurisdiction of national courts and submit all (or certain specified) claims to an arbitration panel. As in many other fields of commercial law marine insurance contracts also tend to opt for dispute settlement before an arbitration tribunal. Having seen the specificity of the problems relating to the issue that is the object of the present paper, the choice for a specialised panel is not surprising. For the implication of the introduction of an arbitration clause on the applicable legal rules, I refer to other, specialised works, as this analysis would take us too far out of the scope of the present discussion.105 The aspect that will be analysed under this chapter is the validity of an arbitration clause under the direct action from an injured party against the insurance company. Does the injured party have to comply with the arbitration clause and its procedural rules or will a court have jurisdiction over the dispute between the injured party and the company? The basis for liability (contractual

102 103

Section 1 (3) 1930 Act. See 5.6-5.9 in the J.C.P. and section 3 of the 1930 Act. 104 See G., Cordero Moss, "International Commercial Arbitration. Party Autonomy and Mandatory Rules", Tano Aschehoug, Oslo 1999 at p. 95-96. 105 See G., Cordero Moss, ibidem and for the negative consequences see the discussion in the Joint Consultation Paper of 1998.
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or third party liability) of the insured will have no influence on the application of the arbitration clause included in the insurance policy. An aspect that is not often mentioned is the existence of an arbitration agreement between the injured party and the person causing damages.106 The presence of such an understanding between the third party and the insured will not help the underwriter to defeat the competence of the court when he is called before a national court by the third party. The existence of an arbitration agreement will never be an argument to defend the exclusive competence of an arbitration tribunal. For the situation in civil law countries we again use French law as the reference. The competence of the French courts has been recognised by the Cour de Cassation in the Irini M case.107 The court handling the ground of the claim is equally competent to take hold of the claim against the P & I club on the basis of Art. 10 of the Brussels Convention of 27 September 1968.108 The national courts incompetence can be defended by the insurer if he is brought before the court in a joint action with the insured and the latter has an arbitration agreement with the injured party. The French courts will always disregard the existence of the arbitration clause in the insurance policy when the third party directs his claim against the insurer. Although the question has not come before a Scandinavian court, its solution is said be similar to the one reached before the courts of Puerto Rico.109 Before the Puerto Rico Courts the arbitration clause is disregarded on the basis of the Direct Action Statute. In the Ocean Eagle case110 the judges first established that the proceedings are based on the law and not on the insurance contract. The second decision was based on this first one and prohibited the insurer to rely on his insurance contract that is subordinate to the law. The Court argued that the insurance company could not weaken the legal position of a third party through a private agreement. This argument could also be accepted before Norwegian Courts faced with an arbitration clause, as the idea is explicitly included in the new NICA.111 Most American jurisdictions submit the third party to the arbitration clause. The rationale for it is that the third party bases its suit on the insurance contract and therefore is bound by the terms of this contract.112 The Aasma case
106

As a clause in their contract or in the form of an agreement concluded after the happening of the cause for liability. 107 Cass. Civ. 27 juin 1995 108 See also P., Simon, op. cit., p. 528. 109 See H.J., Bull, Tredjemannsdekninger i Forsikringsforhold, Sjrettsfondet, Oslo, 1988, p. 522 and p. 147. 110 1974 AMC 1629 DPR, p. 1633. 111 Section 7-8 in fine NICA and see G. Cordero Moss at p. 95. 112 See August Aasma, et al. v. American Steamsip Owners Mutual Protection & Indemnity Assn, 95 F.3d 400, 1997 AMC 1 (6th Cir. 1996).

