Briefings

A victory for insurers: the YUSUF CEPNIOGLU, April 2016

Many jurisdictions around the world have legislation granting a victim the right to sue a defendant’s insurer directly and without first suing the insured. Such “direct action statutes” have been used in a number of recent cases to sue P&I clubs directly. The issue for clubs, and insurance companies generally, is not only that such claims potentially circumvent the choice of law and jurisdiction within the contract of insurance, but also that contractual defences, most notably the pay to be paid rule, can often be declared unenforceable by the local courts.

In Ship-owners’ Mutual Protection and Indemnity Association (Luxembourg) v Containerships Denizcilik Nakliyat Ve Ticaret AS¹, the Court of Appeal has clarified the test to be applied in determining whether a club must defend claims in the relevant foreign jurisdiction in which they are brought, or whether the club can rely upon the choice of law and jurisdiction within the club rules and seek an anti-suit injunction preventing any action from being prosecuted abroad.

Briefly, the facts of the case are as follows.

On 8 March 2014 the m/v YUSUF CEPNIOGLU (the Vessel) grounded on the Greek island of Mykonos. Salvage services were rendered but the Vessel was a total loss. At the time of the grounding the Vessel was laden with 207 containers. The cargo was being carried pursuant to 74 bills of lading issued by the charterers. Cargo claims were notified to both the owners and charterers in Turkey and elsewhere. The charterers commenced arbitration proceedings in London against the owners pursuant to the terms of the charterparty seeking, among others, an indemnity against liability to cargo interests, but were unable to obtain security directly from the owners.

In May 2014 the charterers commenced proceedings in Turkey directly against the club under Article 1478 of the Turkish Commercial Code. This provision provides:

“The victim may claim its loss up to the insured sum directly from the insurer provided that the claim is brought within the prescription period applicable to the insurance contract”.

The charterers also commenced “precautionary” proceedings in Turkey seeking security by attaching premia due to the club in the hands of brokers in the amount of US$13.5 million.

The club rules provide for, amongst others, English law and London arbitration and cover is subject to the pay to be paid rule. The club therefore sought and obtained on an ex-parte basis an anti-suit injunction against the charterers preventing the charterers from pursuing claims in Turkey. This was subsequently challenged by the charterers.

At first instance Mr Justice Teare found in favour of the club and maintained the anti-suit injunction. We reported on this decision in February 2015².

The charterers appealed to the Court of Appeal.

The Court of Appeal clarified that the first stage of the process is to determine what rights Article 1478 gave the charterers. Did the Article allow the charterers to stand in the shoes of the owners and adopt the owners’ contractual rights against the club, in which case the claim will be governed by English law/London Arbitration. Alternatively, did the Article grant an independent right of action, in which case it will be governed by Turkish law. This is the “characterisation” test recently confirmed in the PRESTIGE (No 2)³.

The Court of Appeal agreed with Mr Justice Teare and had no hesitation in determining that the claim by charterers is essentially contractual. On the evidence before the Court, there were a number of “indicia” which pointed to the right being contractual, including:

1. It is to the contract that one must look to determine the perils insured against.
2. Any claim is subject to the contractual limit contained in the club rules.
3. The liability must be due to an event occurring during the period of the contractual cover.
4. Any claim must be brought within the period required by the club’s contractual cover.

Once the claim is characterised as contractual, the second stage is to consider whether an anti-suit injunction should be granted to restrain the charterers from continuing the proceedings in Turkey. There are two ways in which an anti-suit injunction can be obtained:

1. Where a party acts in breach of an exclusive jurisdiction clause, an anti-suit injunction should be granted unless there is good reason for not doing so, per the ANGELIC GRACE⁴.
2. Where the foreign proceedings are vexatious and oppressive.

There are two conflicting Court of Appeal decisions as to which of the above routes is appropriate in relation to claims by third party “victims” where the claim is characterised as being contractual in nature: the HARI BHUM (No1)⁵ and the JAY BOLA⁶.

1. The HARI BHUM says that although the victim is bound by the arbitration clause within the contract of insurance, he is not actually a party to that contract and cannot therefore technically be in breach of the arbitration clause if he proceeds elsewhere. Thus on this reasoning, the insurer cannot get an anti-suit injunction under the ANGELIC GRACE principle and must therefore succeed on the second ground, namely that the foreign proceedings are vexatious and oppressive, if he is to obtain an injunction.
2. The JAY BOLA says that the insurer has a contractual right to have all disputes against him determined in accordance with the law and jurisdiction clause, and equity requires that this should be recognised. Thus an anti-suit injunction may be granted under the ANGELIC GRACE principle.

At first instance Mr Justice Teare felt bound to follow the HARI BHUM and held that the ANGELIC GRACE principle does not apply where the claimant is pursuing a claim under a direct action statute. However, he held that the Turkish proceedings were vexatious and oppressive on the basis that the effect would be to deprive the club of its right set out in the rules to have claims brought against it in arbitration in London. Further, there was a real risk that those proceedings would also prevent the club from being able to rely upon the pay to be paid clause in its contract with its member. He therefore granted the anti-suit injunction.

The Court of Appeal disagreed and held that the reasoning in the JAY BOLA is to be preferred because the claim is characterised as contractual and thus the club has the contractual right to insist that any claim brought against them pursuant to that contract must be brought in arbitration.

Charterers had objected that this offends principles of comity by undermining the public policy of Turkey. The Court of Appeal disagreed again. Parties are free to agree that disputes under a contract may be resolved by arbitration which necessarily involves giving up the right to proceed elsewhere. As set out above, Article 1478 of the Turkish Commercial Code grants the victim the right to enforce the contract of insurance, not an independent right. The victim must therefore accept what the legislation gives him, namely right to enforce a contract containing an obligation to arbitrate. Put simply, the action takes the benefits and burdens of the contract.

The court therefore found in favour of the club on all points, the appeal was dismissed and the anti-suit injunction was maintained. This is an important and helpful decision clarifying a previous inconsistency within the authorities and arguably makes it easier for clubs and insurance companies when facing foreign direct claims to seek anti-suit injunctions in support of English law and jurisdiction clauses within the contract of insurance.

Richard Strub and Paul Dean acted for the successful club in this matter.

For more information, please contact Richard Strub, Partner, on +44 (0)20 7264 8014 or richard.strub@hfw.com, or Paul Dean, Partner, on +44 (0)20 7264 8363 or paul.dean@hfw.com, or your usual contact at HFW.

Footnotes

1. [2016] EWCA Civ 386
2. http://www.hfw.com/downloads/HFW-Direct-rights-of-action-against-P-and-I-clubs-February%202015.pdf
3. [2015] 1 Lloyd's Rep 33 (CA)
4. [1995] 1 Lloyd's Rep 87
5. [2005] 1 All ER (Comm) 715
6. [1997] 2 Lloyd's Rep 279 (CA)