San Evans Maritime Inc & Ors v Aigaion Insurance Co SA

Factual and Procedural Background

This opinion concerns the determination of three preliminary issues in a claim brought by multiple Claimants against Defendant, an insurance company (referred to as "Defendant"), under an insurance policy relating to the vessel St Efrem. The First and Second Claimants, both now dissolved Liberian companies, were respectively the owner and manager of the vessel, while the Third Claimant was a mortgagee. Claims by the First and Second Claimants were stayed due to failure to provide security for costs, so submissions were made only on behalf of the Third Claimant, but the court’s determinations are binding on all Claimants.

Ownership interests in the vessel were insured as follows: 50% by three Lloyd’s syndicates (Catlin, Ark, and Brit) under one policy ("Lloyd's Policy"), 30% by the Defendant under a separate policy ("Aigaion Policy"), and the remaining 20% uninsured. The Aigaion Policy contained a "Follow Clause" agreeing to follow Catlin and Brit in claims excluding ex-gratia payments.

Following a grounding incident of the vessel in Brazil and subsequent claim under both policies, the Lloyd’s syndicates settled their claim for a total of US$779,500 by agreement dated 24 April 2012. The Defendant denied obligation to follow this settlement, giving rise to the three preliminary issues addressed by the court.

Legal Issues Presented

1. On proper construction, does the "Follow Clause" in the Defendant’s policy (a) require the Defendant to follow any settlement made by Catlin and Brit under the Lead Policy, or (b) merely authorise Catlin and Brit to act on the Defendant’s behalf in negotiating or agreeing settlements?
2. If the "Follow Clause" requires the Defendant to follow settlements by Catlin and Brit, is it triggered by the Lloyd’s syndicates’ settlement agreement?
3. Did the Claimants agree by clause 7 of the settlement agreement that the settlement would not be binding on the Defendant, and if so, is the Defendant entitled to rely on the Contracts (Rights of Third Parties) Act 1999 to enforce that term?

Arguments of the Parties

Claimants' Arguments

• The Follow Clause obliges the Defendant to follow any settlement made by Catlin and Brit under the Lead Policy.
• The sum payable by the Defendant is US$450,000, representing 30% of an agreed loss of US$1.5 million.
• Clause 7 of the settlement agreement protects the Assured against any refusal by Brit or Ark to honour the settlement and protects Catlin against claims from co-syndicates, but does not exclude the Defendant’s obligation to follow the settlement.
• Clause 7 should be construed as applying only to the parties to the settlement agreement and not binding the Defendant.
• The Defendant is not entitled to rely on the Contracts (Rights of Third Parties) Act 1999 to enforce clause 7.

Defendant's Arguments

• The Follow Clause merely authorises Catlin and Brit to act on the Defendant’s behalf in negotiating and agreeing settlements, not to bind the Defendant.
• Clause 7 of the settlement agreement expressly states that the settlement is made only by the Underwriters for their respective participations and does not bind any other insurer, including the Defendant.
• The settlement agreement’s clause 7 excludes the Defendant from being bound by the settlement.
• The Defendant is entitled to rely on the Contracts (Rights of Third Parties) Act 1999 to enforce clause 7.
• It would be commercially reasonable for the lead underwriters to exclude binding following underwriters if their policies or negotiating positions differ.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Roar Marine v Bimeh Iran Insurance [1998] 1 Lloyd's Rep 423	Illustrated different forms of follow clauses and the commercial purpose of follow settlements clauses to simplify claims settlement and reduce costs.	Supported the court’s view that the Follow Clause operates as a simple agreement to follow settlements made by lead underwriters, not as agency.
The Buana Dua [2011] 2 Lloyd's Rep 655	Example of a follow clause obliging following underwriters to follow lead underwriters in relation to claims settlements.	Referenced to demonstrate variety in follow clauses and their scope.
Roadworks (1952) Ltd. v JR Charman and Others [1994] 2 Lloyd's Rep 99	Accepted agency analysis of follow clauses where agreement is binding on all subscribing underwriters.	Contrasted with the court’s preferred construction; acknowledged as a differing approach.
Mander v Commercial Union Assurance [1998] Lloyd's Rep Ins & Reins 93	Suggested that a lead underwriter is not necessarily agent of following underwriters; the agreement of the lead underwriter acts as a 'trigger' rather than agency.	Supported the court’s preferred construction rejecting agency in this case.
Youell v Bland Welch [1990] 2 Lloyd's Rep 423	Explained a follow clause in terms of agency.	Referenced as part of the conflicting authorities on follow clauses.
Unum Life Insurance v Israel Phoenix Assurance [2002] Lloyd's Rep Ins & Reins 374	Referred to agency analysis of follow clauses as "thoroughly arguable".	Noted as part of the legal debate but not adopted here.
The Leegas [1987] 1 Lloyd's Rep 471	Considered the existence of a duty of care by lead underwriters to following underwriters.	Discussed but not decided; relevant to agency and fiduciary duty debate.
Dolphin Maritime v Sveriges [2009] 2 Lloyd's Rep 123	Clarified that a contract purports to confer a benefit on a third party only if the parties intended to benefit that third party.	Applied to determine that clause 7 did not confer a benefit on the Defendant for purposes of third party rights.
A-G of Belize v Belize Telecom [2009] 1 WLR 1988	Principle on implying terms into contracts based on what is reasonable and necessary to give effect to the parties’ intentions.	Referenced in arguments regarding whether an implied term should be read into the Follow Clause.