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concerned a third party claimant who was exposed to asbestos on a vessel on the high seas. The claimant sued the insurance company of the ship owner on the basis of the insurance policy. The decision of the court was inspired by the legal basis of the claim itself: the insurance contract.113 One can say that the claimant in the Aasma case accepts to be submitted to the terms of the insurance policy if he bases his right to direct action on the insurance contract. If you get rights out of a certain source, you cannot deny the limits that are pointed out in that same source. It can be deplored that the court only decided the case based on the principles of contract law and didnt make any consideration whatsoever concerning the guiding principle of protection of the weaker, third injured party.114 The reason for it is that the protection of the weaker party is a mandatory rule, but is no part of the ordre public that the judges raise ex officio. The Aasma decision limits the right of the third party at a time when other courts moving in the opposite direction. The solution depended on the applicable direct action statute. As a matter of fact, the judges were more generous towards the third party in states where the direct action statute gives large rights to the injured party. As an example we can point at the conclusion that has been reached in the Talbott Big Foot decision.115 In this case the court has decided to stay the case in order for the proceedings in arbitration to be concluded instead of dismissing the direct action as in the Aasma case. This liberal solution appears to be inspired by the very generous direct action statute of Louisiana. The same result was reached in the Zimmerman case,116 where the judges based their decision on the Talbott Big Foot decision and on the Federal Arbitration Act. According to some authors, the third party can keep his right to direct action if he bases his claim on the direct action statute. Only then does he not need to go to an arbitration tribunal nor is he even obliged to stay his lawsuits during arbitration.117 When the injured party relies on the insurance contract to support his right to direct action however, the injured party seems to be exposed to the arbitration clause and its consequences. Not even mandatory law protecting the third party can prevent this. Only if the rules on protection of the weaker party are seen as public policy will the seized judges be able to overrule the arbitration clause. The outcome of the problem will therefore
See Aasma, 95 F.3d at 400 citing Cheshire Place Associates v. West of England Ship Owners Mutual Insurance Assn, 815 F. Supp. 593, 597, 1993 AMC 2701 (E.D.N.Y. 1993): When a party to a contract bases its rights to sue on the contract itself and not upon a statute or some other basis outside the contract, a provision requiring arbitration as a condition precedent to recovery must be observed, whether the plaintiff acquired rights under the contract as an agent, third party beneficiary or assignee. 114 See N., FOSTER, op. cit., 290. 115 In re Tolbott Big Foot, Inc., 887 F.2d 611, 1990 AMC 1780 (5th Cir. 1989). 116 Zimmerman v. International Companies & consulting Inc., 107 F.3d 344 (5th Cir. 1997) 117 See M., MAGINNIS, J., COT, op. cit., http://www.mlaus.org/
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depend on the law that is applicable according to the judge, federal law or state law.118 The judge who came to the decision in the Aasma case held that the solution would be as severe as he saw the solution119 if it came under the application of English law.120 The courts will withhold all defences out of the insurance policy, including the arbitration clause. The direct action brought before a national court by an injured party against the insurer will be referred to the arbitration tribunal for the handling the action if the insurance policy contains an arbitration clause. The English courts are of the opinion that the insurer cannot be in a worse position against the third party than he was against the insured.121 As the American judge correctly indicated the UK courts decided that arbitration clauses are to be respected.122 In the Freshwater case Lord Hanworth held that it would be impossible to get a right to sue the insurance company without complying with the limits spelled out in the contract, which leads to liability of the underwriter.123 The decision in arbitration is considered to be a precedent contractual condition to the liability of the insurance company.124 Although claimants have submitted the argument of unnecessary and unreasonable extra costs that they could not even bear and that legal support didnt cover, the courts minimised this aspect as a problem of personal nature. The plaintiffs personal troubles should not interfere with the insurance contract and the underwriters rights there under.125 Lord Denning took the defence of the third party by questioning this reasoning in the case of Fakes v. Taylor Woodrow Construction Ltd.126 However the other judges did not follow him in protecting the right of defence and access to justice. The present situation is a good example where the protection of the third party is not effective and merely reduced to theory in case the plaintiff has limited resources.127

118

See the discussion on this point in the Aasma case. For a more detailed analysis see J., GOLDSTEIN, The life and times of Wilburn Boat: A critical guide, in J. M. L. & C. No. 28, 1997, p. 395-448 and p. 555-593. 119 And thus more severe as the general solution proposed by American doctrine. 120 See Aasma, 95 F.3d at 405. 121 The Fanti and Padre Island, 2 All E.R. 705 (1990) as referred to in the Aasma case. 122 For England see Freshwater v. Western Australia Assurance Co. Ltd. [1933] 1 KB 515 and for Scottland see Cunningham v. Anglian Insurance Co. Ltd. 1934 SCT 273. 123 See the Freshwater case p. 516. 124 Dennehy v. Bellamy [1938] 2 All ER 262. 125 Smith v. Pearl Assurance Co. Ltd. [1939] 1 All ER 95. 126 [1973] 1 QB 441. 127 The actual state of affairs has been explained in M., CLARCK, The Law of Insurance Contracts rd (3 ed 1997) p. 161: While seeking to protect the third party from the poverty of the insured, Parliament showed no intention to protect him from his own.

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After an open consultation the Scottish and English Law Commissions decided to maintain the present situation.128 Under the reform of the Third Parties Act of 1930 the plaintiff would be bound by the arbitration clause in the insurance contract before he can get payment through a direct action against the insurer. In their last joint report the commissions refer to one of the few consultees who explained the need for an arbitration clause in the following way: the arbitration clause can form a guarantee to get insurance disputes resolved following UK law. This is possible as an arbitration procedure escapes from the scope of the Brussels Convention: arbitrators will form their own judgement on the applicable law. When we look at the solution that was reached under French forum, we can easily understand the argument of this consultee. The question that remains is if foreign courts cannot avoid the application of the arbitration clause on the basis of proper norms that they can apply according to Conflict of Law rules. 2.3.2 Pay to be paid A pay-to-be-paid clause129 is a contractual term that has traditionally been included in P & I policies and is almost only found in these types of insurance policies. Through this clause the P & I club can only be forced to pay the insured ship owner if the latter has paid the damages to the injured party first. This theory is logical as the insurance contract can only cover (indemnify against) actual losses of the insured and the loss of the insured is only suffered once the money leaves his property. The payment clause is meant to avoid payment to the ship owner that would not benefit the injured party. In case of bankruptcy of the insured however an obvious problem will arise: since the insured is insolvent he cannot pay and as he does not pay the injured party, the P & I club will not let its money go to the insured. The question in a direct action against the underwriter by the injured party is somewhat different: the party suffering the loss will earn the money. The goal of the liability insurance is thus served although a contractual pre-condition is not satisfied. How is this problem solved in the several jurisdictions that are covered in this thesis? In Norwegian and Swedish law, the first and most important reference on this subject is the decision in the Skogholm case.130 The Skogholm case concerned Section 95 of the FAL. This section is construed to protect the third party against the insolvency of the insured and cannot therefore be derogated from. In his judgement the Supreme Court invalidated the pay to be paid clause

