D&O Insurance: Anti-suit injunction granted to suppress US-issued claim

The Commercial Court has granted an application by a D&O insurer for an anti-suit injunction against an individual claiming to be an insured under the D&O policy. The defendant ‘insured’ (who himself was facing a claim for currency manipulation and collusion) had issued a breach of contract claim in a New York court against the insurer, contrary to the law and jurisdiction clause in the policy, which stated that any disputes would be determined in accordance with English law and by way of mediation or arbitration under the LCIA rules in London. The court ruled that, if the defendant is an insured, then he is bound by the law and jurisdiction clause in the policy.

Background

In 2012, the claimant insurer had written a Directors and Officers Liability and Company Reimbursement Policy issued to the policyholder, a bank (“the Policy”). The defendant, a resident of New York state, had formerly worked for the bank in New York. The defendant claimed to be an insured under the terms of the Policy, but the insurer disputed this.

In February 2018, a lawsuit was filed against the defendant in the United States of America alleging manipulation of foreign exchange currency benchmarks and collusion (“the Enforcement Action”). The defendant denied the allegations and claimed to have spent, and continued to spend, “substantial sums” defending the action. The defendant made a claim under the Policy for these costs but cover was declined by the insurer on the basis that the defendant was not an insured under the Policy.

In December 2018, the defendant filed proceedings in a District Court in New York against the insurer (“the NY Proceedings”). The NY Proceedings claimed:- (i) damages for alleged breach of contract in the amounts of loss said to be compensable under the Policy; (ii) damages for breach of an alleged implied covenant of good faith and fair dealing in the Policy; and (iii) a declaration that cover is available under the Policy for the defendant’s costs associated with the Enforcement Action.

The insurer disputed the defendant’s jurisdiction to bring the NY Proceedings in New York on the basis of the law and jurisdiction clause contained within the Policy, which stated:-

“The construction, validity and operation of this policy shall be determined in accordance with English law and in accordance with the English text as it appears in this policy.… any dispute or difference which may arise under or in connection with this policy… shall be submitted to one of the following dispute resolution procedures at the election of any of the parties to that dispute or difference: (i) Non-binding mediation; (ii) Binding arbitration under the then prevailing Rules of the London Court of International Arbitration (LCIA)... The seat of arbitration shall be London, England”.

The insurer issued proceedings in London seeking an anti-suit injunction preventing the defendant from pursuing the NY Proceedings (“the Anti-Suit Proceedings”).

The defendant elected not to attend the anti-suit hearing nor take any part in the Anti-Suit Proceedings, despite (the court found) having every opportunity to do so. In the defendant’s absence, the court considered various arguments which had been made in correspondence by the defendant’s New York lawyers such as lack of jurisdiction of the English Courts, undue delay by the insurer, ineffective service, that the preliminary injunction had been obtained without proper notice, and that the dispute resolution clause did not bind the defendant because he was not party to the negotiation of Policy terms. Mr Justice Popplewell did not consider that any of the arguments raised had merit.

Decision

In his judgment, Popplewell J expressed that the relevant law is not controversial - “where parties have entered into an agreement to arbitrate disputes in a particular forum, this gives rise to a negative obligation not to commence proceedings in any other forum in relation to matters which are within the scope of the arbitration agreement”. He went on to say that this negative obligation is as fundamental as any positive obligation under the agreement and is therefore enforceable by the other party by injunction, as its legal right, and “the English courts have a longstanding and well recognised jurisdiction to enforce this right by restraining foreign proceedings when brought or threatened to be brought in violation of an arbitration agreement”.

As in the Ust-Kamenogorsk Hydropower Plant JSC v AES Kamenogorsk Hydropower Plant LLP case, the insurer’s right was enforceable irrespective of whether it intended to commence arbitral proceedings. Further, the court has jurisdiction to grant an anti-suit injunction even where the insurer denies any contract between it and the defendant (i.e. because the defendant was not accepted to be an insured) (The Yusuf Cepnioglu, and Qingdao Huiquan Shipping Co. v Shanghai Dong He Xin Industry Group Co. Ltd).

Popplewell J went on to highlight that all three causes of action advanced in the NY Proceedings were advanced on contractual reliance grounds and the defendant could not seek to take the benefit of the Policy “without the burden of the obligation to comply with the dispute resolution clause”.

Popplewell J considered whether damages would be an appropriate remedy for the insurer instead of granting an injunction but concluded that it would not because, if the defendant was not restrained from pursuing the NY Proceedings, the insurer would be forced to continue to defend them, at substantial inconvenience and expense and in deprivation of its contractual rights to have all disputes determined in London. Further, there was no obvious hardship to the defendant to pursue his claim against the insurer in London.

In summary, despite the defendant’s New York counsel seeking to portray the insurer’s action as a “sneaky” attempt to deny the defendant the coverage “he so desperately needs”, the court’s view was that the insurer had acted properly. Either the defendant was an insured, in which case he was bound by the Policy terms or, he was not an insured and therefore had no claim. He could not “be an insured who has a claim under the [Policy] but who is not bound by the dispute resolution provision”.

The court granted, (i) an injunction restraining the defendant from pursuing the NY Proceedings; (ii) an order in a mandatory form requiring the defendant to take such steps available to discontinue and withdraw from the NY Proceedings; and (iii) restraining the defendant from commencing proceedings anywhere else, other than as per the Policy terms.

Comment

Whilst this case does not create “new law”, it is a welcome judgment for D&O insurers and goes some way to allaying concerns regarding insureds seeking to ignore law and jurisdiction clauses in policies. This is particularly following a high profile 2016 judgment involving FIFA by a New York judge who determined that, notwithstanding a provision in a D&O insurance policy requiring insurance disputes to be litigated in a Swiss forum, he had the authority to enter a preliminary injunction against insurers requiring them to advance defence costs.

Although the defendant will be bound by the anti-suit injunction and be in contempt of Court if he breaches it, it does not necessarily follow that the injunction will provide a legal basis to stay the US claim if the defendant declines to abide by it. It will be interesting to see how this case develops and what impact the anti-suit injunction actually has on the conduct of the US claim commenced against the insurer.

Further Reading

Eduardo Li v Certain Underwriters at Lloyd’s London, AXIS Specialty Europe SE [2016] 15 CV 06099 (RJD) (JO) United States District Court Eastern District of New York

Ust-Kamenogorsk Hydropower Plant JSC v AES Kamenogorsk Hydropower Plant LLP [2013] 1 WLR 1889.

The Yusuf Cepnioglu [2016] EWCA Civ 386.

Qingdao Huiquan Shipping Co. v Shanghai Dong He Xin Industry Group Co. Ltd (SDHX) [2018] EWHC 3009 (Comm).