Will the New Act Allow Direct Actions against P&I Clubs?

Antonio Quirós de Sas.

21/03/2007 International Law Office

The Commercial Code, which is at the core of Spanish shipping law, was published and entered into force 120 years ago.

Several statutes and international conventions have since been passed or ratified in an attempt to keep pace with developments in the maritime sector. In spite of this, shipping law is outdated in many areas and the enactment of various statutes and the ratification of several international conventions have resulted in disjointed legislation. This hinders the task of lawyers and judges who are sometimes required to assess whether to apply national law or an international convention to a particular case.

In order to update the law and consolidate the shipping regulations into a single statute, the General Codification Commission drafted a new General Maritime Navigation Act. The initial draft of the act was published by the Ministry of Justice in November 2004. After obtaining the opinion of the relevant professional associations and organizations, the ministry published a second draft on July 25 2006. On October 18 2006 the General Council of the Judiciary issued a report addressing certain aspects of the draft. Finally, on November 7 2006 Parliament ordered the publication of a final draft for parliamentary discussion.

During the legislative process (which is still ongoing), several provisions of the draft act were substantially amended (eg, the regime under which direct actions may be brought by third parties against liability insurers in general, and protection and indemnity (P&I) clubs in particular). Under the initial draft, affected third parties could claim directly against liability insurers and contractual provisions whose purpose was to evade the regime were deemed void. While making no express reference to P&I insurance, the introduction of the draft mentioned the contractual provisions that "are unfortunately often found in certain maritime liability insurance agreements", which undoubtedly referred to the 'pay to be paid' rule.

The second draft took a completely different approach to P&I. First, it upheld the regime of general liability insurance established by the initial draft. Second, it introduced a new provision under which the possibility to bring a direct action against a P&I club was prohibited where the insurance contract stated that the insured party responsible for the damage suffered by the third party had to pay compensation before claiming reimbursement from the insurer - in other words, where the contract included a 'pay to be paid' clause. The introduction and the statement of reasons of the draft justified the special P&I regime on the basis that P&I insurance is frequently linked to international insurers (P&I clubs) and insurance contracts subject to English law (which include the 'pay to be paid' rule).

The final draft adopted the position of the initial draft and removed the prohibition of direct actions against P&I insurers; however, unlike the initial draft, the final draft expressly referred to P&I insurance. The reason for this radical change may be found in the report of the General Council of the Judiciary. According to the report, due to the widespread use of P&I insurance to cover the liability of commercial vessels, the prohibition of direct actions against P&I insurers would have far-reaching consequences, as P&I insurers would be released from claims brought by third parties (whose only remedy would be to take action against the shipowner).

According to the report, the special legal regime of P&I insurance is unjustified, as such insurance is a particular type of liability insurance and, in accordance with the law, constitutes a right of third parties to claim against liability insurers. Therefore, this right may not be waived by contractual arrangement between the insurer and the insured. Finally, according to the report, the prohibition of direct actions should be assessed carefully, as such prohibition may significantly affect the chances of obtaining adequate compensation for losses suffered by individuals or public authorities as a consequence of shipping accidents.

The final position of the act on direct actions against P&I clubs and liability insurers remains unclear. However, should the possibility of bringing direct actions be approved, it will be interesting to see the reaction of the Spanish courts when such action is brought against an insurer which has contractually excluded this possibility under the law governing the insurance contract at issue (eg, English law).