128 129

Joint Report of 2001, p. 63-65. Also called "pay first" clause or payment clause. 130 Skogholm, ND 1954 p. 445 (NH)
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based on the argument that the P & I club cannot avoid the statutory rights of the third party.131 The relevant provision of the former Scandinavian law is still applicable in Sweden. The solution that was proposed under the Norwegian Supreme Courts decision is equally followed in these countries.132 This vision has more recently been confirmed before the Court of Appeal of Stockholm in the Deger case133 where the judges decided that Section 95 is a mandatory rule that cannot be derogated from by the contractual parties. In Norway insurance law has been changed since the Skogholm case. Since 1989 Sections 7-6 and 7-8 of the NICA explicitly prohibit the effect of payment clauses in liability insurance contracts, which under Norwegian jurisdiction includes P & I policies. No recent case can confirm the rule, but the law is very clear in its text: The provisions of this section cannot be contracted out of to the detriment of the injured party.134 In Icelandic law the solution in relation to a payment clause will depend on the nature of the insurance. If the insurance is compulsory, objections from the insurance contract cannot be invoked against a third party in a direct action. In the case of voluntary insurance however the objections of the insurance contract can be invoked against the injured party who surrogates in the rights of the insured. These rights are limited by the insurance policy and the third partys rights will be limited in the same way. However Section 96 of the Icelandic Insurance Code protects the third party. This article stipulates that the insurance contract cannot limit the rights of the third party in a way that the latter would have fewer rights than those he would have had against the insured.135 Therefore the payment clause seems to be accepted under Icelandic law, at least in case of voluntary insurance. When the liability insurance is imposed by law, the third party is put in a position whereby no objection regarding the insurance contract can be used against him.136 Common Law lawyers attach much more importance to the specific relationship between the P & I clubs and their members. This vision distinguishes the liability insurers who cover the liability of their insured from the indemnity insurers who only promise to indemnify their members for the losses suffered by paying under their legal liability.137 Although the principle
For more on this case see M., LUND, Sentrale dommer: Skogholm., in : Nordiske Domme i Sjfartsanliggender 1900-2000, Oslo: Sjrettsfondet, 2001, Marius nr. 278, p. 129-138. 132 See S., JOHANSON, op. cit., p. 157-174. 133 Deger, ND 1996 p. 1 (HVS) 134 Section 7-8 NICA in fine. 135 See B., DANIELSON, Third party claim under marine insurance. The Icelandic approach, in Simply, Oslo, 1999, p. 189. 136 SeeB., DANIELSON, op. cit., p. 192. 137 See S., HAZELWOOD,op. cit., p. 323 and Hong Kong Borneo Services Co. And others v. Anthony David Pileher [1992] 2 Lloyds Rep 593.
131

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of a right to direct action against liability insurers is explicitly recognised in the Third Parties Act of 1930,138 the P & I Clubs have always tried to escape from this rule basing their argument on the very specific character of the P & I Clubs.139 The House of Lords accepted this construction.140 In arbitration, before the appeal judges and the Court of Appeals, the decision in these cases on whether or not to apply the payment clause was going both ways, with dissenting opinions between the judges of each instance. The House of Lords finally dismissed the Direct Action on the basis of the existence of a payment clause in a unanimous decision.141 In both the cases that were first joined before the Court of Appeals, the claimants obtained a judgment against the ship owner for cargo loss and sought for an arbitral award for this liability in a direct suit against the P & I Clubs. All conditions for a direct action under the Third Parties Act of 1930 were satisfied. The direct payment from the club to the injured party was however prevented by a clause in the insurance contract. At first sight this denial seems to be in contradiction with the aim of the 1930 Act, which is to protect the third party against the insolvency (impossibility of payment) of the assured.142 The reasoning for the right to direct action before the House of Lords was introduced by three questions: (1) What were the rights of the members against their P & I insurer at the moment precisely before their winding up in respect to the liability to the third parties? (2) Does the pay-to-be-paid clause purport, in a direct or indirect way, to avoid the insurance contract or to alter the rights of the parties to the insurance contract upon winding up of the member, as far as to take away the effect of the provisions to the extent of section 1(3) of the 1930 Act? (3) What rights can be transferred to the third party upon the winding up of the members? Without reproducing the full argumentation143 the most important argument is that the third party cannot have more rights out of the insurance policy than the member. Since the member did not pay damages, he will not be entitled to get an indemnity from the Club. If the member does not have this right, the House of Lords cannot see how the third party should be entitled to this right. The