Court's Reasoning and Analysis

The court began by examining the wording and commercial purpose of the Follow Clause, which was brief and related solely to claims, explicitly excluding ex-gratia payments. The court found that the clause constitutes a direct contractual agreement between the Defendant and the Assured to follow any settlement made by Catlin and Brit regarding claims. The court rejected the Defendant’s submission that the clause merely authorised Catlin and Brit to act as agents on its behalf, emphasizing that the clause’s simple language does not support an agency relationship and that introducing agency would complicate the clause unnecessarily.

The court acknowledged conflicting authorities on the nature of follow clauses, including cases supporting agency and others supporting a 'trigger' mechanism without agency. It aligned with the latter approach, consistent with the commercial purpose of simplifying claims settlement and reducing costs.

Turning to clause 7 of the settlement agreement, the court found that it was intended to clarify that the Lloyd’s syndicates acted only for their respective participations and not as lead underwriters binding others, including the Defendant. The phrase "any other insurer providing hull and machinery cover" was interpreted as referring to insurers outside the Lloyd’s syndicates, including the Defendant. The court rejected the Defendant’s argument that it could enforce clause 7 under the Contracts (Rights of Third Parties) Act 1999, concluding that clause 7 did not purport to confer a benefit on the Defendant but was intended to protect the Lloyd’s syndicates from liability to the Defendant.

Regarding whether the Follow Clause was triggered by the settlement agreement, the court rejected the Defendant’s argument that a settlement expressly not binding on the Defendant would not trigger the clause. The court reasoned that the Defendant’s own contractual agreement to follow settlements by Catlin and Brit means that the Follow Clause applies regardless of the lead underwriters’ intention or capacity in the settlement. To hold otherwise would frustrate the commercial purpose of the clause.

In conclusion, the court answered the preliminary issues as follows: the Follow Clause requires the Defendant to follow any settlement made by Catlin and Brit (excluding ex-gratia payments); the Follow Clause is triggered by the settlement agreement; and while the Claimants agreed that the settlement did not bind other insurers such as the Defendant, the Defendant cannot rely on the Contracts (Rights of Third Parties) Act 1999 to enforce that clause, nor does clause 7 prevent the Claimants from enforcing the Follow Clause against the Defendant.

Holding and Implications

Holding:

The court held that:

• The Follow Clause in the Defendant’s policy requires the Defendant to follow any settlement made by the lead underwriters Catlin and Brit, excluding ex-gratia payments.
• The Follow Clause was triggered by the Lloyd’s syndicates’ settlement agreement.
• Clause 7 of the settlement agreement confirms that the settlement binds only the syndicates themselves and not other insurers such as the Defendant; however, the Defendant is not entitled to enforce clause 7 under the Contracts (Rights of Third Parties) Act 1999.
• Clause 7 does not preclude the Claimants from enforcing the Follow Clause against the Defendant.

Implications:

The decision confirms that a follow clause, even if brief and silent on agency, can operate as a direct contractual obligation on the following underwriter to adhere to settlements made by lead underwriters. It clarifies that a settlement agreement excluding other insurers from being bound does not negate the following underwriter’s contractual obligation under the follow clause. The ruling emphasizes the commercial purpose of follow clauses in simplifying claims settlement and allocating risk among insurers. No new precedent was set beyond applying established principles to the facts, but the judgment provides detailed guidance on interpreting follow clauses and settlement agreements in marine insurance contexts.