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A nail in the coffin for Exclusive Jurisdiction clauses?

By Sarah Coutts and Will Allison (DAC Beachcroft).
4 October 2016 

Arising out of the ongoing FIFA corruption scandal comes the recent US judgment in Eduardo Li v Certain Underwriters at Lloyd's, London, Axis Speciality Europe SE [2016] which has particular relevance for D&O insurers as it highlights the problems that can arise with cross-border policy implementation.

Background

Eduardo Li, a Costa Rican FIFA official, was one of the 14 officials indicted in May 2015 following the dawn raid by Swiss authorities in Zurich. Li, who had held multiple positions in the Costa Rican FA and the pan-American Football confederation CONCACAF, and was a member-elect of FIFA's Executive Committee, faced extradition to the US to face racketeering and wire fraud charges in the criminal case US v Webb et al.

In July 2015, Li made a claim for his costs under a D&O insurance policy purchased for him by FIFA. The request was denied by the D&O insurers for a number of reasons (the policy, for example, contained a provision that excluded coverage for RICO related charges), so Mr Li – after exhausting available funds from a similar CONCACAF policy – sought a preliminary injunction against insurers in a US district court that would direct them to reimburse and advance his criminal defence costs.

Insurers asked that the case be dismissed on the grounds of: (i) the primary policy's exclusive jurisdiction clause which stated that 'for any disputes arising under this insurance relationship, a Swiss place of Jurisdiction and the application of Swiss Law shall be deemed to be agreed''; and (ii) the principle of forum non conveniens, given that insurers were based primarily in Switzerland and the UK.

The Court's Findings

In considering the motion to dismiss, the court firstly had to determine whether the parties were subject to the jurisdiction clause.

In accordance with the choice of law in the policy, the court had to apply Swiss law in order to determine the applicability of the jurisdiction clause. After some disagreement between the parties as to which body of Swiss law applied, the court ultimately applied the Lugano Convention.

Li's position was that the jurisdiction clause did not apply to him as he did not subscribe specifically to it. He relied on the Convention and ECJ case law which stated: "a jurisdiction clause…. cannot be relied on against a beneficiary under that contract who has not expressly subscribed to that clause and is domiciled in a Contracting State other than that of the policy holder and insurer."

Based on the Convention and the case law, the judge concluded that Li was not bound by the clause because he did not subscribe to it.

The judge also rejected the claim of forum non conveniens, saying that insurers had not presented enough evidence showing the choice of forum to be "oppressive or vexatious". Whereas Li was entitled to "substantial deference" because he faced serious charges, which threatened grave consequences for him.

Accordingly, insurers' motion to dismiss was rejected and Mr Li's injunction was subsequently granted, meaning insurers were obliged to cover his legal costs.

Comment

As multi-jurisdictional claims become more commonplace, this finding raises an interesting issue of which court parties can commit their commercial disputes to.

In theory, as England is a contracting party to the Lugano Convention, and the English courts recognise that international law takes precedence over national law, a similar decision could be reached in an English court.

While it is notable that key to the US decision was the judge's finding that Li was not a "subscriber" to the D&O policy but a "beneficiary" of it, in our view, English judges would not identify D&Os as "beneficiaries" to a D&O policy; they would be "Insureds" as the policy is several, so each individual has his/her own policy. As a result, this may preclude a similar finding. In contrast, however, as an E&O policy is entered into by an organisation for the benefit of its directors and officers, those individuals could be considered beneficiaries of the policy who had not "agreed" to the policy's terms and hence not bound to the jurisdiction clause.

Accordingly, while insurers may have previously been confident that their jurisdiction clauses would secure their chosen and preferred jurisdictions for certain disputes, this case has shown that the clauses can be ruled ineffective.