138 139

For the conditions: Cf. supra. See T., dALES, op. cit. 140 See the Fanti and the Padre Island. 141 See B., HARRIS, op. cit., p. 718 on the Fanti and Padre Island. 142 See F., FOUCHIER, op. cit., 4. 143 See B., HARRIS, op. cit., p. 720-723.
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decision of the House of Lords can, apart from policy reasons144 in favour of the P & I Clubs, be justified by the principle that clarity takes the lead over justice in commercial law.145 In the Joint Report of the British and the Scottish Law Commissions we can see that the protection of the P & I clubs continues. Although the general rules in the draft act tend to offer more protection to the third parties, this is not the case in marine insurance. The explanation given in the report is not to interfere with the future international legal framework for marine insurance.146 It would have been preferable to at least propose an interim measure for marine insurance even if a solution on an international level can be reached. The position of the French jurisprudence has been somewhat incoherent and uncertain on the matter. The solution to the problem of a payment clause under a direct action seemed to be open.147 A decision from the French Supreme Court might have brought clarity on the case:148 the pay-to-be-paid rule has not been endorsed in French jurisprudence.149 The last time that the issue came before the French Cour de Cassation,150 it only ruled on the procedural aspect of the matter, namely that the Appeals Court of Basse-Terre had given no legal argumentation in conformity with Art. 455 of the French Procedural Code when it condemned the P & I club to the payment of damages. Before the decision of the Cour de Cassation of 1995 the French position developed through several steps. After the legal establishment of the right to direct action against the insurer in the law of 13 July 1930, the conditions for it were spelled out through court decisions.151 The Court of Appeals of Rennes however dismissed a direct action because the conditions under the English Direct Actions Act were not fulfilled.152 These decisions were inspired by the vision that the direct action finds its source in the underlying insurance agreement and its applicable law. The insurance policy itself was also used to dismiss153 or to award154 the payment of damages under a direct action.

144

English lawyers defend the argument that the payment clauses are vital for the competitive position of the British P & I clubs. The position of Skuld and Gard in Norway can be put forward as counter-arguments to this explanation. For more on this discussion, see E., RSG, op. cit., Marius No 283, Oslo, 2001. 145 See B., HARRIS, ibidem. 146 See the Joint Report of 2001, p. 62. 147 See F., FOUCHIER, ibidem. 148 Cass. Civ. 27 juin 1995 in the Irini M. 149 See P., SIMON, op. cit., p. 528. 150 Cass. Comm., 7 July 1998, DMF 1998, p.826 et seq. with commentary of P. BONASSIES. 151 Cass. Civ., 16 February 1937 and 10 March 1937. Cf. supra for the further discussion on the conditions. 152 CA de Rennes, 15 May 1982, DMF 1982, p. 275. 153 TC de Bordeaux, 23 septembre 1993, DMF 1993, p. 731, in the Heidelberg case. 154 CA de Rouen, 17 dcembre 1987, DMF 1988, p. 477, in the Sea Saint case.

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The decisions thus went both ways, based on the contract (including a payment clause) and on English law (that recognises the effect of the payment clause). Some courts still defended the right to direct action on French law as applicable to all damages caused on the French territory. French law and its far-reaching protection of the third party does not accept the effect of pay-tobe-paid clauses.155 Some Courts ignored the clause on public policy grounds: the P & I club cannot force his member to be bankrupt before indemnifying him for the damages he had to pay to the injured party.156 They here (wrongly) decided that the obligation of the club was to guarantee his members default.157 In the note under the decision of the Cour dAppel of Rennes, the author refers to Cozian158 to indicate that the right to a direct action cannot overrule private international law, as it is not part of the international ordre public.159 But without relying on that argument, the Tribunal de Commerce of Rouen came to a decision that French law shall govern all disputes concerning damages caused on the French territory even if the insurance contract is governed by a foreign law that does not accept a right of direct action.160 The stabilising decision of the Cour de Cassation of 1995, in the Irini M case, confirms the application of the lex assurandi161, but indicates that the application of the payment clause is not accepted in French jurisprudence. This decision is contradictory, as the application of English substantial law to the direct action would include the application of the pay-to-be-paid rule. The explanation for departing from the English jurisprudence on this point can be found in the fact that P & I Clubs are seen as regular insurance companies under French law, whereas the UK still recognises the specific character of mutual insurers.162 This French approach is very important as it indicates that the lex assurandi will apply to determine the conditions to apply to a direct action. Its decision is equally hybrid as the interpretation of the insolvency of the assured is done in accordance with French law.163 When applying the terms of the insurance contract that is governed by English law, the Cour the Cassation ignores the payment clause on the basis of French law. We together with other authors164 can only regret any substantial argumentation by the judges on the choice of the different applicable laws.

