The Federal Mogul Asbestos Personal Injury Trust v Federal-Mogul Ltd & Ors

A non-party to a contract will generally lack standing to obtain declarations concerning the contractual rights of parties who are not themselves in dispute, subject to the court’s discretion and exceptional circumstances. An insurer’s contractual claims-handling discretion may be wide, but it remains constrained where the contract requires it to be exercised in a businesslike manner, in good faith and with regard to specified legitimate interests. That obligation may involve an objective assessment reviewable by the court. It does not, however, require regard to the interests of persons outside the contract. After insolvency, the contractual transfer of claims-handling control must be given effect. A contractual payment mechanism involving set-off or a payment funded through the trust may constitute payment in fact and payment as cash for the purposes of the policy.

The claimant Trust was established under a US bankruptcy reorganisation plan to administer asbestos personal injury claims against Federal-Mogul entities. The defendants included the insured company, its captive insurer and reinsurers under an asbestos liability policy and reinsurance agreement.

The Trust sought declarations concerning its standing, the scope of the reinsurers’ claims-handling obligations after insolvency, the use of trust distribution procedures, payment mechanisms under the reorganisation plan, and limitation issues. The principal dispute concerned whether the reinsurers were required to handle and settle claims by reference to the Trust’s procedures rather than requiring proof in the US tort system.

1. The Trust generally lacked standing to seek declarations concerning the rights and obligations of parties to the ALP and Reinsurance. The modern law permits declaratory relief in a wider range of cases, but the present case was materially different from cases involving contracting parties who jointly sought resolution of a dispute. Here, the contractual parties were not in relevant dispute, the Trust’s interests were opposed to those of the contractual parties, and section III.12 of the ALP supported refusing relief.

2. The Power of Attorney did not authorise the Trust to seek the declarations concerning claims handling. Its purpose was to pursue or recover Hercules Recoveries, not to obtain declarations determining the scope of the contractual claims-handling obligations. Construing it otherwise would be inconsistent with section III.12 of the ALP.

3. Section III.4f transferred full, exclusive and absolute authority, discretion and control over administration, defence and disposition of Asbestos Claims to Curzon and, through the Reinsurance, to the reinsurers after the Insolvency Event. Sections III.4c and III.4d did not continue to apply directly or inform section III.4f after insolvency.

4. The transferred discretion was nevertheless qualified by the requirement that it be exercised in a businesslike manner, in the spirit of good faith and fair dealing, having regard to the legitimate interests of the parties to the ALP and the reinsurers. This was capable of objective review. The obligation concerned both the manner and, to some extent, the substance of the decision. The legitimate interests did not include the Trust or asbestos claimants.

5. The Trust’s distribution procedures did not constitute the contractual yardstick for claims handling. They were designed principally to distribute limited trust funds and did not establish liability in the US tort system. The reinsurers were entitled, subject to the contractual obligations, to require claims to be proved in that system. The proposed declarations on claims handling were therefore refused in any event.

6. The Plummer settlement, effected by set-off against the Stock Repayment Obligation, and the Robinette payment mechanism, involving payment by the Trust to T&N and payment by T&N to the Trust, constituted payment in fact and payment as cash for the purposes of the ALP and its definition of Ultimate Net Loss. Declarations were granted in principle, subject to modification of wording.

7. The declaration concerning limitation issues was hypothetical and convoluted and was refused. Declarations concerning other payment methods were also not determined because the issue was hypothetical and became moot.

First-instance decision. No prior appellate decision is stated in the judgment.