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Direct Actions Against Insurers by Third Parties: The Contract Takes Priority - Ishfaq Ahmed

Introduction

The Yusuf Cepnioglu concerned another case of a foreign statute giving the victim the right to sue the wrongdoer’s insurer directly without needing to first sue the insured. Unless such a right exists then the victim cannot sue the insurer directly since he is not a party to the insurance contract. Such a need usually arises where the insured has become insolvent and the third party seeks to obtain the benefit of the insurance rather than compete with other creditors for what may be limited or non-existent assets. In English law the relevant legislation is currently contained in the Third Parties (Rights Against Insurers) Act 1930 (to be replaced by the Third Parties (Rights Against Insurers) Act 2010). 

Facts

On 8th March 2014 the vessel YUSUF CEPNIOGLU (“the vessel”), operating on a liner service between Turkey and North Africa, 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 carrying 207 containers. The cargo was being carried pursuant to 74 bills of lading issued by the time charterers. The proper law and jurisdiction of the bills was that of Turkey. Cargo claims had been notified to both the owner and charterers of the vessel who were both Turkish companies. The charterers commenced arbitration proceedings in London against the owner pursuant to the time charter. 

The vessel’s owner was a member of the claimant P&I Association (“the Club”). The owner therefore had insurance against third party claims pursuant to its Club cover. Those terms provided for English law and London arbitration, for the Club only to be liable if the owner had paid the claims against it (“the pay to be paid” clause) and, further, that an arbitration award was a condition precedent to the Club’s liability. 

In May 2014 the defendant charterers commenced proceedings in Turkey in which they sought to attach the Club’s assets in Turkey up to a value of US$13.5m as security for a claim pursuant to the Turkish Insurance Contract Law which gave the charterers a right of direct action against the Club. The Club sought an anti-suit injunction in England in respect of these proceedings and the intended “substantive” proceedings in support of the right of direct action. This was granted at first instance and the charterers then appealed to the Court of Appeal (“CA”). 

The decision

The CA first examined the proper characterisation of the claim and decided that this had to be done by looking at whether the charterers’ right to sue the Club direct was essentially a contractual right (in which case it would be governed by English law as the proper law of the contract) or an independent right (in which case it would be governed by Turkish law). Relying on the judge’s findings of fact on Turkish law the CA agreed with the judge that the essential content of the right appeared to be reflected in the contract between the Club and the member. The factors that supported this were, for example, that under the Turkish law the loss had to be in respect of insured perils, within the policy terms, and contractual time and cover limits applied as well as the law and arbitration clause (the latter subject to a possible public order exception). The victim’s right in Turkish law was to a large extent circumscribed by these contractual provisions between the Club and its member. The other factors such as the unenforceability of the “pay to be paid” clause in Turkish law and the judge’s cautious finding that the Club “may” remain liable to the victim, even after its liability to the member had been discharged, were not enough to change this. The charterers were therefore exercising essentially a contractual right and therefore were bound to accept that their claim was governed by English law and must be arbitrated in London. 

The Turkish proceedings were in contravention of this obligation. The CA went on to hold that the Club was entitled to an anti-suit injunction. In doing so, the CA decided that the test to be applied was that set out in Aggeliki Charis Compania Maritima SA v Pagnan SpA (The Angelic Grace) [1995] 1 Lloyd’s Rep. 87, which applied by parity of reasoning, the third party time charterers being obliged to comply with the arbitration clause even though they were not a party to the arbitration agreement. Hence, an injunction would be granted to restrain the foreign proceedings, unless there was good reason not to grant it. There was no need for the Club to show vexatious or oppressive conduct as contended by the charterers and the CA refused to follow The Hari Bhum (No. 1) [2005] 1 Lloyd’s Rep. 67 instead preferring DVA v Voest Alpine (The Jay Bola) [1997] 2 Lloyd’s Rep 279. Since there was no good reason why an injunction should not be granted and no question of delay or any inequitable conduct on the part of the Club, an anti-suit injunction would be maintained as that was the only way that the charterers could be required to recognise the Club’s right to have the dispute referred to arbitration. 

Comment

Regarding the proper characterisation of the claim, the CA preferred the factors relating to the contractual provisions, which limited the victim’s right in accordance with the terms of the contract, and used these to define the essential content of the right. In doing so, the CA’s judgment effectively determined the claim since the claim would then be determined by English law, under which the “pay to be paid” rule provides a complete defence to the insurers if liability has not been discharged by the insured. This was despite the fact that no such defence appeared to exist under the Turkish law being invoked by the charterers. The contrary argument is that the victim is suing precisely because the insured has not and will not pay. Therefore, to regard the relevance of the Turkish exclusion of the “pay to be paid” clause as being of only a “limited extent” may be controversial in some circles. Some may indeed argue that these factors should define the characterisation of the right. However, this argument was rejected by the CA and the outcome in this case is defensible on the basis that the Club has entered an insurance contract governed by English law and therefore its rights should be determined in accordance with that, including the “pay to be paid” provision, thus giving priority to contractual rights over the right to direct action. The case thus confirms previous case law that where the foreign statute follows the contractual provisions then, although much will depend on the terms of the statute, English Courts are likely to characterise the claim as essentially contractual and thus enforce any English law and jurisdiction/arbitration clause.  

In addition, the CA has clarified that in such cases the relevant test for grant of an anti-suit injunction is that in The Angelic Grace and that an injunction will therefore be granted unless there is a good reason not to do so. The fact that the victim is not a party to the insurance contract which is the subject of the direct action does not mean that the test to be applied is that of whether the foreign proceedings are vexatious and/or oppressive. Therefore, in such cases, the courts will grant injunctions on the more readily provable basis that such injunctions will be granted to protect a contractual right. 

Ishfaq Ahmed

03/11/2016
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