TC de Rouen, 20 mai 1988, DMF 1988, p. 381. TC de Salon-de-Provence, 25 mai 1990, and CA de Rouen, 11 mai 1993. 157 See L., LEWIS, French direct action against P & I Clubs, http://www.richardsbutler.com/. 158 See M., COZIAN, Laction directe, no. 542. 159 See C.L. in a note under CA de Rennes, 15 mai 1981, DMF 1982, p. 283. 160 TC de Rouen, 20 mai 1989. 161 The law of the insurance contract. 162 See P., SIMON, op. cit., p. 528. 163 See P., SIMON, op. cit., p. 529. 164 See L., LEWIS, op. cit.
156

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On the other hand, the more logical solution to apply would be that the right to a direct action is determined by the lex loci delicti commissi or else the lex contractus from the underlying agreement in the case of contractual liability.165 The possibility of invoking defences based on the insurance policy can then be based on the lex assurandi. 2.3.3 Limitation period The problem in connection with the limitation period for direct actions resides in the complex relation between the different related claims. There are different periods applicable to the insurance contract (for the claim from the insured against the insurer) and to the claim for damages (based on tort law or on the contract between the insured tortfeasor and the injured party). Where the law specifies a statutory limitation period for direct actions against the marine insurer, the problem is easily solved. When this is not the case or when the relevant law does not to the P & I Clubs, the solution is more difficult to find. Although a homogeneous solution has not been reached, the discussions in doctrine are also limited. In France the limitation period is the one that is applicable to the claim against the tortfeasor.166 The third party does not need to follow the limitation period of two years prescribed in L 114-1 of the Code des assurances as the direct action is seen as a personal right of the injured party.167 The French Supreme Court168 even extended the period as long as the insured has the right to sue his insurer and this rule is now laid down in L 124-3 of the French insurance Act. The English position is again opposite to the one taken in France: In the Joint Report of 2001, the joint commissions conclude that we should take into account the period governing the insureds right of action under the insurance contract against the insurer.169 The reasoning that is followed in England is based on the subrogation in the rights of the assured. If the right of the assured is limited by a certain period, then the right of the surrogated third party should be limited in the same way.170 It has to be said that the commissions accorded strong protection for the third parties by proposing that the limitation period should only start running from the date that the liability of the insured is established!171

165

As was decided before the Cour de Cassation in 1972 (Cass. Civ. 1re, 21 avril 1972, Revue crit. DIP 1972, 306, note of P. Lagarde) and in CA de Rouen 13 Juillet 1994 166 Cass. Civ. 28 mars 1928, Bull. Civ. II, No 148, p. 9. 167 See F., FOUCHIER, op. cit., p. 6. 168 Cass. 1re Civ., 11 mars 1986, RGAT 1986, 354. 169 See Joint Rep. 2001, op. cit. p. 67. 170 See Popplewell J in Lefevre v White [1990] 1 Lloyds Rep 569 at p 578. 171 See Joint Rep. 2001, op. cit. p. 68-69.

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2.4 Limiting the right


After the contractual terms conditioning the right to insurance cover, we will now briefly discuss the terms that limit the right to compensation. These concern the wilful misconduct of the assured and to a certain degree other negligent acts of the assured, the preliminary payment of damages to the injured party, the non-payment of the premium, the unseaworthiness of the vessel, contractually agreed deductibles, illegal, hazardous or improper character of the marine adventure of the assured and finally the arbitration clause etc. The clauses that are discussed under the present title concern personal actions or omissions of the insured having consequences on the contract. It is difficult to say that the injured party should be punished because the insured breached a contractual term. On the other hand it is difficult to make an insurer liable when he explicitly indicated not to provide cover under certain circumstances. The question on the opposability of these terms to a third party will thus depend on the degree of protection given to the third party. This is the reason why under compulsory insurance these defences are generally not available to oppose to the injured party. In that case the legislator installed a right to direct action in order to protect the third party. No contractual term could then be opposed to the mandatory rule ... no contractual term but the exception of wilful misconduct. 2.4.1 Wilful misconduct of the assured The term "wilful misconduct" refers to deliberate actions172 of the assured. Not just the intentional but also reckless acts seem to fall under the actions aimed at by section 55(2) of the MIA 1906. The wilful character is clearly more than just acting negligently with privity.173 In a case-to-case study the judge must establish that the insured caused the damage wilfully or disregarded a possible risk that ultimately caused the damage.174 Although very little discussion on the matter exists, the Norwegian approach seems preferable. The NMIP 1996 describes the different consequences for acts under intent or under gross negligence. Moreover it stipulates expressly175 that the wilful act loses its wrongful character when it is committed to avert a greater loss or to save human life.176
172

