Wai Yue Loh Partner and Chief Representative of Beijing Office, Beijing; and Partner, Hong Kong
Direct rights of action - P&I Club succeeds in upholding anti-suit injunction
Shipowners' Mutual Protection And Indemnity Association (Luxembourg) v. Containerships Denizcilik Nakliyat Ve Ticaret AS (Yusuf Cepnioglu) EWHC 258 (Comm)
The English Court has upheld an anti-suit injunction preventing a party from pursuing direct rights of action against a P&I Club (“the Club”) in Turkey. The Court protected the Club’s contractual right to English arbitration in priority to a direct right conferred by Turkish law.
This important decision brings the relationship between English and foreign courts into focus again, and raises questions regarding the effect of European regulations on English conflict of laws principles.
The background facts
The Yusuf Cepnioglu went aground off Mykonos in March 2014. The vessel was a total loss, and cargo claims were intimated against both the Turkish Charterers (the “Charterers”) and the Turkish Owners (the “Owners”).
The Charterers commenced arbitration in London against the Owners under the charterparty. The Charterers also commenced proceedings against the Club in Turkey and sought security for their claims. The Charterers relied on a Turkish statute which gave them a right to claim losses directly from the Owners’ P&I insurer, the Club.
The Club sought an order from the English Court continuing an existing anti-suit injunction that restrained the Charterers from continuing proceedings in Turkey against the Club. 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 have any claims brought against it by arbitration in London.
The choice of forum was of far-reaching consequence for the Club. In an English arbitration, the Club would be entitled to rely on a “pay to be paid” clause in the Club cover as a complete defence to the Charterers’ direct claim; the liability in question had not yet been discharged by the insured, the Owners. However, if the Charterers were allowed to pursue the Turkish proceedings, it was “more likely than not” as a matter of Turkish law that the “pay to be paid” clause would not provide a defence to the Club to defeat the direct action claim by the Charterers.
The Commercial Court decision
Characterisation of the direct right
The Court had to decide whether, under English law, the right of direct action under Turkish law was properly characterised as a claim to enforce the contract between the Club and the Owners, or alternatively a claim to enforce an independent right of recovery against the Club.
The Court followed the approach and reasoning in the 2014 case, The London Steam Ship Owners Mutual Insurance Association v The Kingdom of Spain and another (Prestige No.2) and concluded that the right of direct action was a right to enforce the contract between the Club and the Owners, rather than an independent right of recovery. The Charterers’ direct right of action was inextricably linked to the underlying insurance contract between the Club and the Owners: the Club’s liability was dependent on the loss being an insured peril, and was also prescribed by the limits under that contract.
It followed that since the Charterers were seeking to enforce a contractual right which was itself subject to a law and arbitration clause, the Charterers were required to respect the law and arbitration clause in the contract. If the Charterers decided to exercise their right of direct action, they were bound to refer the disputes to English law arbitration.
The anti-suit injunction
The Court then had to decide whether to uphold the Owners’ application to continue the anti-suit injunction. An injunction could only properly be granted if the proceedings in Turkey were deemed to be “vexatious and oppressive” from the Club’s perspective.
The Charterers argued that there was nothing “vexatious and oppressive” in simply proceeding in Turkey under a Turkish statute which gave them the right to do so.
However, the Court held that allowing the Turkish proceedings would deprive the Club of its contractual right to have claims brought against it arbitrated in London. There was also a real risk that the Turkish proceedings would prevent the Club from being able to rely upon the “pay to be paid clause” in its contract with Owners.
Both of those interferences with the Club's contractual rights meant that, from the Club's standpoint, the Turkish proceedings were in fact “vexatious and oppressive”. The Court accordingly concluded that the anti-suit injunction should be continued, preventing the Charterers from continuing the proceedings in Turkey.
The Court decided to give priority to the Club's contractual rights in precedence to the right of direct action conferred upon the Charterers by Turkish law. Turkish legislation was not recognised as capable of affecting the parties' rights and obligations under English law.
The decision is significant, at least when the relevant parallel proceedings are in non-EU jurisdictions. A similar decision so far as the grant of an anti-suit injunction is concerned would not have been possible had the relevant foreign law been that of another EU state. Following the decision of the ECJ in Allianz SpA v. West Tankers Inc (Front Comor), an English court would have been bound by rules of comity and unable to grant an anti-suit injunction.
There is developing European jurisprudence in this area. The impact of the newly-recast Brussels regulations on the relationship between courts of different EU states, particularly in light of the Rome II Regulation regulating the applicable law governing direct rights of action against liability insurers, remains to be seen.
The Charterers have been given leave to appeal, and all eyes now turn to the Court of Appeal to provide further guidance on this issue.
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