A claim arising from a North Korean helicopter crash in July 2005 has finally been settled for €40m following extensive litigation in the North Korean and English courts, including two visits to the Court of Appeal. A retrospective review of the issues raised in the litigation highlights the importance of two clauses which are often regarded as ancillary in reinsurance contracts:
- the currency conversion provisions
- governing law and jurisdiction
Background
In July 2007, state-owned Korea National Insurance Company applied to the English courts for the enforcement of a Democratic People’s Republic of Korea judgment against Allianz and other London reinsurers. That judgment required the reinsurers to indemnify KNIC in relation to an underlying helicopter crash claim, in Euros, in accordance with the third party liability reinsurance policy between the parties.
Summary judgement application
The judge at summary judgment dealt with the reinsurers’ assertion that the DPRK judgment had been obtained by fraud because KNIC failed to disclose to the court a conditional settlement agreement between the parties under which the reinsurers would pay the total indemnity limit under the policy, but that payment would be in North Korean Won at a contractually agreed exchange rate, instead of Euros. On the basis of that settlement agreement, the reinsurers also asserted that the court had no jurisdiction.
The court held that it was wholly improbable if not inconceivable that a settlement had been reached between the parties without anything being written down to evidence that settlement, and as such its jurisdiction wasn’t called in to question.
Our law-now following this first instance decision emphasised the importance of recording any settlement in writing. We also pointed to the huge difference in the value of the claim depending on whether it was calculated in North Korean Won or in Euros. The reinsurers were already facing an adverse decision in the DPRK Courts, which they faced difficulty in overturning because they had agreed to be bound by DPRK law and jurisdiction. To read more on the decision click here.
This first instance decision was affirmed in the Court of Appeal, which gave little credence to the assertion by the reinsurers’ solicitors that a settlement had been reached.
Fraud and non-justiciability
Two further preliminary matters were then to be settled before the trial on the remaining issues. One was the allegation by the reinsurers’ that the DPRK judgment had been obtained by fraud instigated or approved by the state of North Korea, with the knowledge or participation of KNIC. More particularly, it was alleged that the objective of the fraud was the generating of profits in foreign currency, including for the North Korean Leader, Kim Jong-il (the “Dear Leader”). The other was an allegation that the judgment was unenforceable by the English courts on the basis of public policy, because the North Korean judiciary is partial and flawed.
The commercial court held that the parts of the reinsurers’ defence dealing with these issues be struck out on the grounds of “non-justiciability”; that is, on the grounds that the issues could only be dealt with on a state to state level rather than being resolved by judicial means. The court found the potential for embarrassing the foreign relations between Her Majesty’s Government and the Government of North Korea so obvious that it saw no need to consult the Foreign and Commonwealth Office before coming to this view.
On 2 December 2008, allowing the appeal, the Court of Appeal held that there was no general rule that if an allegation might embarrass a foreign sovereign it followed that it would also embarrass diplomatic relations with the UK and that therefore such embarrassing issues were non-justiciable. It further held that failing to seek guidance from the Government was not the proper course. The Foreign and Commonwealth Office had since declined an invitation to make representations to the Court of Appeal, stating that the Government would not normally make representations in court proceedings unless it were directly interested in the case, or in response to a request from the court concerned. The Court of Appeal inferred from this that it had not struck the Foreign and Commonwealth Office that a decision on the issues might seriously embarrass diplomatic relations between the UK and North Korea. For this, among other reasons, including there being no objection from KNIC who were happy to argue the issues on their merits at trial, the Court of Appeal restored the pleadings that had been struck out.
The fraud and public policy arguments were thus to be determined at trial, but a few days after the Court of Appeal’s decision was published the London reinsurers settled the dispute for €40m, which amounts to 95% of the claim, and a withdrawal of all allegations of fraud and impropriety made against the state-owned insurance company.
Comment
This extensive litigation across two jurisdictions underlines the dangers of carrying on business in politically sensitive countries, and with entities sponsored by such states. In this particular instance the reinsurers must have entered into the transaction with their eyes open, aware that KNIC was a government-owned company in a state which was at the time already subject to US sanctions.
Reinsurers willingly entering into such transactions are able to protect themselves through the terms and conditions of reinsurances (as well as, presumably, building a weighting into the premium to reflect political risk).
- reinsurers have the option of insisting that claims are to be made either in local currency or at a market rate of exchange, rather than agreeing to a specified rate of exchange in advance - this would deter claims being advanced or inflated simply to generate foreign currency
- agreeing to local law and jurisdiction in states in which the reliability of the court system is an unknown quantity is a serious legal risk that might be overcome by stipulating the law and jurisdiction of a more sophisticated court system or arbitration pursuant to internationally recognised rules
Further reading: [2007] EWHC 1744 (Comm), [2007] EWHC Civ 1066, [2008] EWHC 2829 (Comm), [2008] EWCA Civ 1355