It concerns willing misfeasance as well as willing omissions as is specified in IVAMY, H., General principals of law, p. 288 and the references that are stated there. 173 See S., HODGES, S., Law of Marine Insurance, Cavendish Publishing Ltd., London, 1996, p. 224. 174 See S., HODGES, op. cit., p. 224. 175 See 3-35 of the NMIP 1996. 176 See H., IVAMY, op. cit. where it is pointed out that this solution will also be reached in common law.
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It is public policy that a man cannot profit from the consequence of his own criminal conduct. Therefore it is also a general principal in insurance law that an assured cannot recover indemnity when he deliberately caused the loss and thus will not be covered if the wilful misconduct is at least one of the effective causes of the loss.177 Unlike the other subsection, Section 55(2), a of the MIA 1906 cannot be excluded by express stipulation. As the fundament of this rule is public policy, the underwriters have the right to refuse payment also to a third party claimant. It seems to be unfair that the injured party has to be the victim in this situation, but their personal interest cannot overrule the public policy. This idea not only supported finds, but also in international conventions as the CLC. The only case where the discussion is inactive is the circumstance of personal injury. Courts estimate that reparation of personal injury is more important than the protection of the insurer against the criminal acts of his insured. The discussion to get the wilful misconduct-exception out of the Athens convention is going on at this very moment.178 The result of these discussions will show if the hierarchy is to be considered as being established. 2.4.2 Non-payment of the premium The rights under the insurance contract are linked to obligations from the counter-party, just as in all other types of contracts. The basic condition for the insurance contract to provide cover is the payment of the premium by the assured. If the assured does not do so, this constitutes a fundamental breach of contract that results in the loss of insurance cover for the insured. (Although in some cases the insurer cannot rely on non-payment of the premium altogether)179 A third party bringing a claim directly against the insurer will generally be bound by such contractual term in the same way as the assured. This is a consequence of the rule that the third party - when surrogating in the rights of the assured - cannot have more rights than the assured. Under English law, there is a sharp distinction between the effect of terms and the one of conditions. In Murray v. Legal and General Assurance Society Ltd180 the court held the insurance company liable although the premium was not paid to it. The court considered that the P & I Club is entitled to rely on
177 See Arnould's law of marine insurance and average, p. 786-787, referring to Trinder, Anderson & Co. v. Thames and Mersey Mar. Ins. Co. [1889] 2 QB 114. 178 Cf. infra. 179 This might not immediately be the case if there are days of grace, or if the insurer is prevented by election or estoppel from avoiding the claim on the basis of the non-payment. 180 [1970] 2 QB 495.

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this clause, and that the wording of the policy expressed the will not to make it a precondition for third party claimants.181 The Joint Committee however explicitly underlined that the non-payment of the premium will be opposable to the third party under the new draft of the 1930 Act.182 This trend was already set after the critics on the Murray decision. The decision to oppose the non-payment to the third party was followed in Cox v Bankside183 and it is supported by large doctrine that the injured party can only get rights if they are subject to the same defences as the insured.184 As pointed out in the Joint Consultation Paper, a breach of the insurance contract may well occur around the time of a statutory transfer. If this does occur, the third party may not be able to cure the breach, either because the term in question requires the insured to do something personally, or because he is not aware of it in time, or because he lacks the financial resources to do so.185 As the 1930 Act lays the insolvency of the insured as a precondition, the last hypothesis is not unlikely to occur. The condition to the right of direct actions can be the same ground for a defence not to obtain payment under English law. This is at least a remarkable conclusion. But if the third party surrogates in the rights and obligations of the assured, he can also pay the premium before directing his claim against the insurance company. Can the judge go as far as to deduct the premium from the damages to be paid to the injured party? Howard Bennett sure doesn't think so.186 The author finds support to refuse the right of set-off to the insurer in a judgement of 1970.187 In this case Cumming-Bruce held that the statutory subrogation was limited " to the rights under the contract in respect of the liability incurred by the insured to the third party. Rights which are not referable to the particular liability ... are not transferred." 2.4.3 Other defences Some final defences that could arise out of the insurance contract need to be mentioned. They are not however subject to much discussion before the courts nor in doctrine. I think it is wise to leave it that way and finish this part two by indicating the generally accepted solutions. Firstly we have the negligence of the assured. All lawyers agree that when the assured acts negligently and causes damages with these acts, the P & I Clubs
not a term of the policy which arose in respect of the liability of the insured to the third party. In Edwards v. Minister Insurance Co. Ltd. (unreported) 10 March 1997. 182 Joint Report of 2001, p. 58. In footnote, the Committee underlines the 'Murray exception' will not apply anymore! 183 [1995] 2 L.L.Rep. 437, p. 451. 184 MacGillivary on Insurance Law, 9th edition, 1997. 185 Joint Consultation Paper 1998, p. 130. 186 See H., BENNETT, The law of marine insurance, Clarendon Press, Oxford, 1996, p. 343. 187 See Murray v. Legal & General Assurance Society Ltd. [1970] 2 QB 495, 503.
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cannot waive the claim of the injured party based on this very same negligence. Ivamy writes: "Negligence, whether on the part of the assured himself or of his employees, does not release the insurers from liability...."188 As a specific type of negligence we can refer to the breach of the insured's duty to provide information. The Louisiana courts have followed the general rule in Edwards v. Fidelity & Casualty Co. of New York.189 The line of reasoning was based on the fact that the claimant's compensation should not depend on the actions of the insured. This argument can certainly be defended in countries like Norway where the right to direct action is mandatory but it is less certain that the argument will stand before English courts. In West v. Monroe Bakery190 the court held that the right of the third party arises at the time he was injured and that in the light of public policy such right cannot be defeated by the omission of the insured to give notice. This argumentation strongly resembles the French theory of dchances postrieures191 and also the Joint law commissions of Scotland and English authors alike192 agree that this defence can only be invoked if it consists in a denial of a substantial right of the insurer. Finally, the unseaworthiness of the vessel or other policy conditions relating to minimum safety standards cannot be objected to the third parties. The joint law commissions underline that the third party cannot look after this duty and therefore cannot be held responsible for the consequences of such a breach.

