Arbitration clause not binding on the employer's insurer
An employer's liability insurer covered damage to a neighbouring property and subsequently demanded payment from the employer's adviser. Despite the arbitration clause between the employer and the adviser, the case could be brought before the district court because the claim was based on a breach of the law and rules on non-contractual damages.
An employer had hired a consulting engineer in connection with a building project. In the consultancy agreement, it was agreed that any disputes were to be decided in accordance with the General Conditions for Consulting Services (ABR 89).
The General Conditions contain an arbitration clause which is generally binding on the parties to the agreement. Clause 9.0.1 of the General Conditions thus provides that any disputes arising in connection with the consulting services must be decided by arbitration with final and binding effect
The construction work caused subsidence damage to the neighbouring property. The employer admitted liability to the owner of the neighbouring property, and the employer's insurer paid compensation to the neighbour. Subsequently, the insurer sued the adviser to recover the compensation paid ( i.e. recourse). The insurer chose to ignore the arbitration clause in the consultancy agreement and brought legal action before the district court.
The adviser believed that the dispute was to be settled by arbitration because of the arbitration clause in the General Conditions and that the district court was consequently to dismiss the case. However, the insurer was of the opinion that the specific claim was not subject to the arbitration clause. In support of this claim, the insurer submitted that the claim arose out of the Danish general law of non-contractual damages and that the insurer was not a party to the consultancy agreement with the employer.
The district court dismissed the case, but the High Court remitted the case to the district court
According to the district court, it was vital to determine whether the adviser had acted negligently in relation to the employer with respect to the risk of subsidence damage to the neighbouring property. As the insurance covered the employer's liability to the owner of the neighbouring property, the district court held that the insurer's claim derived from the employer and not from the owner of the neighbouring property. For that reason, the district court found that the insurer was subrogated to the employer's claim against the adviser. On these grounds, the district court concluded that the arbitration clause between the employer and the adviser was also binding on the insurer. Consequently, the district court dismissed the case.
The insurer appealed against the judgment, and the case was to be heard by the High Court. The High Court attached weight to the wording in the writ of summons where the insurer had stated that the liability of the adviser was based on a breach of the law and the law of non-contractual damages. According to the High Court, the insurer's right of subrogation and claim were consequently not based on the consultancy agreement itself. Against this background, the High Court found that the insurer was not bound by the arbitration clause in the consultancy agreement. The High Court consequently remitted the case for rehearing by the district court.
The decision shows that even if an arbitration clause is expressly agreed upon, legal disputes may nevertheless be decided by the ordinary courts of law in special cases. This applies e.g. to claims which are not based on the agreement between the parties. Such cases deal with non-contractual damages which are naturally not covered by the provisions of the agreement. The decisive factor when determining where to bring legal action is whether the claim arises out of the agreement or the law of non-contractual damages. The distinction is not always clear, which is illustrated by the disagreement between the district court and the High Court in this matter. The basis for the claim is decisive for determining whether or not the case is subject to the arbitration agreement. Consequently, IUNO recommends you to pay special attention to this question when an arbitration clause is in play.
However, the Danish Appeals Permission Board has given leave to appeal to the Supreme Court. We will follow the case and revert with an update when the Supreme Court has rendered its judgment.
[High Court judgment of 14 January 2013, case no. B-2021-12]
Receive our newsletter
15 September 2021
The Danish entrepreneurial company type will expire – learn how you can convert yours