On Wednesday 20 April 2016 the Court of Appeal (Moore-Bick, Longmore and Macfarlane LJJ) handed down judgment in Shipowners’ Mutual Protection and Indemnity Association (Luxembourg) v Containerships Denizcilik Nakliyat Ve Ticaret AS (The “Yusuf Cepnioglu”)  EWCA Civ 386.
Led by David Lewis QC also at 20 Essex Street, I appeared for the appellant charterers (the “Charterers”) against whom an anti-suit injunction had been ordered, first by Cooke J (ex parte) and then maintained by Teare J at the return date ( EWHC 258 (Comm),  1 All ER (Comm) 966).
The decision gives a clear signal that the English courts will fiercely protect against the infringement of a party’s English law rights – even to the detriment of comity (which the court held was not a relevant consideration). Thus, recognising its two previous decisions in The Hari Bhum  1 All ER Comm (715) and The Jay Bola  2 Lloyd’s Rep 279 were irreconcilable, the Court preferred the latter.
The case also further delineates the approach that should be taken to characterisation of a foreign right of direct action (previously recently addressed in The Prestige  EWCA Civ 333,  2 Lloyd’s Rep 33 – in which 20 Essex Street’s Christopher Hancock QC and Charlotte Tan appeared).
For a longer note on the case than appears here, please see the Bulletin I wrote with David Lewis.
In 2014 the m/v YUSUF CEPNIOGLU (the “Vessel”), which at the time had been chartered by Charterers, grounded off the coast Mykonos. It was a total loss. Charterers suffered substantial cargo claims against them amounting to some US$13m.
Owners of the Vessel effectively dropped out of the picture leaving Charterers no direct recourse against them. Instead, Charterers (being a Turkish company) decided to take advantage of a direct action statute in Turkey that allowed them to seek an indemnity for their losses directly from owners’ insurers, viz. the claimant P&I club (the “Club”). Charterers’ direct action proceedings in Turkey are referred to as the “Turkish Proceedings”.
Direct action statutes effectively allow a victim (here, Charterers) to stand in the shoes of the insured (here, owners) and claim directly against an insurer under the relevant insurance policy between the insured and the insurer (to which the victim would otherwise not be a party, and hence have no rights under). Such statutes are an exercise in “victim protection”.
The Club’s insurance contract with Owners contained a “pay to be paid” clause, which negated the need for the Club to pay out under the policy to owners unless they had first paid out to Charterers. It also contained an English law and London arbitration clause. Importantly, whilst the pay to be paid rule would be upheld under English law in London arbitration, the Turkish law evidence was that the pay to be paid rule would not be upheld in the Turkish Proceedings.
Because Owners had not paid any sums out to Charterers after the casualty, the Club took the view, in reliance on the pay to be paid rule, that they had no obligation to pay out any sums to Charterers in a direct action if it was adjudicated in London arbitration and subject to English law. That may well not be the case, however, if the dispute was litigated in Turkey.
The Club therefore argued that the Turkish Proceedings had been brought in breach of the arbitration agreement in their insurance contract with owners. They argued that if Charterers wanted to take the benefit of the insurance contract via a direct action, then the only forum to do so was London arbitration.
The Club therefore obtained an anti-suit injunction in relation to the Turkish Proceedings. In the Commercial Court, Teare J declined to set-aside the anti-suit injunction but granted Charterers permission to appeal.
The legal issues in the Court of Appeal
The first key issue was termed “characterisation”. The first step the English courts take in a direct action statute case is to characterise, on the basis of English conflict of laws rules, whether the cause of action under a particular foreign direct action statute is: (i) enforcement of the underlying insurance contract between the insured and insurer; or (ii) an entirely independent right of action between the victim and insurer, essentially divorced from the insurance contract.
Where the Court decides that the foreign statute falls into category (ii), there is no basis to argue that the jurisdiction clause in the insurance contract should apply. There is thus no basis for the English Court to intervene and restrain the foreign proceedings.
If, however, the statute falls into category (i), then prima facie the jurisdiction (or arbitration) clause from the contract ought to apply. The right of the insurer to rely on that clause can then be protected by anti-suit relief.
In this case the Court of Appeal took a hard line on characterisation, affirming the approach it had previously taken in The Prestige. It characterised the Turkish Proceedings as an attempt to enforce the Club’s insurance contract with Owners.
The Judgment makes clear that it will be very difficult indeed succeed in arguing that a foreign direct action statue gives rise to a truly independent cause of action cf a right that is seeking to enforce the terms of the base insurance contract.
Breach of contract or vexatious and oppressive conduct?
In the Commercial Court, Teare J held that the Club was entitled to an anti-suit injunction because Charterers’ conduct in bringing the Turkish Proceedings was vexatious and oppressive. He held though that the Club was not entitled to the remedy on the “breach of contract” basis (“breach of contract” and “vexatious and oppressive conduct” being the two broad categories of anti-suit injunction that Millet LJ identified in the classic case of The Angelic Grace  1 Lloyd’s Rep 87). The reason for this was that Charterers were not a party to the insurance contract between the Club and Owners. Accordingly, he said, Charterers could not technically be in “breach of contract”.
The Court of Appeal reversed this decision, holding that Charterers were in breach of contract. They said, following The Jay Bola that an assignee or transferee of a cause of action under a contract (eg an insurance contract) was bound to give effect to (for example) an exclusive jurisdiction or arbitration clause in the base contract if it wished to enforce its cause of action against an original party to that contract.
The Court of Appeal rejected the contrary analysis in The Hari Bhum (No.1) and held that there was no distinction of principle between rights derived via subrogation/assignment (as was the case in The Jay Bola) and rights derived via a direct action statute that is characterised as enforcing an underlying insurance contract.
The Court of Appeal recognised that The Jay Bola and The Hari Bhum (No. 1) were conflicting Court of Appeal authorities on the point, but preferred the analysis of Hobhouse LJ in The Jay Bola to that of Clarke LJ in The Hari Bhum (No. 1).
The corollary of its decision was to reject Charterers’ submissions that comity was, in any event, a good reason for the Court not to injunct the Turkish Proceedings. Charterers had argued that it was inappropriate, having regard to comity, to enjoin those proceedings where the foreign direct action statute was enacted by the Turkish legislature to pursue a legitimate public policy aim of victim protection.
The Court of Appeal disagreed – holding that the requirement to protect the Club’s right under English law to insist on London arbitration, and thereby take the benefit of the pay to be paid rule, trumped all else.