Conclusion
The description of the position of the third party faced with the policy defences shows that the generally conceded right to direct action is a very fragile right. Where the political will exists to protect a fragile party faced with an unreliable wrongdoer, the interests of the P & I Clubs seem to have the law on their side in some countries. Although the direct action has been granted based on the general policy of protection of the weaker (third) party and the legal rules confirm this right explicitly, there seems to be a more important legal principle to protect the economic interest of the P & I Clubs. The most important evidence of this fact is that the least effective protection is given in the jurisdiction where the P & I Clubs have the strongest influence. England has granted the right to direct action in land-based law together with all other jurisdictions and has not arisen any special objections to it. Therefore it is even more painful to see that in the field where insurance law found its
188 189

See H., IVAMY, op. cit. p. 287 and the references you find there. See La. Ct. App. 1929. 190 See West, 46 So. 2d at 130-31. 191 Cf. supra. 192 See S., HAZELWOOD, op. cit., pp. 281-282.

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roots and even more in the country that is both an important maritime and insurance nation people hold on to those roots and fear the evolution of their market. But when we compare the English position with the one taken in Norway, which is also a maritime nation with strong players in the P & I market, we see a striking difference. Here the protection of the weaker party is understood and incorporated in the practice. Although the Clubs still include self-protecting clauses in their rules, the judicial power does not bend to their wishes. The Scandinavian doctrine also prefers to take a legal position rather than to serve the interests of the P & I Clubs. And in Norway we can see that even with the strong right to direct action the arguments put forward by the English P & I Clubs are exaggerated and the Norwegian ones are still competitive. I hope that this thesis clarified the importance of a stronger right to direct action from a legal point of view. If this is recognised in a uniform way all over the globe, this will serve both the law and economics. First of all the number of judicial actions can be reduced. In the case of compulsory insurance, the income of the P & I Clubs will increase with the number of the members. If there still remains a lack of money because of higher expenses, the members will be willing to contribute as they profit from the right to direct action indirectly. Another strong argument for compulsory insurance is that the right to direct action adds to the standards on vessels and will be a factor lowering the number of incidents. I am convinced that the right to direct action is an important instrument to help the injured party to be reimbursed, but I am also convinced that ship owners and P & I Clubs will profit from the introduction of this right in the long run. I therefore think it would be wise for the lawmakers to provide third parties with a large and transparent right to direct action against the insurers so as to provide a solution for the existing eternal triangle at sea.

Laws and statutes


Belgium: - Law of 11 June 1874, on Insurance in general, B.S. 14 June 1874. - Law of 25 June 1992, on land-based insurance contracts, B.S. 20 August 1992. England: - Marine Insurance Act, 21 December 1906 (6 Edw 7 c 41) - Third Parties (Rights against Insurers) Act 1930 of 10th July 1930 Norway: - Act no. 69 of 16 June 1989 relating to insurance contracts
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(Earlier Act no. 20 of 6 June 1930 relating to insurance contracts. - See Acts of 3 February 1961 relating to liability for damage caused by a motor vehicle, no. 39 of 10 June 1988 on insurance activity and no. 65 of 16 June 1989 relating to industrial injury insurance) - Act no. 39 of 24 June 1994 The Norwegian Maritime Code USA: Federal Arbitration Act, http://www4.law.cornell.edu/uscode/9/ch1.html International: - 1968 Brussels Convention on jurisdiction and the enforcement of judgments in civil and commercial matters, Official Journal L 299 , 31/12/1972 p. 0032 0042, http://www.europa.eu.int/eurlex/en/lif/dat/1968/en_468A0927_01.html - Convention of 16 September 1988 on jurisdiction and the enforcement of judgments in civil and commercial matters - EC Convention on the Law Applicable to Contractual Obligations, Rome 19 June 1980, Official Journal C 27, 26.01.1998, http://www.jus.uio.no/lm/ec.applicable.law.contracts.1980/toc.html

