Wai Yue Loh Partner and Chief Representative of Beijing Office, Beijing, Partner, Hong Kong and Joint Managing Director, Singapore
Court of Appeal upholds anti-suit injunction to deny right of direct action against Club
Ship-owners' Mutual Protection and Indemnity Association (Luxembourg) v. Containerships Denizcilik Nakliyat Ve Ticaret AS (Yusuf Cepnioglu)  EWCA Civ 316
The Court of Appeal has upheld an anti-suit injunction preventing cargo interests from pursuing a direct right of action against a P&I Club (“the Club”).
In dismissing the appeal, the Court reinforced its commitment to protecting the Club’s contractual right to London arbitration, in priority to a direct right conferred by Turkish law.
The background facts
The Yusuf Cepnioglu went aground off Mykonos in March 2014. The vessel was a total loss and cargo claims were brought against both the Turkish Charterers (the “Charterers”) and the Turkish Owners (the “Owners”).
The Charterers commenced arbitration in London against the Owners but, given concerns about the Owners’ financial status, the Charterers also relied on a Turkish statute that gave them a right to claim losses directly from the Owners’ P&I Club to commence proceedings against the Club in the Turkish courts.
The Club argued that because the insurance contract between the Club and the Owners contained an English law and arbitration clause, the Club was entitled to rely on its right to face any claims brought by the Charterers in London arbitration. The Club, therefore, sought an order from the English Court to continue an existing anti-suit injunction that restrained the Charterers from pursuing proceedings in Turkey against the Club.
The choice of forum was significant because, in a London arbitration, the Club would be entitled to rely on a “pay to be paid” clause in the Club cover. Since the Owners had not paid any sums to the Charterers, this clause would provide the Club with a complete defense to the Charterers’ direct claim. The Turkish law evidence suggested that this defense would not have assisted the Club in the Turkish proceedings.
The Commercial Court decision
At first instance, the Commercial Court upheld the anti-suit injunction. Even though the Charterers had not made a promise to the Club to be bound by the arbitration agreement, the proceedings in Turkey were “vexatious and oppressive” from the Club’s perspective, and the anti-suit injunction was therefore upheld. The Charterers could not pursue the Turkish proceedings and were obliged to respect the arbitration agreement.
The Court of Appeal decision
On appeal, the Court of Appeal reached the same conclusion as the Commercial Court, but took the opportunity to clarify the correct approach to two important legal issues regarding granting anti-suit injunctions.
First, the Court affirmed the strict view that English law will take in properly characterizing a foreign right of direct action. The Court emphasized the correctness of the test laid out in The London Steam Ship Owners Mutual Insurance Association v. The Kingdom of Spain and another (Prestige No.2) and applied in the Commercial Court decision to determine the nature of the right of direct action.
In this case, the Court held that the substance of the right of direct action was a right to enforce the underlying English law contract between the Club and the Owners, rather than an independent right of recovery against the Club governed by Turkish law.
The Charterers were, in essence, exercising a contractual right against the Club, and English law would apply to the claim as a matter of conflict of laws. The Charterers were obliged to respect the terms of that contract, and the proposed Turkish proceedings would be a contravention of the arbitration agreement in the contract.
Second, the Court clarified the reasoning justifying the granting of the anti-suit injunction and restraining the Charterers from continuing the Turkish proceedings. In doing so, the Court of Appeal acknowledged the difficulty created by two previous conflicting Court of Appeal decisions on this point, but helpfully settled this point of law going forward.
The English courts may grant an anti-suit injunction restraining a party from pursuing foreign proceedings if those proceedings are either a breach of the arbitration agreement, or, alternatively, if those foreign proceedings are “vexatious and oppressive” to a party.
At first instance, the Commercial Court relied on the latter ground to uphold the anti-suit injunction, but concluded that there was no breach of contract because the Charterers were not a party to the contract that contained the arbitration agreement.
However, the Court of Appeal has held that an anti-suit injunction could be granted under the first test also – it was irrelevant that the Charterers were not a party to the underlying contract, when in fact they were exercising a contractual right. Where a third party seeks to enforce rights that are subject to an English law arbitration agreement, there is a breach of the arbitration agreement and an anti-suit injunction should be granted unless there is a good reason for not doing so. It was not necessary to establish that the Turkish proceedings were vexatious and oppressive to the Club.
This decision is important because it re-affirms the English courts’ commitment to protecting parties’ English law rights. The Court of Appeal characterized the action brought under foreign statutes as being fundamentally linked to the underlying English law contract. The Court would, therefore, protect and fulfill the parties’ original agreement; Turkish legislation was not recognized as being capable of affecting the parties' rights and obligations under English law.
The decision will be welcomed by P&I Clubs and other insurers, who will seek to rely on this decision to try and obtain anti-suit injunctions to avoid having to face substantive claims in non-EU jurisdictions and to enforce their right to English law and arbitration.
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