Jurisprudence
United Kingdom: - Freshwater v. Western Australia Assurance Co. Ltd. [1933] 1 KB 515 - Cunningham v. Anglian Insurance Co. Ltd. 1934 SCT 273 - Dennehy v. Bellamy [1938] 2 All ER 262. - Smith v. Pearl Assurance Co. Ltd. [1939] 1 All ER 95 - West Wake Price & Co v Ching [1957] 1 WLR 45, 49. - Post Office v. Norwich Union Fire Insurance Society LTD [1967] 2 QB 363. - Murray v. Legal and General Assurance Society Ltd [1970] 2 QB 495 - Fakes v. Taylor Woodrow Construction Ltd [1973] 1 QB 441. - H.L. Firma C. Trade S.A. v. Newcastle Protection and Indemnity Association (The Fanti) and Socony Mobil Oil Co. Inc. v. West of England (The Padre Island) [1990] 2 Lloyds rep. 191. - Popplewell J in Lefevre v White [1990] 1 Lloyds Rep 569 at p 578 - Hong Kong Borneo Services Co. And others v. Anthony David Pileher [1992] 2 Lloyds Rep 593 - Cox v Bankside [1995] 2 L.L.Rep. 437, p. 451 France: - Cass. Civ. 14 juin 1926, DP 1927, p. 57. - Cass. Civ. 28 mars 1928, Bull. Civ. II, No 148, p. 9 - Cass. Req. 24 fvrier 1936, D. 1 936-1-49, note of Savatier - Cass. Civ., 16 Fvrier 1937 328
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- Cass. Civ., 10 March 1937 - Cass. Civ. 1re, 21 avril 1972, Revue crit. DIP 972, 306, note of P. Lagarde - C.A. Rennes, 15 mai 1981, D.M.F. 1982, pp. 275-283. - Cass. 1re Civ., 11 mars 1986, RGAT 1986, 354 - CA de Rouen, 17 dcmbre 1987, DMF 1988, p. 477, (Sea Saint). - TC de Rouen, 20 mai 1988, DMF 1988, p. 381. - TC de Rouen, 20 mai 1989 - TC de Salon-de-Provence, 25 mai 1990 - Cass. 1re Civ., 15 janvier 1991, RGAT 1991, 405 - CA de Rouen, 11 mai 1993 - TC de Bordeaux, 23 septembre 1993, DMF 1993, p. 731, (Heidelberg). - CA de Rouen 13 juillet 1994 (Heidi) - Cass. Comm. 27 juin 1995, DMF, 1995, p. 530 (Irini M) - C.A. Rouen, 26 juin 1997, D.M.F., 1998, pp. 133-137. - Cass. Comm., 7 juillet 1998, D.M.F., 1998, pp. 826-843. - C.A. Rouen, 18 mars 1999, D.M.F., 1999, pp.822-828. - Cass. 1re Ch. Civ., 7 novembre 2000, R.C.A. 2001, n 29. Belgium: - Cass., 18 oktober 1945, Pas. 1945, I, 247. - Cass., 26 februari 1960, Pas. 1960, I, 749. - Cass., 8 mei 1971, A.C. 1971, 886. - Antwerpen, 25 juni 1980, R.H.A. 1981, 451-456 (Simone). - Gent, 23 oktober 1985, R.H.A. 1985, 16-22 (RN 7, Mauricette). - Antwerpen, 16 maart 1993, R.H.A. 1994, 429-453. Norway: - Skogholm, ND 1954, p. 445 (NH) - A/S Dolsy Sweden: Deger, ND 1996 p. 1 (HVS) USA: - Cushing v. Maryland Casualty Co., 1952 AMC 1803 5th Cir. - Ocean Eagle case, 1974 AMC 1629 DPR, p. 1633. - Crown Zellerbach Corporation v. Ingram Industries Inc. et Al. and London Steam-ship owners mutual insurance association Ltd., Inc., 783 F.2d 1296 (5th Cir. 1986) (en banc), 17:271; 1986 AMC, 1471-1487. - In re Tolbott Big Foot, Inc., 887 F.2d 611, 1990 AMC 1780 (5th Cir. 1989). - August Aasma, et al. v. American Steamsip Owners Mutual Protection & Indemnity Assn, 95 F.3d 400, 1997 AMC 1 (6th Cir. 1996) - Zimmerman v. International Companies & consulting Inc., 107 F.3d 344 (5th Cir. 1997
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